Skip to main content

Who’s better prepared? A look at two physician households

These case studies reflect real-life conversations MD Advisors* have with physicians and their families every day, as well as concerns raised by our 2021 MD Physician Retirement Readiness Research Study. The scenarios below are genuine, but we’ve changed the names and a few details to protect client identities.

To any casual observer, the following two physician households may look similar: both include mid-career professionals who are raising teens or supporting young adults, and who are trying to make good decisions about money through their peak earning years.

At first glance, their day-to-day finances may appear comparable when it comes to household incomes and current net worth. However, when we dig deeper, we see that these two households couldn’t be more different when it comes to financial security and being well prepared for retirement. Hint: one is doing much better than the other, but we’ll show you how both stand to gain from more personalized financial advice.

The following provides insight into why no two physician households are alike in planning their financial future, and the careful analysis it takes to determine your own retirement “number.”

TABLE OF CONTENTS

Section 1: A tale of two physician households

Section 2: Net worth, alone, is no signal of retirement readiness

Section 3: Accounting for lifestyle in retirement planning

Section 4: Our analysis of these households’ retirement readiness

Conclusion: Checking in with your MD Advisor to keep financial plans on track

 

Section 1: A tale of two physician households

Household 1 — Armin and Nina

Armin and Nina settled in their current city in 2005, where Armin began his residency. At the time, the couple bought a detached house within walking distance of work for both of them and in an ideal neighbourhood for starting a family. More than 15 years later, they remain in the same home and Armin’s practice is thriving. They have two children, now 15 and 17, who are enrolled in a nearby private high school. Nina recently resumed full-time work, as senior counsel with a public utility board, after years of working part time while the kids were younger.

Together, they earn $450,000 a year before personal taxes. Annually, Armin saves $120,000 in his corporate account and $27,000 in his registered retirement savings plan (RRSP).

Household 1

Age

Practice income
(net of expenses)

Salary

Armin

49

$450,000

$200,000

Nina

51

n/a

$250,000

  • Armin saves $120,000 annually to a corporate account and also contributes to his RRSP.
  • Nina contributes as much as possible to an RRSP, less an adjustment due to membership in a pension plan.
  • Both contribute the maximum allowed to their tax-free savings account (TFSA).

Household 2 — Claude and Olivia

Claude and Olivia were grateful to have both sets of parents close by when they started a family after graduating from medical school. They didn’t have to worry about — or pay for — child care as they completed residencies and began practising in their respective specialties.

Their two children — now young adults aged 18 and 23 — are following in their parents’ high-achieving footsteps: one’s in medical school, and the other starts university next year. Claude and Olivia value their personal space and privacy in their downtime, enjoying the amenities of their large home with views of the countryside. The physicians maintain separate corporations, within which they earn their respective net practice income and pay themselves using dividends.

Together, they earn $360,000 (non-eligible dividends) before taxes and have been saving a combined $400,000 annually within their corporate accounts over the past nine years.

Household 2

Age

Practice income
(net of expenses)

Employment income
(via non-eligible dividends)

Claude

53

$550,000

$180,000

Olivia

54

$450,000

$180,000

Each has been saving $200,000 annually within their corporate accounts.

Section 2: Net worth, alone, is no signal of retirement readiness

Most people think of retirement in terms of a dollar amount: a majority surveyed in the 2021 MD Physician Retirement Readiness Research Study (52%) said they expected to need $2 million or more and one-third (36%) expected to need $3 million or more.

On the surface, these physician households look a lot alike financially at this time. They have achieved similar net worth, built successful practices/careers, are about 10 to 15 years from retirement, and spend a comparable amount each year on personal expenses.

Both couples are now looking ahead to the next stage in their lives, as they encourage and support their children’s education. They’ve also been discussing specific plans for their post-working years and are consumed by a common question: “Will we have enough money in our retirement?”

Household 1 — Armin and Nina’s net worth

Armin and Nina have benefited from a hot real estate market over 16 years. Their home has increased in value from $550,000 in 2005 to $2 million. While this accounts for a large proportion of their current net worth, personal real estate is not considered an investable asset in financial planning. Their total net worth is $4.2 million: excluding real estate, it’s $2.2 million.

RESP*

$155,000

RRSPs

$700,000

TFSAs

$160,000

Corporate account

$1,200,000

Principal residence

$2,000,000

Total assets

$4,215,000

Net investable assets (excluding real estate)

$2,215,000

*Registered education savings plan.

