Financial Planning For Physicians: An Actuarial Perspective

Being a doctor in Canada brings many rewards, including helping people, intellectual stimulation, and a comfortable income. The medical profession also brings unique financial challenges. From high educational debt to liability risks, doctors face concerns that few other high-income professionals do. 

This guide gives an overview of how proactive financial planning for physicians helps you protect your finances and achieve your goals. Other posts from your family team at Taxevity go into more detail about related topics, such as estate planning for physicians as well as disability insurance, critical illness insurance and life insurance.

Managing Educational Debt

Most physicians in Canada graduate from medical school with significant student loans. The median debt is $90,000, according to the 2022 Graduation Questionnaire from The Association of Faculties of Medicine of Canada (AFMC). Replies show that 12% owe $200,000 or more. The highest reported debt was $429,000.

High levels of debt can be daunting, but there are ways to manage it:

• Make minimum payments – Most government student loans have reasonable interest rates and flexible repayment options. Make minimum payments and focus extra cash flow on higher-interest debts first.
  
• Consolidate loans – Consolidating multiple student loans into one with a lower interest rate can save money in the long term and simplify tracking.
  
• Dedicate signing bonuses – Many provinces offer signing bonuses for doctors who practice in underserved areas. Allocating these lump sums to pay down the loan principal is prudent. 
  
• Claim tax credits – Remember to claim federal and provincial tuition tax credits annually to reduce the tax payable.
  
• Pay during residency – Consider making small lump sum payments during medical residency to reduce interest from accumulating further. Every bit counts.

A focused repayment strategy makes even six-figure student loans more manageable. Making smart investment choices with any extra income can accelerate your debt repayment even further. Learn more about investing for physicians.

Insuring Earning Potential

A physician’s ability to earn income is their most valuable asset. Disability insurance protects this earning potential if a sickness or injury prevents you from working.

Disability insurance provides tax-free replacement income if you cannot work due to an illness or injury. Payouts begin after an initial waiting period and can continue to age 65 if the disability continues.

Because physicians have high earning power, disability insurance coverage is especially valuable. Some guidelines:

• 60-80% income replacement – Policies often replace 60-80% of gross income. Higher coverage better protects lifestyle.
  
• Own occupation definition – “Own occupation” coverage provides benefits as long as a doctor can’t perform their own specialty, even if they work at another job.
  
• Future income increases – Policies can be designed to increase payouts by a set percentage, often 2% or more per year, keeping up with inflation and earnings growth.
  
• Medical association vs. individual – Disability insurance from a medical association like the OMA tends to have more cons than pros.

Disability insurance provides valuable peace of mind. Which doctor wants to worry about supporting their family if they get sick or hurt and can’t work?

Learn more about disability insurance for physicians and also special offers for medical students, residents and fellows.

Protecting Assets from Liability 

In addition to insuring their income, physicians must also manage professional liability risks. Malpractice lawsuits are an unfortunate reality in modern medicine.

While the chance of being sued for malpractice is low, the costs are high. The Canadian Medical Protective Association (CMPA) spent $4.09 billion over ten years ($2.29 billion in patient compensation and $1.8 billion in legal fees), according to their 2022 Financial Report:

Physicians who use a multi-layered strategy to limit liability get invaluable peace of mind. Your legal advisor may advise you to protect your personal assets by using strategies like these:

Incorporate – By incorporating their medical practice, physicians legally separate personal and business assets. Lawsuits (for instance, ones initiated by a creditor) against the corporation may put practice assets at risk but not personal assets. This is not true in cases of medical malpractice, however, where an incorporated doctor can still be personally sued. 

Buy liability insurance – The CMPA protects doctors against malpractice claims. They call themselves “a mutual medical defence organization” in which members collectively share the costs, risks, and benefits. 

Income sprinkling – Incorporated physicians may be able to shift income to family members in lower tax brackets through dividends. This can limit assets exposed to potential lawsuits. Note that limitations on how much income can be “sprinkled” have been imposed in recent years. 

Trust and estate freeze – Moving assets into protective trusts or holding companies may protect them.

Pre-pay future expenses – Physicians can pre-pay future life insurance premiums and household expenses to move assets beyond the reach of lawsuits.

Saving for Retirement

Since physicians earn high incomes and have long working careers, high expenses like mortgages can create a temptation to defer saving for retirement. However, doctors must be diligent about retirement planning, just like everyone else.

The key is to automate savings specifically for retirement using tools like RRSPs, Individual Pension Plans (IPPs), TFSAs, and taxable investment accounts. Diversifying portfolios and choosing the right investments within these accounts is another consideration. Find out how to tailor your investment plan to maximize retirement savings as a physician. A wealth advisor finds and manages investments that suit your personality and goals. If you need a suitable advisor, we can make an introduction.

Delaying CPP/OAS claims until age 70 boosts retirement income compared with taking these benefits at age 65 (or earlier).

Many physicians can retire comfortably on 60-70% of peak pre-retirement earnings. Those wanting to maintain a lavish lifestyle in retirement may need closer to 80-90% income replacement.

In addition to saving, unexpected medical expenses could derail retirement savings. That is a reason for physicians to consider critical illness insurance.

Retirement projections should be stress-tested under different market return scenarios to see if more savings are needed. With proper planning, physicians can retire on time and continue their desired lifestyle.

Philanthropy

Many physicians feel compelled to give back and leave a positive legacy. Charitable giving can enable doctors to support causes close to their hearts and gain tax relief. Donations can be made personally or corporately.

Donate cash – Cash donations qualify for donation tax receipts, which reduces taxes owed.

