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Retirement Planning for Physicians: An Actuarial Perspective

Category 2: Satisfy wants

The long hours and intense demands of being a physician may make retirement planning feel like a distant concern. Developing a retirement strategy early on helps set you up for long-term financial success. The good news? You don’t have to do all the work yourself.

As a doctor, you have access to special retirement planning opportunities that can accelerate your path to retirement. Proper planning helps you retire earlier and more comfortably than most Canadians. Retiring allows you to focus on your passions, philanthropy, and family.

This guide will provide an overview of retirement planning for physicians in Canada. We will cover strategies to maximize RRSPs, IPPs, TFSAs, and other savings vehicles. You will also learn ways to optimize corporate structures and plan for philanthropy in retirement.

Assessing Your Current Financial Situation

The first step to retirement is to take stock of where you currently stand financially. The analysis examines your assets, liabilities, income sources, and expenses. The work is part of financial planning for physicians, which is typically done by a Certified Financial Planner (CFP) using advanced financial planning software.

Take Inventory of Your Assets

  • What is the current value of your incorporated business?
  • Do you have rental properties or other investments outside of your corporation?
  • How much have you saved in RRSPs, IPPs, TFSAs and non-registered investment accounts?

Assess Your Liabilities

  • How much debt do you have personally and corporately? Your obligations may include mortgages, lines of credit, shareholder loans, and commercial debt.
  • What are your current monthly debt repayment amounts?
  • Do you expect to take on additional debt in the future?

Examine Your Income Sources

  • What is your current annual income as a physician? Is it steady, increasing or decreasing?
  • Do you have spousal income?
  • Do you receive passive investment income? At what rate is it taxed?
  • Do you anticipate any lump sum payouts before retirement, like an inheritance? 

Document Your Expenses

  • What are your current household, lifestyle and discretionary expenses?
  • Do you expect any expenses to increase or decrease closer to retirement?
  • What are your annual costs associated with practicing medicine, like malpractice insurance, licensing fees and continuing education?
  • What significant one-time expenses do you foresee, like weddings, house down payments for children or dream vacations?

With this complete financial picture, you can start forecasting how inflation and life changes may impact your finances. The projections help you see if you are on track for the retirement lifestyle you desire or need to make adjustments.

Corporate Strategies For Physician Retirement Planning

For physicians in Canada, incorporating your medical practice provides significant tax and estate planning advantages. Your medical professional corporation allows you to save more for retirement by legally deferring personal taxes until you extract funds later as a salary or shareholder dividends. Here are some strategies to optimize your corporate structure:

Income Splitting Opportunities

Consider employing family members in roles that provide reasonable pay for the work performed. You can split income by paying them dividends, which are usually taxed at a lower rate in their hands.

Maximizing the Capital Dividend Account (CDA)

This tax-free pool of funds available for distribution allows you to take funds from your corporation without tax implications. Tools like permanent life insurance can grow your CDA.

Individual Pension Plans (IPPs)

IPPs are defined benefit corporate retirement plans with much higher contribution limits than RRSPs. An IPP effectively defers more taxes until retirement and can significantly boost your retirement savings.

Retirement Compensation Arrangements (RCAs)

RCAs allow incorporated physicians to set aside more retirement funds tax-deferred than the RRSP and IPP limits permit. Since RCAs are more complex, get specialized help to understand the pros and cons.

Corporate Insured Retirement Plans (CIRPs)

CIRP allows incorporated physicians to supplement their retirement income by using permanent life insurance with tax-sheltered cash value growth. Unlike an RRSP, IPP or RCA, the cash value can be accessed via tax-free collateral loans.

Retained Earnings

Rather than paying out all corporate earnings as shareholder dividends each year, you can retain funds inside the corporation for investment. Retaining earnings is advantageous because the tax rates on active business income are much lower than on personal income or dividends. The main downside is that any investment income generated by retained earnings is taxed at over 50%, regardless of amount.

