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Pandemic fallout: Does your retirement plan need a reset?

 Un grand-père serrant son petit-fils dans ses bras.

COVID-19 has had a dramatic impact on many physicians’ lives. Could it have affected your retirement plan too?

Several months after the pandemic was declared, more than 90% of Canadian physicians said they had experienced a reduction in patient care, with 33% reporting a drop of more than 50% in patient care. This drop has made it harder to keep up with contributions toward retirement.

To make sure your retirement plan is still on track, here’s what you may need to consider, depending on how far you are from retirement.

Early- to mid-career planning for retirement

With interest rates at historical lows, your fixed income investments (i.e., GICs, bonds) are likely offering low returns. Long-term equity projections, however, remain relatively strong. If you’re more than 10 years from retiring, investing in more equities could help you make up for lost progress this past year.

Review your asset allocation. In your portfolio, how much fixed income do you hold compared with equities? Is it more than necessary? Let’s say you have a 50/50 mix of equities to fixed income, but a suitable portfolio for your situation is more like 65/35. If your portfolio is more conservative than is suitable, you could increase your potential for higher returns over time by increasing your equity exposure. By reassessing your risk tolerance, updating your goals and getting a complete picture of your assets and investments, you might decide you’re able to increase the percentage of equities in your portfolio. Your MD Advisor* can help.

Review your asset location. Many investors have different accounts, such as an RRSP (tax-deferred), a tax-free savings account (tax-free) and a non-registered account (taxable). We refer to account types as ‘locations’ for investments. Physicians often also have corporate assets. How you allocate your investments between these locations can affect your after-tax return.

Traditionally, the advice has been to hold fixed income investments in tax-deferred and tax-free accounts because interest income is highly taxed. The ratio of returns (fixed income to equities) also matters. With interest rates so much lower than growth expectations for equities, the importance of capital gains in non-registered and corporate accounts has increased.

Depending on the impact of your income in 2020, it might make sense to adjust the amounts you would normally move between accounts, including how much you pay yourself from your corporation or how much you contribute to your own or a spousal RRSP. Your MD Advisor and your accountant can help you understand the impact these changes could have on your plan, today and in the future.

Review your financial plan. If you’ve reviewed and adjusted your asset allocation and asset location and your retirement plan is still not on track, it’s time to change some other things. Look at your financial plan: you might need to save more per month, spend less (now and in the future), adjust your retirement expectations or consider pushing your retirement date back.

Late-career planning for retirement

The 10 years before your retirement can be peak savings years for physicians, especially if your kids are becoming more financially independent and your mortgage is finally paid off. But with the pandemic, lower incomes and lower interest rates might affect your retirement readiness. When you’re closer to retirement, you are more vulnerable to these kinds of changes — because you have less time to recover before income is needed from your portfolio.

Watch your expenses. If you haven’t been able to maintain your income, there may be opportunities to hold the line on expenses. As your expenses to support your kids and pay your mortgage go down, can you hold the line on other expenses going up? That might not be what you had planned or hoped for, but it is often easier to not take on new spending than to cut existing spending. 

Rethink your retirement. At this point, you likely have a planned retirement lifestyle and date, but COVID-19 may well have complicated your ability to achieve your goals. Delaying retirement, reducing lifestyle expenses, selling lifestyle assets, increasing savings and adjusting your portfolio probably all sound less than ideal. But the point is, you have options. Your MD Advisor can help you determine what options impact you the least.

Rethink moving to safer investments. Low interest rates have big ramifications for safe income streams.  If you are close to retirement, you can probably remember a time when double-digit interest rates could generate income of $50,000 per year with less than $500,000 in capital. At today’s interest rates, that same income stream requires closer to $5 million of capital. Relying solely on income from safe investments will probably not yield high enough returns for most of us. Therefore, holding a mix of both income-producing and growth investments is increasingly important.

It also may mean being extra careful if you’re planning to commute your pension or if you’re starting to collect government benefits early. Secure income streams (such as government benefits, rental income, royalties, deferred annuities, etc.) are highly valuable in low interest rate environments.

Depending on how far you are from retirement, the pandemic may mean your retirement plans are due for a reset. There are several financial planning strategies for physicians that we can help you explore. An MD Advisor can help ensure your retirement plans match today’s realities, as well as your personal needs, goals and circumstances.

* 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.

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