When your life partner is a physician, your household finances usually look a bit different from those of other Canadians. There are the long, lean years of training and the debt your spouse or partner racks up. There is retirement to think about, since most physicians don’t have a company pension. Putting a financial plan in place will help you figure out — as a household — how to pay off debt, save for retirement and achieve your other family goals. And planning together as a household may mean you achieve your goals faster.
How physician and non-physician net worth changes over time
The following graphic is presented for illustrative purposes only.
As this graphic shows, physicians will often incur more training-related debt compared to other Canadians, but their net worth could rise quickly once they’ve finished med school, residency and any further training. Keep in mind, though: the physician’s net worth includes their retirement savings. That’s because unlike the many Canadians who have a pension plan, physicians need to fund their retirement themselves.
After the first five to 10 years of practice, many physicians will have caught up to non-physicians in terms of net worth — and then continue to climb with subsequent years of practice and saving for retirement, often outpacing the net worth of non-physicians as retirement approaches.
Financial planning during your spouse’s training years
If you’re the spouse or partner of a physician in training, all of this impacts you too. Your career may be disrupted if your partner moves for residency or a fellowship, even if you are the higher income-earner.
Many years in medical school, followed by further years of training, means physicians usually take on considerable debt; they also hit their peak earning years later in life than other professionals. All told, physicians may spend up to 10 years in training — incurring debt and/or earning relatively low incomes along the way.
Still, as long as one or both of you is working and earning income, it’s wise to put financial plans in place to help you reach your goals. Be strategic: during these periods of lower household income, you want to maximize the benefit of every dollar you save.
Here are a few strategies to consider during the physician-training years:
- Contribute to RRSPs if you can: Contributions to an RRSP can lower your household’s taxable income. A lower taxable income means a lower tax bill — and can also mean increases in certain benefits that are based on household income, like the Canada Child Benefit. Make sure RRSP contributions are made by the higher-income spouse to maximize the tax benefit. And remember: contributing to an RRSP not only gets you a tax deduction, it also means you’re saving for retirement, and that those savings will grow tax-deferred.
- If you have children: Cash flow may be tight, but setting up a registered education savings plan (RESP) now has multiple benefits. Lower-income households are often eligible for more substantial contributions from the government. Contributing to an RESP early and taking advantage of any extra income-based funding means your contributions are enhanced and the RESP has more time to grow before the funds are needed.
- If either of you have student loans: Interest payments on student loans may produce a tax credit, which can lower your household tax bill. If you’re repaying loans, remember that some student loans may be interest-free,1 so put them on the back burner and focus on other financial strategies and goals instead.
Financial planning when your spouse is practising
Once your spouse or partner begins practice, their earnings may ramp up quickly. However, starting a practice involves expenses, like the costs associated with licensing, registration and setting up an office. There may also be a move or the costs of incorporation.
Another thing to keep in mind: Gross billings can be very different from your partner’s after-tax take-home pay. For incorporated physicians, the type of compensation they choose — dividends, salary or some of each — can significantly impact how much personal tax is due.
As income increases, it’s especially important to have insurance in place, should either of you die or lose capacity unexpectedly. Having adequate life and disability insurance coverage serves to protect your family’s finances if income from either of you is interrupted or lost, whether by premature death, an illness or an accident.
Physicians can get lifestyle protection insurance through their provincial or territorial medical association (PTMA). MD Advisors* work together with the insurance advisors from PTMAs to provide advice and solutions for physicians and their families.
With the increase in your household income, it’s also prudent to revisit the planning and savings tactics that made sense earlier, when your circumstances were different.
Here are some points to review:
- Role reversal: Perhaps you’ve been the higher income earner to this point, and thus the primary investor in the household. But once your spouse’s earnings increase, they might now take on this role. That’s because the tax benefits, such as tax deductions for RRSP contributions, will usually be greatest when made by the higher-income earner. Taking both of your incomes into account when planning can help reduce your household tax bill when you’re saving for retirement, and then in retirement, as well.
- Remuneration from the corporation: If your spouse or partner incorporates their medical practice, they’ll need to decide how they are paid by the corporation, since this affects taxes. This decision can be complex, and also can impact you if you’re a named shareholder who can receive dividends. Again, planning together will help optimize your household tax bill, both during practice and in retirement — this is an area where you’ll need specialized advice for your specific situation.
- Income splitting if you’re an employee: If you’re working for your incorporated physician spouse, income splitting can help lower the household tax bill. Income splitting is a strategy of moving taxable income from the highest-taxed members of a family to lower-taxed members. Speak to your accountant about this strategy.
Shared goals, shared planning
Although your household income has increased, it might take physician households up to 10 years to pay off the debt incurred in training and transitioning to practice. This can be especially true if your household is balancing debt repayment with other goals like paying down your mortgage, saving for your children’s education or saving for retirement.
If you and your spouse or partner have shared financial goals, such as retiring together, putting your children through school, and protecting each other in the event of unexpected interruptions to your income, then you’re best to develop a financial plan together. This can be done without co-mingling assets and ensures that all available opportunities are considered by both parties. Your MD Advisor* can help you identify shared goals and the right strategies to reach them.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 In the federal budget tabled on April 19, 2021, the government proposed making Canada Student Loans interest-free until March 31, 2023. This is a proposal until it receives royal assent and becomes law.
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.