Why a “high” salary alone does not equate to wealth
Erica*, an incorporated medical doctor (radiologist) in her 30s, currently earns $380,000 annually. Based in Toronto, her mortgage totals $1,500,000 and her student debt amounts to $87,000. She feels overwhelmed by the increasingly complex range of financial decisions she is faced with, particularly given her busy career and schedule, and her limited finance and investing knowledge. She also describes being frustrated by the seemingly little progress she is making in terms of saving and retirement planning and is keen for information on tax-efficient investing. She is conscious of having fallen into the lifestyle “spending trap” that can afflict many high-earning physicians.
This example highlights a key issue concerning many MDs: a relatively higher salary alone does not automatically equal wealth. The latter is about building net worth (your assets minus liabilities) – and that requires discipline and a well-defined strategic financial plan. In other words, it means resisting the urge to overspend and instead balance discretionary lifestyle spending with a focus on investments that build wealth.
Avoiding spending traps and focusing on wealth building
Erica is not alone when it comes to the ‘overspending’ pain point of many MDs. A financial blog written by American physician James M. Dahle (“The White Coat Investor”), intended for his peers, sums up the key reasons many doctors overspend. Notably, many of these reasons can also apply to non-physicians (that is, the rest of us), including the following: limited understanding of the progressive tax code and the impact on earnings; a tendency to spend what’s in our account; the belief that we will always earn at our peak and that this salary will never stop; not understanding just how much we need to save for retirement; and the common belief that spending necessarily brings happiness. We highlight two reasons that may resonate with physicians in particular:
- Pent-up deferred gratification. This happens either when a newly minted doctor, fresh out of medical school, finally starts earning and tends to over-indulge, perhaps to reward themselves for successfully making it through a gruelling school and training schedule. It can also apply to a resident or doctor whose salary may climb substantially higher after several years of training or practice.
- Societal and family expectations. Physicians are typically accorded a certain social status and for many doctors this means living up to expectations through their own conspicuous consumption: a house or car for example that befits this social standing. Socializing with higher-earning peers can also lead to the desire or pressure (self-imposed or external) to “keep up with the Joneses”.
Working with an Investment Advisor to develop a concrete plan is vital to getting on track to build and preserve wealth for a comfortable retirement. Erica and her Richardson Wealth Advisor worked closely with the inhouse Tax, Estate Planning and Insurance teams who considered her goals and objectives to customize an action plan incorporating the following: tax and financial planning strategies; corporate planning; insurance solutions; estate planning; and retirement planning.
Questions to consider in Erica’s planning included:
- What strategies should she use to reduce her debt load as quickly as possible?
- Is her professional corporation still tax efficient?
- Should she receive annual income as salary and/or dividends from her corporation?
- How can she reduce the impact of recent tax legislation in relation to investments held within her corporation?
- What insurance planning should she consider to protect her income in the event of a critical illness or disability?
- What is the projected tax impact on her death?
- Does she have a will and powers of attorney or health care directives in place?
Managing your wealth effectively requires continuous attention to ensure that as your goals change, and as financial markets and government regulations evolve, you are capitalizing on strategies to help maintain, protect and transfer your wealth.
*For illustrative purposes only. Erica represents a composite of actual client circumstances.