Money. As a dentist with a few years under your belt, maybe you’ve got it all figured out. Or maybe money worries keep you up at night. Maybe you’ve got questions: How quickly should I pay off my debt? When should I start saving? How much will I need to retire? Is this the right time to incorporate my practice?
These are the questions that Lamees Rahif, an Investment Planning Advisor with CDSPI Advisory Services Inc., hears every day. She advises new dentists on the best ways to kick-start their financial plans and get set up for long-term success. Her advice is simple and straightforward: “There’s no magic bullet. You just need to get started and put the right wheels in motion all at once.”
Let’s break down some of the most common ways you can take control of your money and start building wealth today.
Pay down debt and invest at the same time
For many young dentists, it’s not a good idea to focus entirely on paying off debt. A smart long-term strategy can be to lower your regular loan payments, which frees up extra cash, so you can start saving and investing that money for the future.
Here’s how it works:
Imagine you plan to pay your student loan off in five years but you stretch that to 10 to lower the monthly payment. You take the difference each month and invest it across your long-term savings accounts like your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA).
In the example below, this strategy lowers your loan payment by $819.04 a month, but you will also pay an additional $20,522.40 in interest over the life of the loan. But that’s not necessarily bad news.
| Loan details | Over 5 years | Over 10 years |
|---|---|---|
| Loan amount | $100,000 | $100,000 |
| Monthly payment | $1,980.12 | $1,161.08 |
| Monthly savings | $819.04 |
If you decide to invest that $819.04 a month and it earns an average rate of return of 5%, it could increase to as much as $127,182 over those 10 years. By the end of this period, you’ll be ahead by $106,659.60. This is just one example of a debt-management strategy an advisor might recommend to simultaneously help you pay off your debt and start building some savings.
Having a clear debt-management plan early in your career helps you identify the financial tradeoffs you can make to reach your goals.
Protect your lifetime earnings with insurance
If you think you don’t need insurance, add up your lifetime earning potential as a dentist. That’s your salary, times the number of years you plan to practise. If you can’t work as a dentist due to illness or injury, how will you replace all that income and still maintain your lifestyle? The answer is insurance. And here are the top reasons to get it now.
1. Insurance costs less when you are young and relatively healthy
The monthly premiums for critical illness, disability and life insurance are typically much lower when you’re young because there is less risk of a payout. Most policies will let you increase your coverage, so make sure you get the future insurability option offered on most plans so that you can increase your coverage without medical underwriting to keep pace with your increasing income. Getting started with an amount you can afford is a wise first step.
2. Your coverage is guaranteed even if your health changes
If you wait to buy insurance, any change in your health could affect the cost of insurance and even your ability to qualify for the coverage you need.
Knowing what you have and what you need is key when it comes to insurance. If you’re working for a practice or a dental service organization that provides group benefits, make sure you understand the coverage you have and how it works. This will help you to spot gaps in your coverage and take steps to make sure you and your business are fully protected.
HOW INSURANCE REPLACES YOUR INCOME AS A DENTIST
Life Insurance
Your beneficiaries get a lump sum they can invest and turn into steady income and/or pay off debts.
Disability Insurance
A percentage of your income is provided to you until you recover or reach the age of retirement.
Critical Illness Insurance
When you're diagnosed with a qualifying illness, you get a lump-sum payment to cover expenses so you don't have to dip into savings.
Know when to incorporate
Wondering when it makes sense to incorporate? Ms. Rahif offers this simple piece of advice to new dentists: “If you have two consecutive years in which your income exceeds the amount you need to live on, it’s probably time for you to incorporate your practice and start taking advantage of short and long-term tax savings.”
Short-term tax advantages
By incorporating your practice, all the money you earn goes into your corporate account and gets taxed at about 12% versus a personal tax rate of up to 33%. Your corporation can pay you a salary and invest the rest.
Long-term tax advantages
Corporate investments grow on a tax-deferred basis, meaning they can increase faster thanks to time and compound interest. You can also set up an individual pension plan. Then, your corporation makes tax-deductible contributions to the plan that are invested based on an established strategy that helps you save more for retirement.
ARE YOU READY TO INCORPORATE?
Through an exclusive partnership with the accounting firm, MNP, CDSPI can help determine whether incorporation is right for you. Book an appointment today and qualify for a 20-per-cent discount on set-up fees. .
Synchronize your retirement journey
Off-the-shelf plans rarely work for dentists because they fail to take into account the variety of income streams that will provide for you and your family throughout retirement and even beyond. They may include:
- A Registered Retirement Savings Plan (RRSP)
- A Tax-Free Savings Account (TFSA)
- An Individual Pension Plan (IPP)
- A group savings plan
- Guaranteed Daily Interest Account (GDIA)
- Corporate investment income
- Proceeds from the sale of your practice
- Withdrawals from the cash portion of a permanent life insurance policy
- Canada Pension Plan (CPP)
- Old Age Security (OAS)
Getting all these financial cogs working together, as early as possible, helps you generate an income and tax plan that will help you keep more of the money you earn, pay less tax, and transfer assets to your loved ones in the most tax-effective way. Having a financial plan helps you determine which accounts you should open, which ones you should contribute to first, and how to minimize your annual tax bill. Knowing where you stand can help you decide whether it makes more sense to contribute to your TFSA or RRSP.
Even though retirement seems like a long way off, having a plan based on your current income, your expectations, time horizon, and risk tolerance is essential. Once you establish a base plan, you can refine it every year or whenever your circumstances change.
Don't go it alone
To ensure that your financial plan is in sync with your goals, it’s best to get the advice of a professional. As a busy dentist, you may not have the time or the energy to do it all yourself, and it can be stressful. Why not outsource the job of planning to someone with decades of experience, who understands the financial and tax planning needs of the dental community?
Establishing a long-term relationship with financial experts who understand your business and know how to personalize a plan for you is the first step toward building wealth and protecting loved ones. At CDSPI, we know dentists. With more than 60 years of experience, our team of advisors** knows how to anticipate your needs and recommend the right financial solutions.
ADVICE PAYS
A 2020 survey* found that "the average household with a financial advisor for 15 years or more had asset values 131% higher than an average 'comparable' household without a financial advisor."
* More on the Value of Financial Advisors. Claude Montmarquette and Alexandre Prud’homme. Copyright 2020. ISSN 1499-8629 (online version).
**Advisory services provided by licensed advisors at CDSPI Advisory Services Inc.