Corporate Class Funds

These specialized mutual funds allow you to defer taxes on investments held within your corporation. The funds are structured to minimize tax payable by generally only paying out capital gains and dividends rather than interest. As a result, returns may be lower than with traditional mutual funds, but the tax benefits can outweigh this. 

Personal Strategies For Physician Retirement Planning

Beyond corporate accounts, personal registered savings vehicles like RRSPs and TFSAs provide tax-sheltered growth.

Maximize Your RRSP Contributions

Your annual RRSP contribution room is 18% of your earned income from the previous year up to an annual maximum ($31,560 for 2024). Maxing this out reduces your personal taxable income. RRSPs are rolled into Registered Retirement Income Funds (RRIFs) at retirement.

Tip: Transferring your RRSP into an IPP can provide more retirement income because of higher contribution limits and other benefits.

Top Up Your TFSAs

TFSAs provide tax-free investment growth with contribution room unrelated to your personal income. For 2024, TFSA limits are $95,000 total or $7,000 annually. This combines tax-free growth with tax-free withdrawals in retirement.

Spousal RRSPs

You can contribute to your spouse’s RRSP while claiming the tax deduction. This income-splitting strategy shifts future taxation to your spouse, who likely has a lower marginal tax rate in retirement.

Use Savings Vehicles Strategically

Consider which accounts to withdraw from first in retirement. Drawing RRIF income may trigger OAS clawbacks sooner than TFSA withdrawals. Coordinating withdrawals across retirement accounts helps optimize your taxes.

Insurance Strategies For Retirement Planning

Insurance provides income protection against life events and tax-efficient growth opportunities. Physicians can use various insurance strategies:

Disability Insurance

Having adequate disability insurance protects your income if you cannot work due to illness or injury. The tax-free benefits help cover expenses and provide funds to save for retirement. The own-occupation add-on continues your benefits even if you can work in another capacity.

Critical Illness Insurance

A serious illness like a cancer, heart attack or stroke can derail your health and financial stability. Critical illness insurance provides a tax-free lump sum that helps protect your retirement savings.

Personally-Owned Life Insurance

Temporary “term” life insurance provides for your dependents in case of your death during your working years. As a result, you can allocate some of your retirement savings towards other goals, like travel, hobbies, or leaving a legacy.

Permanent life insurance offers tax-sheltered investment growth via its cash value. The savings can supplement your retirement income. In addition, your beneficiaries get a tax-free death benefit.

Corporately-Owned Life Insurance

Your corporation can pay premiums and be named beneficiary of a life insurance policy. Proceeds paid to the corporation increase the Capital Dividend Account for tax-free distributions to shareholders. In the interim, you reduce the high tax payable on passive investment income (50.17% in Ontario). The Corporate Insured Retirement Plan can supplement your retirement income.

Estate Freezes 

This locks in the value of your corporate shares today, and future growth passes to your heirs. This can be combined with life insurance so your estate has cash to pay the tax liability upon death.

Passive Income Sources

Generating passive income streams provides cash flow without you needing to work. This extra padding can allow for an earlier retirement. Some options to consider:

  • Rental income from investment properties
  • Dividends from stocks/funds held personally and corporately
  • Royalties from investments in resources, intellectual property or digital products
  • Pensions from previous employers
  • Annuities providing benefits for life

Diversifying your income sources among these types of passive investments can provide retirement stability.

Tax and Estate Planning

Proper estate planning ensures more of your wealth is passed on rather than lost to taxes. The process helps avoid conflicts between heirs. Options to take:

  • Maximize the use of tax-sheltered accounts to reduce future estate taxes.
  • Set up a trust to distribute assets while bypassing the costs and delays of the probate process.
  • Name beneficiaries on registered accounts and life insurance policies so that the benefits bypass the costs and delays of the probate process.
  • Gift assets early to heirs to simply your estate and pay taxes for transferring now, when the assets are worth less and so subject to less tax, rather than at death when the assets have grown more. 
  • Review wills and powers of attorney regularly to keep current.

