Financial planning for physicians — why you're different
A financial plan is the roadmap that guides you to your life goals — it lays out how you intend to use your money to reach those goals over time. While this can be straightforward — depending on age and stage of life — for salaried employees, physicians and physician households must take into account some unusual challenges and opportunities, and often need professional guidance in their financial planning.
As a physician, you very likely had to take on considerable debt during medical school and residency. Now you need to consider how to pay it down, when — or if — to incorporate your practice, whether to pay yourself a salary, dividends, or a mix of both, whether to contribute to a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) or invest within your corporation, how much to save, when to retire, and how to unwind your corporation in retirement. Tax planning, insurance, and other risk management throughout your career is more complex than that of a salaried employee as well. Finally, your planning has to take into account your spouse's choice of career and income at every stage, as well as — should you choose to have them — savings towards your children's educational and other anticipated needs.
Starting out: create a debt repayment plan
The road to becoming a physician is long, arduous, and usually expensive. Nearly a quarter of medical school graduates owe $140,000 or more in medical school debt, and the median debt for graduates
Physicians start their careers later than most, as well as deeper in debt. And while your earning potential is very high, your earning years are shorter than most, and you will probably want to tackle your debt load before focusing on saving for your longer-term goals.
It's important to prioritize your debt: high-interest credit card balances and unsecured line-of-credit debt should be paid down first, followed by federal student loans — interest rates on those are far lower, and you'll receive a 15% federal tax credit on the interest you pay on your federal student loans.
Don't forget about taxes: a self-employed physician, incorporated or not, is responsible for filing and remitting taxes on time. In the year after becoming an in-practice physician, you'll need to remit quarterly tax instalments and keep track of those amounts and deadlines or be faced with interest charges and penalties — even more challenging, in your first year of self-employment the Canada Revenue Agency (CRA) can't estimate your income, so instead of being required to pay quarterly instalments your full taxes for the year will be due when you file your return. If you haven't been setting money aside each month, you could be in for a nasty shock!
READ MORE: Tax Planning for Physicians
Don't forget about your short-term goals
Life doesn't move in a straight line: like many Canadians starting out in their careers, younger physicians have immediate and short-term as well as long-term financial goals, such as getting married, having children, supporting their partner's education or career, or buying a home.
These goals need to be woven into a financial plan where they can be prioritized alongside debt repayment and saving for retirement.
Relying on a healthy income to fund one's lifestyle without any structured planning or budgeting can be a mistake. Let's face it: high earners tend to be high spenders, especially in the first euphoria after the austerity of school and residency. Despite having a high income, it can be challenging to buy a home when you have a heavy load of medical school debt and little saved for a down payment. Starting a family often means a lengthy absence from work, for the physician, their partner, or both, and many years of expensive childcare costs.
A financial plan takes into account your short-term goals and focuses on making your dreams a reality. It often means working out the best way to make necessary trade-offs, like pausing aggressive debt repayment or retirement savings while you save for a short-term goal.
Ultimately, a financial plan can tell you whether or not your goals and ambitions currently exceed your ability to pay for them over time and help you find a way.
Start investing for your future
Physicians have a high amount of human capital — their ability to earn a lot of income over time. But they need to convert that human capital into financial capital if they want to continue funding their lifestyle in retirement.
Most retirees want to enjoy the same standard of living in retirement as they enjoyed throughout their careers, and for most physicians that means they've grown used to a life of considerable comfort.
The key to converting your human capital into financial capital is to invest. Canadians have the ability to contribute to and invest within a number of account types, both registered — RRSPs and TFSAs — and non-registered (taxable) accounts. Investing a percentage of your income every year will help ensure you have sufficient assets in retirement to continue funding your desired lifestyle.
But you can't just sock away money into various accounts and hope for the best. You invest to earn a higher rate of return on your money than it would get if it was parked in a savings account. That means understanding your capacity for risk, investing in an appropriate and diversified mix of stocks and bonds, contributing regularly to your portfolio, and sticking to your strategy for the long term.
Physicians don't have the luxury of having a defined benefit or defined contribution pension to help them in retirement. They're on their own to invest appropriately.
(This is changing: MD Financial Management (MD) and Scotiabank are developing Medicus, a pension plan designed specifically for Canadian incorporated physicians to help address this need.)
A financial plan can help determine how much you need to invest for the retirement you want, and how best to structure a portfolio that delivers a rate of return commensurate with the risk taken.
Consider incorporating your practice
As physicians become more established in their careers and their debt has been repaid or significantly reduced, their attention may turn to optimizing their tax rate and investment opportunities.
One big question physicians wrestle with is whether to incorporate their practice. Incorporating comes with additional costs and complexity, but can offer tremendous advantages in terms of tax savings and investment opportunities. Incorporation can also offer a way for your spouse to be involved in your practice: they can choose to become an employee shareholder of the corporation, take advantage of income-splitting to reduce taxes.
When incorporated, a physician can choose to pay themselves a salary, dividends, or a mix of both.
Taking a salary means continuing to earn RRSP contribution room. It also means the corporation must pay both the employee and employer portion of CPP contributions. A salary is taxable income for you as an individual but deductible as a business expense to the corporation.
Dividends are taxed at a lower rate individually but are not deductible as a business expense. Paying yourself dividends will not earn RRSP contribution room and you also won't pay into CPP.
One income strategy is to pay yourself a salary up to either the CPP yearly maximum pensionable earnings, which were $64,900 in 2022, or to earn the maximum RRSP deduction limit ($29,210 in 2022), and then top up your income with dividends to help meet your individual or household spending needs.
Finally, any profits remaining in the corporation are taxed at a much more favourable rate than if you remained a sole proprietor. That means opportunities to invest inside the corporation to help grow that money for the future.
A financial plan guided by an MD Advisor* who specializes in medical corporations can be invaluable to help determine the right time to incorporate, how to pay yourself, and how to set up your corporate investments.
Start retirement planning
So far we've seen how your financial plan can help you prioritize debt repayment, make trade-offs to save for short-term goals, invest appropriately for the future, determine whether to incorporate your practice and optimize your tax rate.
As your career as a physician winds down, you'll also need to think about how all of these puzzle pieces fit together to create your retirement income plan.
As mentioned earlier, most retirees want to maintain their existing lifestyle in retirement. That means devising a strategy that meets your spending needs when you're no longer earning a high salary.
Considerations include when to tap into your RRSP, how to wind down and withdraw your corporate assets (if incorporated), when to take your CPP and OAS benefits, and how to supplement your income with TFSA and non-registered withdrawals as needed.
A retirement plan is crucial to help determine if you can meet your desired spending for the last third of your life. It's about more than just numbers, though — a good retirement plan can also help you uncover new meaning and purpose in your life.
You've spent decades as a physician helping people and may have been truly defined by your career. Now that you're planning for retirement, you need a plan for how to spend your days, as well as your income. Whether that's more time to spend on travel and hobbies, or volunteering, or spending quality time with your spouse, kids, and grandkids, defining that purpose is key to a successful retirement.
Financial planning can help you make important financial decisions, prioritize goals, and plan for the future at every stage of your life. Whether you're starting your career and worrying about student debt, well-established in your practice and dealing with complex decisions, or beginning to think about what comes after your career, an MD Advisor can work with you to create a financial plan to address your unique challenges and opportunities.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.