If you’ve been thinking about retirement for awhile, you likely have some idea of what it takes – you might have an RRSP independently or through your employer, be part of an employer provided pension, or work with a financial planner to create savings to cover the basics.
While for many physicians, retirement seems a long way away – according to Alberta Doctors Digest 40% of physicians are over 55, and even those who are well into their 70s often have a hard time considering true retirement given their satisfaction with their professional career – it’s always a good idea to prepare financially.
How much money do doctors retire with? In Canada, physician retirement savings is generally between $1-2M. However, this amount could change based on your financial goals, any outstanding financial obligations that you might have, and the investments in your portfolio. Here are some things to think about when setting yourself up financially:
1. Set Goals
The first thing to do when planning and investing for your retirement is to do some financial goal setting. Deciding what you want your retirement to look like is a good first step – will you take on a second career? Go back to school? Travel extensively? All of these options can leave you with more or less money for your retirement. It’s important to think about whether the goals you’ve set out for yourselves are ‘must haves’ or just options – the degree of certainty you have about your goals will determine how much money you set aside to pursue them. If travelling is something you think you might like to do, it might be worth it to set aside a cushion for this amount. However, if you’re fairly certain you’d like to go back and do an MBA, it’s worth setting the full amount of these funds out ahead of time.
Just like your day to day spending now, your goals in retirement aren’t set in stone – think about how your financial priorities change on a year over year and even day to day basis. You can’t expect yourself to all of a sudden follow rigid guidelines just because you’re retired – you’ll need to work some flexibility into your savings plan.
2. Track Your Spending
One way to check whether or not you’ll have enough saved for your retirement to cover your spending into your later years is to track your spending habits in the years leading up to retirement. Use a tracking app, keep tabs on bank statements, credit card receipts, and monthly billing amounts and have yourself or your accountant corroborate them into a spreadsheet at the end of each year. While certain months might have larger outflows than others, you’ll be able to get a good idea of what it is you’re spending now.
While many of the expenses you face in retirement will likely decrease – for example, the cost of commuting to work, dressing professionally, or spending money on lunches or dinners out when you’re working late – new expenses can crop up as well. Afternoons on the golf course, vacations, and gifts for family members can all add up, and if you’re seeing gaps between your financial goals and the amount of money you’re currently spending, it’s a good idea to either plan on continuing your work for a few years post-retirement to keep the salary flowing or cut back on your expense in the years prior to leaving practice. Your savings will thank you!
3. Calculate the return on your investment
If these seem like big numbers, don’t worry – the amount you have saved already will continue to grow in the years leading up to your retirement thanks to compounding interest rates. The $1-2M you have in savings right now will earn additional return in the years you have until your retirement. If, for example, you have $1M saved and are getting a rate of 5% on your income, your savings in 10 years (compounded annually) will be $1.6M. So how much money do doctors retire with? There are physician retirement calculators available to help you to see what you need to put in now to have a good nest egg ready for when you’re ready to leave the practice.
Another thing to think about when deciding where to put your money is how much of a return you’ll be earning – in addition to compounding interest, many stocks pay out dividends to shareholders on a quarterly basis. Optimizing your portfolio to get additional income from having equity in the companies where you invest is a great way to guarantee yourself some additional income in your later years.
One great option for investing your money is putting it into an index fund. Index funds are like a mixed basket of popular stocks based on a certain criteria (like the top 500 largest companies). It’s a hands off way to make sure you get a decent return on your investment – they are often well diversified in terms of company size and will generate a return based on the overall health of the market. Many of these funds outperform top portfolio managers on a yearly basis, and are a great option if you want a good return from your investments.
Bonds are another solid option for generating wealth. With a bond, you technically loan money to a large business or government entity, to be returned in a certain time period at a given rate. For example, if you buy a Canadian Railway bond for $100,000 over a 10 year term with a 5% coupon rate, you are loaning Canadian Railway $100,000, and they will pay you back in 10 years. To compensate you for the loan, CNRL will pay you interest of 5% ($5000 per year) paid at decided upon dates. At the end of the 10 years, you will collect back your initial investment, having earned interest on the money in the interim. Many bonds are publicly traded, and certain ‘investment grade’ bonds – like those from utilities and government entities – are considered one of the safest investments you can make.
If you’re more interested in the financial side of things, you could invest in different financial instruments like options, foreign exchange contracts, or individual securities. If you do take this route, it’s always a good idea to also invest in an index fund or exchange traded fund as well to mitigate some of your risk. Plenty of options for investing don’t involve the market at all – purchasing assets like art and land, or buying shares in businesses owned by family, friends, or colleagues are also great ways to generate income for your later years in a way you understand.
While having a financial planner is a great idea for those who aren’t interested in managing or reviewing the ins and outs of your portfolio or tracking your wealth on spreadsheets, many physicians find they enjoy doing their own financial planning. The research and mathematical skills required for your years of medical school are highly transferable to your finances, and it can also save you money. In the years leading up to your retirement, try to look into as much financial information as possible and get an idea of how you’d like to plan your money. Invest time and money into researching your options. If you’re unaware of where you stand in relation to your retirement investments set up a time to speak with a Healthcare Specialist, who can help guide you in the right direction.
4. Consider Tax Implications
Now that you’re fully invested for your retirement, there are a number of tax implications to think about. If you’re no longer earning employment income – and even if you are, there are many changes to how your taxes will look in your later years.
The first thing to think about is your income coming in. While you might not be receiving a salary anymore, you might be generating a return on your money through dividends or other investment based income (like bond interest) that will pay you every quarter. Once you reach retirement age, you’re eligible for pension income splitting – where you can transfer up to 50% of your income to your spouse, which might allow you to pay less taxes.
In addition, you can still contribute to your RRSP until you’re 71, and contributions to this plan are tax deductible – along with medical expenses, disability benefits, and credits for seniors who make under a certain amount. This is an area where you will want to check with an accounting professional – many of these credits and amounts are dependent on whether your income is earned income or passive income, like income from investments. To claim deductions from your RRSP contributions, you will need to have some earned income from employment coming in, or contribution room carried over from previous years – so if you’re planning to give up work entirely, you’ll need to find another option.
One last thing to consider is whether or not you’ll be selling your practice. If you are, you can take advantage of the one-time Lifetime Capital Gains Exemption, which will allow you to sell the shares in your privately held business for up to a maximum of $866k (adjusted for the year you’ll be retiring in). This has significant tax savings for you and your family, and is worth looking into if you’re selling off a stake in your medical business.
With the right financial planning, spending habits, and some clear goals for your retirement, you can create a strong financial foundation for your later years. Take control of your investing and enjoy a lifetime of financial freedom!