Lifestyle and Expense Planning

Your retirement lifestyle will significantly impact how long your savings need to last. Be realistic about your spending habits:

  • Pay down debt before retirement to reduce expenses.
  • Downsize your home if less space is needed (for example, if you plan to spend a lot of your time travelling).
  • Review discretionary spending such as travel, dining out, and memberships
  • Understand health costs like prescription drugs and dental care.
  • Delay or accelerate government benefits like CPP and OAS, depending on which strategy provides better results.

Testing different scenarios can give you flexibility if actual expenses exceed projections. You can also get peace of mind knowing how secure your retirement income is. A CFP would likely make the projections.

Managing Assets in Retirement

Upon retiring, you need to manage lump-sum payouts from your corporation carefully. This retained capital gives you options:

  • Invest amounts personally in a portfolio of conventional or alternative assets. Withdraw at a sustainable rate.
  • Pay down mortgages to reduce interest costs.
  • Fund TFSA and RRSP contributions to shelter future growth from taxes.
  • Make corporate investments in conventional assets, alternative investments or cash value life insurance. Continue deferring taxes on growth.
  • Purchase annuities to generate guaranteed lifetime income.

Work with a qualified financial planner and wealth manager to allocate payouts tax-efficiently. We can make introductions if you need the right advisors.

Philanthropy Planning

Giving back is essential for many physicians. With proper planning, you can make significant charitable giving during your retirement.

  • Donate publicly-listed securities directly from your corporation or personally to avoid capital gains tax.
  • Set up a donor-advised fund for strategic giving. Contribute publicly-listed securities to eliminate tax on the capital gains and receive donation tax receipts. Later, recommend grants to your charities of choice over time.
  • Create a family foundation for legacy giving. Your corporation can gift funds to optimize taxes annually.
  • Name a charity as beneficiary of your RRSP/RRIF, life insurance or TFSA to avoid estate taxes on those assets. 
  • Explore social impact investing like micro-loans and social enterprise debt. This provides a return alongside social good.
  • Volunteer your time and expertise with organizations aligned to your passions.

Tax-smart giving maximizes the impact of your philanthropy for causes that matter to you.

Prepare Early for a Smooth Transition

Retirement planning has many moving pieces to optimize. You can retire confidently by reviewing your finances early and creating a holistic strategy. Work with independent professionals like accountants, financial planners, wealth advisors, insurance advisors (us!) and lawyers to implement coordinated strategies.

Retirement marks an exciting new life stage, free of workplace constraints. Thorough preparation allows you to focus on exploring your passions, from world travel to philanthropy. Putting prudent strategies in place well before your target retirement date helps ensure you have sufficient income to live life to the fullest.

For focused guidance for your specific situation, book a private consultation with your independent family team at Taxevity Insurance. We can provide tailored strategies to help you retire earlier and more comfortably as a physician in Canada.

Frequently Asked Questions

Retirement planning can be complex for physicians. Here are answers to common questions we get asked:

What is the biggest mistake physicians make when planning for retirement?

Not having a plan early enough. It’s never too early to start thinking about retirement. Many physicians need to catch up on savings because they put off planning and graduate with sizeable student loans. A financial planner can run projections and help keep you on track.

How much do I need to retire comfortably?

The amount varies based on lifestyle and expenses. Aim to replace 60-80% of your pre-retirement income through retirement savings and income streams. Work backwards from your target income amount to see how much to save yearly.

What percent of assets should I withdraw annually in retirement?

To avoid outliving savings, stick to a 4-5% withdrawal rate, adjusted annually for inflation. This sustainable rate preserves capital.

How do I plan for healthcare costs in retirement?

Extended health insurance through associations can cover big-ticket costs. Have at least a few years of prescriptions, dental, physio and other maintenance care costs accessible in cash. 

What other questions should I be asking?

Retirement planning is complex, but our family team can collaborate with you and your other advisors to provide tailored strategies for your situation. Book a complimentary consultation to discuss your specific questions.

Tags: physicians, doctors, retirement planning, strategies