As a financial advisor, I speak to many dentists—ranging from those who are starting out to established practitioners—about their financial concerns. That is why I was not surprised to see that in a recent survey1 Canadian dentists identified saving for retirement as their most important personal financial goal.
Dentists’ concerns around retirement savings may differ, depending on their life or career stage. Most dentists in the early years of their careers ask me for advice about fitting investing into their budget, given that they have competing priorities such as paying down education debt, opening and growing a dental practice and starting a family. Meanwhile, dentists who have been working for 10 years or longer are generally concerned about tax-efficient strategies for retirement. Both groups wish to make the most of their investment dollars. Here are some ways they can accomplish this shared goal.
Start Early, Start Small
If you are a young dentist, my advice is to start investing as soon as possible, even if you can only afford to invest a small amount. Otherwise, you will lose valuable time that is impossible to make up later. Let’s say you reduce some discretionary expenses and are able to invest $100 a month starting at age 25. If you keep investing just this amount, you will have retirement savings of approximately $192 000 at age 65 (assuming an average return of 6% annually).
However, you will have to save more aggressively if you delay investing. Imagine that you wait until age 35 to start investing. Even if you double your contribution to $200 monthly, at retirement, you will have only half as much as someone who started investing in their retirement plan at age 25.
Once you establish a savings plan, consider increasing the amount you invest whenever your income increases. A general rule is to take half your age and use it as guide to determine the percentage of your gross income that you should invest annually for retirement. Consult your financial advisor for advice on meeting your personal retirement income objectives.
Reduce Investing Fees
It costs money to invest, even when you do not see the charges. For example, commissions can be embedded into the management fees for investment funds. Over time, these charges can erode wealth in your portfolio.
As a not-for-profit organization with a mandate to support dentists, CDSPI is able to offer investment funds that do not charge commissions or routine transaction fees. CDSPI investment funds have some of the lowest management fees on the market (ranging from 0.67% to 1.77% annually depending on the fund selected).
Don’t assume that you have to pay high fees to obtain quality investments. Quartile rankings are a measure of how well a fund has performed against all other funds in its asset category. The top 25% of funds with the highest returns in a given category are assigned a quartile ranking of 1, down to the last 25% of funds, which are assigned a ranking of 4. In the one-year period ending September 30, 2013, 77% of all* CDSPI funds achieved a quartile ranking of 1 or 2 (i.e., performing in the top 50% of all funds in their categories). Over the longer term, 97% of CDSPI funds achieved a quartile ranking of 1 or 2 for the 3-year period ending the same date, and 90% of CDSPI funds achieved a 1 or 2 ranking in the 5-year period ending on this date.
Choose Qualified Advisors
According to the survey1, 73% of respondents have RRSPs (registered retirement savings plans) and the Canadian Dentists’ Investment Program’s RSP is the leading choice for dentists. Besides its competitive pricing, dentists cited trustworthiness among the reasons for choosing CDSPI. It’s a reflection of CDSPI’s ongoing commitment to providing relevant advice and financial services solutions for the dental community.
The investment planning advisors at CDSPI work exclusively with dental professionals. This specialization means that they truly understand the issues that many dentists will encounter throughout their careers. For instance, as more dentistry professional corporations have been established in recent years, dentists have been eager to learn about the investment planning opportunities available for this type of arrangement.
If your practice is operated through a corporation, you may have additional choices for retirement income outside of an RRSP. One potential option is to have the corporation set up a corporate investment account to fund your retirement. The corporation would pay you dividend income at retirement, which may be taxed at a lower rate than retirement income from an RRSP. This strategy may offer other advantages, including eligibility for investment tax credits and deductions, and income splitting with family members.
Corporate class funds are another tax-efficient solution. Traditional mutual funds are trusts, whereas corporate class funds are actual corporations. Within a non-registered investment account, the corporate class structure may provide tax advantages, such as switching or rebalancing between funds within the corporate structure without triggering capital gains. This effectively defers taxes. The structure may also help minimize taxable dividends through the sharing of expenses, gains and losses within the corporation.
My advice for dentists at all life stages is: help your retirement portfolio reach its full potential by taking advantage of the expert advice and solutions offered as member benefits through your professional associations.
1Source: 2012 CDSPI Survey conducted by a third party; data collected between July 18 and August 10, 2012.
*Based on analysis by Morningstar (www.morningstar.ca) of CDSPI funds with performance records of one year or more. Past performance is not necessarily indicative of future performance.