Household 2 — Claude and Olivia’s net worth

Claude and Olivia’s home in the countryside is worth $900,000 and they have a share in a family cottage — their share is worth $700,000. Their total net worth is $4.2 million: excluding real estate, it’s $2.6 million.

RESP

$20,000

RRSPs

$257,000

TFSAs

$13,000

Corporate accounts

$2,300,000

Principal residence

$900,000

Share of family cottage

$700,000

Total assets

$4,190,000

Net investable assets (excluding real estate)

$2,590,000

Section 3: Accounting for lifestyle in retirement planning

Our contrasting case studies illustrate how two households with nearly identical incomes and current expenses might be better or less prepared to plan a secure retirement. We asked each couple to outline their financial priorities and retirement goals to help us determine whether their current plans and targets are feasible.

Determining how much income you’ll need in retirement isn’t about a simple calculation or reaching a magic number. It involves tough conversations, including discussions about how you expect to live in retirement, life expectancy, whether either or both of you want to work part time, and whether you wish to create a legacy for family or charity.

A financial plan considers your current finances, individual circumstances, goals between now and retirement, and future lifestyle plans to determine the finances needed to sustain the retirement you envision.

Household 1 — Support for kids comes before savings for Armin and Nina

With both kids in high school and their own careers on a roll, Armin and Nina are currently happy to stay focused on work and expect to keep building retirement savings at the same rate over the next 15 years. At the same time, they want to keep supporting their family financially and building an inheritance for their kids. They spend about $235,000 each year ($125,000 for living expenses, $60,000 for their kids’ private school and $50,000 to support their parents). Here are their priorities:

Kids’ education a high priority. Armin and Nina regard their children’s education as a priority. They plan to continue funding private school tuition, at $30,000 per child annually, through their children’s remaining years of high school (they’re currently in grades 9 and 11). They also want to contribute to both kids’ post-secondary education (an estimate of $100,000 each) and be prepared to provide additional money for non-education goals, such as a business start-up or home purchase.

Support for extended family. Both Armin and Nina have a great appreciation for their parents, who immigrated to Canada with few financial resources, wanting a better life for their families. They plan to continue contributing $50,000 per year to support their parents’ retirement years.

Retirement expectations. Armin and Nina imagine that in retirement they’ll be able to live on about half of what they spend today, by maintaining their fairly modest lifestyle and after their kids’ and parents’ needs are taken care of. They assume they can make do on an annual income of $120,000, after tax and indexed for inflation.

Annual corporate cash flow                

CORPORATE CASH INFLOW

 

Professional income

 

Practice income
(net of overhead and business expenses)

$450,000

Total inflows (A)

$450,000

 

CORPORATE CASH OUTFLOW

 

Salary

$200,000

Corporate tax

$31,200

Total outflows (B)

$231,200

 

CORPORATE RETAINED EARNINGS (A – B)

$218,800

 

Annual personal cash flow

PERSONAL CASH INFLOW

 

Employment income

 

Salary (both) $200,000 + $250,000

$450,000

Total inflows (A)

$450,000

 

PERSONAL CASH OUTFLOW

 

Source deductions

 

Canada Pension Plan premiums

$6,332

Employment insurance premiums

$890

Nina’s defined benefit pension plan contribution

$12,500

Personal expenditures

 

Living expenses

$125,000

Private school

$60,000

Support for parents

$50,000

Savings and reinvestment

 

RRSP contributions

$27,778

TFSA contributions

$12,000

RESP contributions

$10,500

Taxes

 

Taxes payable

$145,000

TOTAL OUTFLOWS (B)

$450,000

 

UNALLOCATED CASH FLOW (A – B)

$0

Household 2 — Claude and Olivia ease into retirement, invest in property and travel

Claude and Olivia have given lots of thought to boosting their finances over the next few years. They would like to reduce their workload and enjoy more time off. Retirement is still at least 10 years away, so they want to pay off debts, leaving time and opportunity for investments to grow. They spend about $200,000 to $220,000 each year. Here are their priorities:

Support for children’s education. Their daughter is midway through medical school, which they will continue to pay for until she earns her medical degree. They also plan to pay for their son’s undergraduate degree, starting next year.

Elimination of debt. Claude and Olivia plan to repay their $90,000 line of credit debt within two years. They also would like to clear the $110,000 mortgage left on their respective corporations’ purchase of their medical building.

Vacation property investment. They have about US$1 million earmarked to buy or build a winter haven and investment property in the United States, with preliminary plans to develop a waterfront lot on Amelia Island, off Florida’s northeast coast.

