Hi. Today I’m going to give you some insight into your retirement income options as an incorporated physician.
Perhaps one of the most surprising things about turning age 65 as an incorporated physician is how little actually changes.
You can continue to practice medicine if you wish, and many physicians certainly do.
You can continue to be an investor, and that’s generally a very good idea.
You can also continue to be incorporated, so nothing changes there.
What might change is your investment purpose and time horizon. Your purpose is likely to change from saving for retirement to other issues, such as drawing retirement income and perhaps thinking about a legacy for future generations.
And your time horizon is likely to change as well. Instead of working towards your retirement date, you’re now thinking about how to finance the rest of your life and perhaps even beyond.
What you need is some professional planning to help you define your goals and determine how best to achieve them from two separate but related perspectives: Investments and Taxes.
From an investment point of view, it may be tempting to focus only on trying to achieve the most secure and predictable cash flow in retirement. The trouble with that approach is, with today’s low interest rates, you might need $10 million or more in savings to generate $100,000 per year in after-tax income from a portfolio of guaranteed investments. That’s just not practical for many physicians.
For comparison, you could potentially generate the same level of income from retirement savings of less than $4 million by using a balanced portfolio with a mix of interest income from bonds plus dividend income and capital growth from equities and even alternative assets that can enhance return potential and reduce risk.
That’s a look at investment planning. Now let’s talk about tax.
Not everyone has the same goals when it comes to tax planning in retirement. You may be focused on minimizing your current tax bill, continuing to grow your net worth, managing risk, or preserving your estate for your heirs. These goals aren’t necessarily mutually excusive, but they will require different prioritization on the way you draw your retirement income.
Let’s look at current tax minimization for example.
When you retire, you are likely to have investments in many different types of accounts, including personal investment accounts, a Registered Retirement Savings Account or RRSP, perhaps a Tax-Free Savings Account or TFSA, a corporate account that may or may not have a Capital Dividend Account or CDA balance, and maybe even an Individual Pension Plan or IPP.
If your goal is to minimize current tax, the simplest strategy it to avoid taking any income at all unless and until you truly need it. True, you will be required by law to convert your RRSP into an Registered Retirement Income Fund or RRIF and start taking income by age 71 whether you need it or not, but in general, money you can keep invested is money that won’t trigger income tax.
However, when you do need money, it’s important to look at the most tax-efficient sources first. For example, money withdrawn from the Capital Dividend Account of your corporation or your TFSA triggers no direct tax consequences, so that’s a great place to start.
Next, money in your personal investment account or regular corporate account might be an attractive place to look for income. And within those accounts, you might prioritize equity funds with capital gains as your source of income, since only 50% of capital gains are taxable.
Registered plans, such as a RRIF or IPP are often the last place you will want to draw income. During your working years, these plans allowed your savings to grow tax-free, but in retirement and at age 71 at the latest, the government is ready to recoup by fully taxing this income.
Now, one important caveat: someone who looks only at investment planning or only at tax planning is bound to make mistakes. Retirement income is a balancing act, and it’s important to maintain the right mix of investments in the right types of accounts with smart tax planning to arrive at an optimal outcome.
My advice? Talk to an MD Advisor.
An MD Advisor can help you define any changes to your investment purpose and time horizon at retirement and provide excellent guidance on how to generate investment income.
An MD Advisor will also help you determine what your priorities should be from a tax point of view so you can draw income in the most efficient manner possible.
An MD Advisor can also work with your accountant to make sure you receive clear, straightforward advice.
How do you set yourself up for comfortable retirement income? It’s all about having a customized plan. Even if retirement is still many years away, an MD Advisor can set the foundation for that plan today.
If you have any questions, speak to an MD Advisor.
This has been an MD Quick Clinic. Thanks for watching.
All examples are for illustrative purposes only and not applicable to US Persons living in Canada.
MD Financial Management does not intend to provide taxation, accounting, legal or similar professional advice to clients or potential clients. The information contained herein is not intended to offer such advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.
The MD ExO service provides financial products and guidance to eligible clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). MD Financial Management is owned by the Canadian Medical Association.
Incorporation guidance limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Professional legal, tax and accounting advice regarding incorporation should be obtained in respect to an individual’s specific circumstances.