Canada: Retirement Planning: It Is Never Too Early To Start

Last Updated: February 23 2015
Article by Alan Wainer CA, CPA, CPA (Illinois)

Retirement means different things to different people. When our medical professional clients meet with us for their annual financial checkup, our primary objective is to ensure that they leave informed and with a sense of relief and comfort. It is no different than when their patients come to see them to address their health issues.

The retirement discussion is not age specific, but it does become a more prevalent topic as we get older. The focus of this article is to address some of the financial aspects of retirement.

Goal Setting

The second habit of Stephen Covey's Seven Highly Effective Habits is, "Begin with the End in Mind." It is much easier to plan for retirement when you know where you are heading.

It is our role as an advisor to first, ask questions; second, help identify goals and objectives; and third, provide some of the solutions and options available to help you get to where you want to be. Some of the questions that need to be addressed include:

  • When do you plan or expect to retire?
  • How much will you need to maintain your desired standard of living in your retirement years?
  • What is your expected lifespan based on family history and lifestyle?
  • What are your goals for retirement (e.g. to work part time, travel, get involved in community work, take up a new interest, etc.)?
  • Will your children and/or dependents have financial needs that will reduce your retirement pool?
  • Will you have sufficient funds to cover your retirement years?

Based on the answers to these questions, we will often be able to establish goals and objectives. Once we know what the end game is, it is much easier to put a plan in place to accomplish those goals. Goals are not static, though. Retirement goals can be revised or, in some cases, have to be revised based on one's ever-changing life circumstances. It is important to revisit your retirement goals and financial plan every few years and make the appropriate changes.                                            

Assets Retained in the Professional Corporation

One of the main benefits of incorporating a professional practice is the ability to defer tax. For every $100,000 that can be kept in a professional corporation and not withdrawn for personal living expenses, there is an opportunity to defer approximately $34,000 in taxes. If this strategy is utilized, many professionals will have built up considerable assets in their corporation by the end of their careers. These assets, often invested in marketable securities, bonds, term deposits or real estate, can make up a significant portion of a professional's retirement nest egg.

In retirement, the professional will start to draw down these assets, withdrawing monies, generally, as dividends. Currently, in Ontario, dividends are subject to personal income tax rates ranging from zero per cent to 40 per cent, depending on the recipient's marginal tax rate and amount of other income. The timing and quantum of dividend distributions from the professional corporation should be discussed in advance with your advisor so that the personal income taxes can be minimized to the extent possible.

The Use of Life Insurance

Some clients purchase a permanent-type life insurance policy within their professional corporation. A permanent-type life insurance policy is unique in that the policy can be over funded, with the excess premiums going into a special account, which is invested and grows tax-free. If the excess premiums and tax-free growth are withdrawn from the policy, the monies become taxable immediately, which is why some professionals leverage their investment in life insurance policies. The monies received from leveraging the policy can provide funds for the professional's retirement. While we do not condone leveraging a corporate-owned life insurance policy personally, if the funds from leveraging a corporate-owned policy are received by the professional corporation, they can be distributed as dividends. It is not always recommended to hold a permanent-type life insurance policy in a professional corporation, so prior to purchasing or transferring a life insurance policy to your corporation, proper advice should be obtained.

Retirement is just another chapter in your life. But like anything in life, if you are going to do it right, you need to plan ahead. Goal setting is the first step.  Proper advice and planning will allow you to achieve those goals. Taking advantage of the tax deferral opportunity afforded by your professional corporation and utilizing a permanent-type life insurance policy can enhance your retirement pool. So what are you waiting for? No time like the present to get started!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Alan Wainer CA, CPA, CPA (Illinois)
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