Donate securities – Donating publicly traded securities eliminates capital gains tax, resulting in even more tax savings than donating cash.

Set up a foundation – Private foundations allow donors to fund causes directly. They offer the most control over charitable activities.

Donor-advised fund – Like a foundation without all the administrative work. The fund provider handles investments and grants, while donors advise on the causes to support.

Insured donation – Making a charity the beneficiary of permanent life insurance creates a large future donation funded through manageable premiums today. There are other ways of donating life insurance, each with pros and cons.

Giving generously to charity can be a rewarding experience for physicians. Consulting financial advisors allows physicians to develop tax-efficient donation strategies that align with their charitable goals. Donating time and expertise are also impactful ways physicians can give back.

Estate Planning

Proper estate planning provides physicians with an organized and efficient approach to managing and transferring their wealth to beneficiaries, ensuring a smooth and effective wealth transfer process.

A good starting point is drafting a Will to dictate how assets are distributed at death. Without a Will, assets pass by the law of intestacy, which may not reflect your wishes. Beyond a basic Will, here are more advanced strategies:

Trusts – Assets transferred into trusts avoid probate and minimize estate taxes. Trusts also control what, when, and how beneficiaries inherit bequests.

Beneficiary designations – Registered accounts and life insurance bypass the estate and transfer directly to designated beneficiaries.

Estate freeze – Freezing assets into a holding company retains value in the corporation while future growth passes estate tax-free.

Life insurance – Permanent life insurance provides quick tax-free cash to pay the taxes owing upon death so that heirs inherit property cleanly without needing to sell any portion to fund taxation due to the deemed disposition.

Estate planning achieves multiple goals:

• Minimizing taxes and fees
• Protecting assets
• Transferring assets according to your wishes

Doctors benefit by developing an estate plan early on and making updates as their wealth and family situations evolve. For more details, read about estate planning for physicians.

The Rewards of Prudent Planning

While physicians face unique financial planning challenges, you also have high incomes to overcome obstacles and achieve meaningful goals like:

• Paying off student debt
• Protecting income streams
• Accumulating wealth
• Giving to charities
• Providing for your family in the present, future, and after your passing

Doctors can minimize liabilities, maximize assets, and unlock possibilities with prudent planning. Working with independent specialists in different niches saves time and makes navigating the issues more manageable.

Financial security for physicians is within reach with some education, discipline, and guidance. By tackling each issue one step at a time, doctors can ensure their finances align with their values and aspirations.

Frequently Asked Questions

Here are answers to questions we often get. To get more clarity and personalized replies, schedule a chat.

How much disability insurance should a physician get?

Disability coverage for 60-80% of gross income is typical. Higher replacement ratios of up to 90% better protect lifestyle. Individual coverage can supplement or replace the weaker coverage from a medical association.

What retirement savings rate do physicians need?

Saving 15-20% of annual gross income is often a reasonable target. For example, the RRSP rules encourage saving 18% of earned income, and Individual Pension Plans allow more. Specialized strategies like a corporate insured retirement plan can supplement retirement income and provide other tax advantages.

Your personalized financial plan will show you what your specific situation requires.

Should physicians incorporate? What are the benefits?

Incorporation can be very beneficial and is an important part of tax planning for physicians for several reasons:

• Liability protection – Incorporation separates personal and corporate assets to shield personal assets from lawsuits other than those for malpractice.
• Income splitting – Through dividends, income can be split with family members in lower tax brackets within certain limits.
• Tax deferral – Funds retained in the corporation can be invested to defer taxes.
• Business expense deductions – More expenses become deductible against professional income.
• Retirement planning – Additional options like Individual Pension Plans become available.
• Estate planning – Shares can be transferred tax efficiently to holding companies and heirs.

Incorporation requires more administration and accounting costs. The tax and liability benefits generally outweigh the costs for many physicians earning over $200,000 a year. 

What charitable giving strategies are most tax efficient?

Donating appreciated securities rather than cash provides the biggest tax savings since capital gains tax is eliminated on the donated shares. Setting up a donor-advised fund simplifies ongoing granting while providing immediate tax relief. Combining life insurance with charity beneficiaries creates large future donations funded with smaller premiums today. 

What mistakes do doctors make in their financial planning?

Here are some common financial planning mistakes that Canadian physicians make:

• Not having adequate disability insurance. Underestimating risk can result in having too little disability insurance, skipping the “own occupation” definition of disability or getting weaker coverage from the provincial medical association.
• Overspending and lifestyle inflation. Doctors’ high earning potential can lead to living beyond their means with expensive mortgages, vehicles and vacations.
• Not investing enough early in their career. Failing to maximize contributions to tax-advantaged accounts like TFSAs and RRSPs while young.
• Not having a comprehensive estate plan. Not using tools like trusts and life insurance to protect assets.
• Not seeking professional guidance. Trying to navigate the complex and changing world of finances and tax planning without help from independent experts.
• Focusing more on accumulation than wealth management. Neglecting to properly manage and preserve their assets.

How do I get started with my financial planning? 

Start with personalized guidance on prioritizing your financial goals with help from the family team at Taxevity Insurance. We collaborate with independent accountants, lawyers, financial planners, and wealth advisors to customize strategies that align your finances with your values while safeguarding your hard-earned lifestyle.

Schedule a free consultation to walk through your questions in a pressure-free environment. Our purpose is to provide unbiased guidance so you can gain financial clarity and peace of mind. 

As physicians focused on patient care, you don’t have to figure this out alone. Let us handle collaborating with the appropriate specialists so you can focus on what matters most.

Promod Sharma (FSA, FCIA) and Jeevan Sharma (CFP) YOUR FAMILY TEAM

At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.