t h e w e a lt h y p r a c t i c e M a n f r e d p u r t z k i Manfred Purtzki, CPA, CA, is a principal in the Vancouver office of Purtzki Johansen & Associates. He can be reached at: Manfred@purtzki.com or 604-669-7558.
Another challenge in 2021
Besides all the other issues, healthcare practitioners need to save for the next “rainy day”
T
he year 2020 is one that everyone On the other hand, if the yield drops One solution for Dean and Cheryl to wants to forget. The pandemic to 2%, your investment would then shrink consider is accessing the equity of their disrupted our lives in unimaginable by $400,000 to $1.2 million. That’s a drop home to supplement their retirement ways. It brought our economy to its of $700,000! income. With a Home Equity Line of Credit knees and forced the closure of many The sharp decline in the interest rate (HELOC) they can enjoy a fun retirement thriving businesses. Medical and dental particularly affects those investors who without having to worry about money clinics were not spared either, and many are nearing retirement. (like the high-up-on-their-bucket-list clinics had to shut down entirely for a few Consider the situation of Dean and dream of taking an Oceania cruise on the months during the first wave. Cheryl. Dean retired from his practice Baltic Sea…eventually). The disruption in income this year when he turned 65. Many The HELOC accomplishes the best had a lot of practitioners years ago, the couple set a goal of two worlds: tax-free income and worried about how to pay to have an annual investment continued enjoyment of their present Everything, the bills. Many did not income of $80,000 for the home. There’s no need to downsize to including your have cash reserves and next 30 years. Their advisor take the equity out of the home. savings plans, has had to resort to a line of suggested a 4% investment Suppose Dean and Cheryl own their changed with the credit to pay for ongoing withdrawal rate, which $2-million home mortgage-free. It’s clinic costs and personal meant an investment target expected to appreciate by 5% annually. pandemic living expenses. With no of $2 million. They arrange for a HELOC at 3% with money coming in, many The 4% withdrawal rate for interest accumulating on the line of credit. practitioners learned the hard investments has been the gold Suppose they want to draw $50,000 lesson of why they need to have standard for many years. Previously, per year for the next 20 years. The table enough cash on hand to last at least six the 4% withdrawal rate was always (below) shows the impact of their draws months in case of an emergency. In one considered very conservative. It assumed on the equity remaining in their home. survey, 25% of the top income earners that a risk-averse couple at age 65, with To illustrate, in 10 years they have stated that they did not have enough cash limited stock market exposure in a drawn $500,000 plus the interest owing, put aside to last even three months. portfolio, was able to provide funding for for a total of $573,194. The value of their There was a collective sigh of relief 30 years of retirement. $2 million home increased to $3,257,789 when clinics were allowed to reopen. This all changed with the pandemic. in Year 10. Their equity in the house Revenues eventually recovered to preHaving reached the investment goal would be $2,684,595. Despite taking COVID-19 levels. Many practitioners in the of $2 million, Dean and Cheryl counted $500,000 of draws, the home value still sunset of their careers decided to opt for on receiving $80,000 per year for the rest increased by $685,000. early retirement instead, much to their of their lives. It colleagues’ envy. came as a shock to To get the economy back on its feet, them when their AT END OF HELOC HOME VALUE EQUITY the Bank of Canada used its monetary financial planner YEAR 1 $ 50,000 $ 2,000,000 $ 1,950,000 tools to lower the bank rate to the current cautioned them to YEAR 5 $ 265,457 $ 2,552,563 $2,287,106 0.5%. This created a significant drop in the withdraw only 3% yield of interest-bearing securities. You’re annually from their YEAR 10 $ 573,194 $ 3,257,789 $2,684,595 lucky if you can find a secure investment investments. With YEAR 15 $ 929,946 $4,157,856 $ 3,227,910 today for 2%, and the government is not the majority of their YEAR 20 $ 1,343,519 $ 5,306,595 $3,963,076 concerned about the inflation rate of 2%. portfolio invested Therefore, you can expect this low-rate conservatively at investment climate to continue for the the current 2%, the next few years. likelihood is that they’ll run out of funds The home equity line of credit is a Here’s an illustration of how the lower in their lifetime at the 4% withdrawal rate. fantastic tool that lets you enjoy your yields on your investments will impact It’s a bitter pill to swallow to drop their retirement years to the fullest without your ability to save. expected income of $80,000 to $60,000. worrying about the pandemic and its If you invest $4,000 per month for While the $60,000 per year takes care effect on your investment portfolio. And 20 years at 6%, you’ll have accumulated of their basic needs, it does not allow for maybe take that dream cruise—when almost $1.9 million in your portfolio. much else. such bucket-list travel is possible again.
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Just For Canadian dentists March/April 2021
