The Doctor’s Financial Lifecycle Part 1: Medical Residency
We know that anyone embarking on a career as a self-employed physician has lots to think about. While retirement might seem light years away, it isn’t too soon to start thinking about financial planning for your future. This article should serve as a starter kit on how you might want to save and protect some of your hard-earned money.
Repaying Medical Student Loans
Too many residents transition to self-employment with no plan to repay medical student debt. That’s a mistake. Up until now, the debt has been interest free, but when the interest kicks in, the debt starts to soar. For some, this is big money. We see residents carrying student loans ranging from $60,000 to more than $200,000. Many take advantage of the tax savings from their tuition credits during their resident year and reduce their debt by using some of those savings to pay down their loan. This is a smart move.
Paying off personal debt is common sense. If you pay down your debt with excess cash, waiting to invest in RRSPs won’t harm your eventual bottom line. Once your personal taxable income reaches over $100,000, your RRSP contributions will save you over 40%. Deferring RRSP deductions until your taxable income increases can generate much higher tax savings. You should consider having at least $25,000 in your and your spouse’s RRSP account available to use towards a Home Buyers Plan. Not only would you get an RRSP deduction, you could borrow up to $25,000 to purchase your first house.
Financial Health Warning: As a physician, the bank will happily offer you a large line of credit and/or mortgage because they know your earning potential. But this can be a financial trap because it encourages some doctors to live large too early. Get the debt monkey off your back. If you don’t, the financial repercussions can bite hard.
As you transition into practice, there are several types of insurance that you should consider. Each has a role for ensuring a solid financial future. Here is an overview:
- Disability Insurance
If the policy is a personal policy, disability insurance pays you a tax-free monthly income should you be unable to work because of an accident or serious illness. Payment occurs over the course of your career as an active physician.
- Term Life Insurance
Protects your beneficiaries against your premature death. It can cover final expenses, like medical bills, funeral expenses, loans, unpaid taxes, and can provide your family with money to replace your lost income.
- Critical Illness Insurance
Provides you with a predetermined, one-time, tax-free, lump-sum benefit after a set number of days of surviving a diagnosis of one of the covered critical illnesses (if the policy is a personal policy). Some illnesses covered could include cancer, heart attack, and stroke.
- Professional Overhead Insurance
Many of the financial obligations associated with running a practice, such as employee salaries and utility bills, are covered if you are absent from work due to an accident or a series of illnesses.
If you would like to learn more and discuss your plans with a professional advisor, please contact our Health Professionals Team that specializes in providing tax guidance for medical professionals, including doctors and dentists.
You can also review the OMA website for information on programs and insurance provided to OMA members.
Whatever route you choose, this is the bottom line: It’s never too early to get a handle on your finances.