While many physicians find their work fulfilling and plan to practise medicine until at least age 65, a growing number are looking to retire early.
Indeed, physician burnout is real — whether due to the pandemic or the general overburdened state of health care in Canada.
If you’re considering early retirement, it’s important to take stock of your finances to make sure you’re adequately prepared for a post-retirement life without your physician’s income.
This article explores the financial implications of retiring early, as well as the psychological adjustments involved in leaving your practice behind.
The challenge of early retirement
Physicians are well compensated in Canada, but what’s often lost is that they tend to start their careers later and be deeper in debt than the average Canadian. Add to that the fact that for most physicians, there is no company pension.
Retiring early — say, at 55 instead of the more traditional age of 65 — then leaves a shorter runway to save and invest for retirement. Physicians who own a home may also still be paying down a mortgage.
Furthermore, high-earning physicians (like many high-income earners) may also become accustomed to spending quite freely. Sustaining that level of spending through a 30- to 40-year retirement can be a stretch.
Retiring early also means fewer years to contribute to the Canada Pension Plan (CPP), which will lead to reduced benefits in retirement. Taking CPP early — at age 60 (the earliest allowed) instead of 65 — will reduce your benefits by a further 36%.
Finally, there are psychological struggles with leaving your practice behind to retire while your colleagues and friends may still be practising. Many people, not just physicians, tie their identity and sense of purpose to their occupation, and it can be difficult to let that go and successfully transition to a new chapter in life.
With planning and diligence, it can be done
A well-compensated physician who diligently saved and invested throughout their career may be in a great position to retire early and enjoy life travelling and spending more time with friends and family.
Consider a physician — let’s call her Dr. Lee — who contributed the maximum allowable amount to RRSPs and TFSAs throughout her career, while investing any excess dollars inside her medical corporation. If she retires at 55, she can begin withdrawing a mix of dividends from the corporation and withdrawals from her RRSP, enough to meet her desired spending needs from age 55 to 65.
If Dr. Lee’s RRSP and corporate investments are substantial enough, this approach could even sustain her to age 70. That way, she could delay taking her CPP and OAS till age 70 and thus take advantage of the age-deferral credits (getting 42% more CPP and 36% more OAS than if these benefits were taken at 65).
She preserves the TFSA (and may even continue contributing the annual maximum) as a tax-free savings bucket to draw upon later in retirement.
The point is, with enough savings and a spending plan that’s reasonable but meets your needs, retiring early can maximize your life enjoyment and allow you to minimize lifetime taxes over a long retirement.
Retiring at 55 versus 65+
Many physicians will be in the financial position to retire earlier than the traditional age, 65.
The tax advantages of early retirement are clear. Because of Canada’s progressive tax system, high-income earners may pay a marginal tax rate of more than 50% on their top dollars of income earned.
Simply put, you’re paying a lot of tax on that top tier of income is costing you — and it’s unlikely you’ll need it to meet your spending needs in retirement. If your mortgage is fully paid off and you’re no longer saving for retirement, your cash flow needs will be much lower in retirement.
If you are thinking about retiring early, the question is whether you have enough resources to sustain your lifestyle for longer — especially in the “early retirement” phase (age 55 to 65), before CPP and OAS kick in. If you plan to delay those government benefits until age 70, your resources have to last even longer. Psychologically, it can be difficult to deplete your savings and investments while you wait for government benefits.
Retiring at 65 or later, on the other hand, will most certainly allow you to shore up your finances with another decade of saving and investing (or at least not withdrawing from your savings and investments).
The downside? Your sizable nest egg can have tax and other financial consequences when finally you do retire.
Because you haven’t been drawing on your RRSP, your minimum mandatory RRIF withdrawals (starting at age 72), will be bigger. Plus, your CPP and OAS benefits will have now kicked in, creating a perfect storm of fully taxable income. This can often lead to a high tax bracket in retirement and a clawback of some or all of your OAS benefits.
In brief, the trade-offs
Early retirement is a great way to maximize your life enjoyment while you still have your health. It allows you to minimize lifetime taxes through strategic RRSP and corporate withdrawals.
The downsides include a potential loss of identity at a time when many of your peers are still in the prime of their careers. Plus the idea of running through your savings and investments while you wait for government benefits to kick in can be uncomfortable. Another downside is that retiring early results in a reduced CPP benefit (fewer years of contributions between 18 and 65) and a temptation to take CPP early, which further reduces the benefit.
Working until 65, or longer, obviously has its financial benefits. It allows you to maintain a certain lifestyle without worrying about draining your savings or investments. In most cases, you’ll continue to add to them. Working longer also ensures you’ll pay more into CPP and will receive a higher benefit in retirement. Finally, there’s the personal fulfilment and satisfaction that comes from the rewarding work you do as a physician.
The downside of working longer is the potential loss of healthy years to spend travelling, on hobbies, and with friends and family. You also have a larger RRSP, and thus larger mandatory RRIF withdrawals, which can lead to more lifetime taxes and the potential loss of OAS benefits through clawbacks.
The best way to tackle this difficult decision is to speak to your MD Advisor* and assess both scenarios. An MD Advisor can review your financial plan — or work with you to create one — and recommend ways to help you achieve your retirement goals. Knowing what’s possible, financially, will allow you to make the best and most sensible lifestyle decision for you.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
