RSRS has assembled some sound advice from experts in the financial and legal fields geared to you, the physician. The following is an excerpt from RSRS’ new guide: “Getting Ready to Retire: Financial and Estate Considerations for Retiring Canadian Physicians.”
As a doctor, how do I determine when I am financially prepared for retirement?
Estimate Current Cash Flow
Whether you’ve been considering retiring from medicine for some time or the idea only occurred to you recently, you may be ready to make it happen – but are your finances ready? Start with cash flow.
It’s important to estimate what your current cash flow needs are to determine, based on your life expectancy, how many years your retirement ‘nest egg’ will last. Look at everyday expenses (mortgage payments, child expenses/schooling, auto expenses, food and other household expenses), and determine the annual cost of retirement hobbies (golfing, travelling, etc.) and other foreseeable expenditures (vacation home, children’s weddings, etc.), comparing these expenditures with the amount of income your investments will earn once you have retired. The difference will have to come out of your retirement nest egg and will, in turn, reduce the amount of income your investments will generate each year.
Review your sources of income such as CPP, pension payments from an IPP, investment assets and the tax effectiveness of each type of income. Calculate whether your after-tax income will cover your expenses. Track your expenses so that you can make changes if your income isn’t high enough to pay for everything.
Pension and interest income are taxed at your highest marginal tax rate. Dividends and capital gains are taxed at a lower rate. So you should try to structure your investment portfolio so that interest income is earned in a registered account such as an RRSP, RRIF or TFSA.
CPP and pension income can be split with your spouse so that you end up paying less tax. When you apply for your CPP, you will have to indicate the desire to split the income with your spouse on the application form. If you are receiving income from a pension or a Registered Retirement Income Fund (RRIF), you can choose the most tax-effective split with your spouse when you file your tax return. When you calculate the best allocation, keep in mind the clawback on Old Age Security (OAS) — which is based on your income — so that you don’t end up losing your OAS entitlement.
Risk and Your Asset Mix
Review your investment portfolio’s asset mix and make sure it matches your risk profile. Now that you are retiring, you may want to take on less risk. In that case, you may want to reduce your exposure to equities and increase your exposure to cash and fixed income such as bonds and GICs. Keep in mind that if you do this, your portfolio’s rate of return will probably decrease. Review your cash flow requirements before making this change.
Which assets do you draw down first?
Which pool of retirement assets do you start to draw down first — TFSA, non-registered account, RRSP/RRIF, money in your professional corporation, etc.? The answer to this question depends on your age and the age of your spouse; whether the investments in those accounts have unrealized accrued gains; how much income is required and how the income will be taxed once the amounts are distributed from the investment account. There is no one right answer and often monies are taken annually from a combination of sources.
This information is excerpted from “ “Getting Ready to Retire: Financial and Estate Considerations for Retiring Canadian Physicians.” A physician contemplating retirement has a myriad of details to tend to, both professionally and personally. Prudent financial, estate and legal planning can make a big difference, both in the short and long terms.
If you’d like a printed version of this useful book mailed to you, call RSRS at 1‑888‑563‑3732, Ext. 222 or get the free download now from http://www.recordsolutions.ca/guide. There is no cost associated with obtaining this information.