The Doctor’s Financial Lifecycle Part 1: Financial Planning for Medical Residents
We know that anyone embarking on a career as a self-employed physician has lots to think about.
May we add one more: Financial planning.
Actually, two more: Financial planning and Retirement.
Yes, we know that retirement is light years away, but putting the right plans in place will help you achieve your financial goals and make a huge difference to your lifestyle during your working years.
Think of the following as a kind of starter kit for how you might want to save and protect some of your hard earned money.
1. Repaying student loans
Too many residents transition to self-employed with no plan to repay student debt. Up until now, the debt has been interest free, but now interest starts to kick in. 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.
2. RRSP contributions
Paying off personal debt is fundamentally common sense financial planning. If you pay down your debt with excess cash, waiting a while 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. Seek advice from a financial planner before looking into a Home Buyer Plan, just to make sure you qualify.
WARNING TO DOCTORS:
As a physician, the bank will happily hand you a large line of credit and/or mortgage because they know your earning potential. This can be a financial trap because it encourages some doctors to live large too early. Although the idea of self-awarded prizes for years of dedicated study is alluring, if you get a mortgage for a big house and dip into the line of credit for a luxury car without first getting the debt monkey off your back, the financial repercussions can bite – and bite hard.
Many doctors fail to realize that being in the highest tax bracket means they have to earn almost $2 to pay each dollar of debt. (Taxable income over $150,000 is taxed at 46.47%, $200,000 at 47.97%, and $220,000 at 53.53%.) Those higher tax rates mean it will cost upwards of $200,000 to repay a $100,000 loan; so, set up regular loan payments and get that loan paid off sooner, rather than later.
3. Insurance coverage 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, but you should speak with an insurance advisor to plan what’s right for your situation.
- Disability Insurance
Pays you a tax-free monthly income, if the policy is a personal policy, should you be unable to work as a result of an accident or serious illness 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, and unpaid taxes, and can assist your loved ones with the mortgage and education expenses. In addition, it provides your family with money to replace your lost income.
- Critical Illness Insurance
Provides you with a pre-determined, 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.
The GGFL Health Professionals Team has 45 years of experience. We understand the nuances and unique needs of a professional practice.
If you’d like to learn more and discuss your plans with a professional advisor, please contact us.
It’s never too early to get a handle on your finances. You can review the OMA website for information on programs and insurance provided to OMA members.