Cutting down on workload. While they are at least a decade away from retirement, the couple plans to start reducing the hours they are working. They plan to stop saving money inside their corporate account ($400,000 annually, combined) after one more year.

Retirement expectations. Claude and Olivia expect to keep their current home as long as possible in retirement, with maintenance costs of about $10,000 per year. They think they’ll be able to live on an income of $220,000 annually, after tax, through their first 10 years of retirement, including a $20,000 annual budget for travel. After that, they’re planning for a reduced income of $200,000 (indexed for 2% annual inflation).

Annual corporate cash flow

CORPORATE CASH INFLOW

 

Professional income

 

Practice income
(net of overhead and business expenses)

$1,000,000

Total inflows (A)

$1,000,000

 

CORPORATE CASH OUTFLOW

 

Taxes payable

$125,000

Non-eligible dividends

$360,000

Total outflows (B)

$485,000

 

CORPORATE RETAINED EARNINGS (A – B)

$515,000

 

Annual personal cash flow

PERSONAL CASH INFLOW

 

Employment income

 

Non-eligible dividends

$360,000

Total inflows (A)

$360,000

 

PERSONAL CASH OUTFLOW

 

Personal expenditures

 

    Living expenses

$200,000

Savings and debt

 

    Personal savings and debt repayment

$62,000

Taxes

 

    Taxes payable

$98,000

Total outflows (B)

$360,000

 

UNALLOCATED CASH FLOW (A – B)

$0

 

Section 4: Our analysis of these households’ retirement readiness

Household 1 — Good news for Armin and Nina

A closer look at Armin and Nina’s balance sheet reveals that they currently have many non-recurring expenses — these will be behind them by the time they retire.

Their MD Advisor has told this duo that they have done well on their education savings and that they are also on track to meet their retirement savings goals. They face less pressure to accumulate retirement savings, given that Nina will be entitled to future income from a defined benefit pension plan.

The couple appears poised to do well, based on their stated assumptions to keep saving and spending the equivalent of $120,000 per year (in today’s dollars).

To create a more meaningful legacy for their family, we identified an opportunity for them to establish an estate plan by using the large surplus in their corporate account to buy a corporate-owned life insurance policy. This would cost an annual premium of about $300,000 over five years.

This strategy may reduce current corporate taxes and provide a more tax-efficient distribution of their estate in the future. Based on our projection, the estimated estate value in future dollars would translate to a net increase of $9.3 million, adding significantly to the after-tax amount they will be able to leave to their children.

Household 2 — A projected shortfall for Claude and Olivia

Given Claude and Olivia’s ambitious goals, our analysis of their current plan projected a substantial shortfall: they are going to run out of money!

For one thing, they have overestimated their ability to fund their children’s education, particularly the ongoing costs of medical school, and need to reconsider a few of their financial plans.

Their stated goal to reduce their workload and cease investing in their corporate account will severely hamper their long-term savings. Their desired lifestyle includes many recurring expenses, including overhead on an investment property, that will chip away at their retirement income.

Our analysis estimated that Claude and Olivia would require an additional $1.4 million in capital today to achieve all their goals (we didn’t include the value of their principal residence because it doesn’t form part of their net investable assets).

To close the gap, we identified a few immediate adjustments that they could make to their savings and retirement plans:

  • First, they will need to save more, as long as they are working. After paying for their children’s education costs over the next four years, they should resume saving in their non-registered corporate investment accounts until retirement — about $125,000 annually should be sufficient.
  • They should also each continue to invest the maximum contribution allowed in their TFSAs to save for retirement. Money earned within or withdrawn from a TFSA is not reportable as income, so it won’t trigger clawbacks on government benefits like Old Age Security (OAS). If they wait until age 70 to collect OAS, this could add $15,000 to $20,000 per year to their household retirement income (adjusted for inflation).

Under this proposed plan, we calculated that Claude and Olivia would have sufficient capital to meet their goals, fund their retirement and leave a modest surplus of $150,000 in their estate to account for taxes, fees or other financial obligations upon their deaths. The calculation doesn’t include the value of their existing or future principal residence.

Conclusion: Checking in with your MD Advisor to keep financial plans on track

We recognize that every physician household is unique in terms of financial planning. Retirement plans need to be shaped by personal values, how you see the future for yourself and your loved ones, and the way you manage your money today and will manage it in retirement.

Our process helps validate your individual retirement goals against current and future financial realities. We encourage you to check in regularly with your MD Advisor so that together you can uncover problems, close the gap on potential shortfalls and explore new opportunities that will help you to live well in retirement.

*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.

//ARCHIVE - INACTIVE CODE