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In This Issue: How Much Do You Need to Retire?
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Volume 6, Number 3
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Dr. Huang Needs $108,000 Annually During Retirement p. Bonuses vs. Benefits – Advantages of a Health Spending Account
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Mike Lakhani and his Team of Specialists. Tax Advisors to the Dental Community
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Editorial
How Much Do You Need to Retire? etirement represents a very special time in life when you can relax after a busy career and reflect upon your accomplishments. New opportunities present themselves for you to enjoy a lifestyle you worked so hard to earn. It could include more travel, enjoyment of hobbies, time with family and friends, or perhaps time devoted to charity or faith. It is a time of self-actualization to accomplish a lifetime of goals and dreams, and to give consideration to the legacy you will leave for others. However, to fully enjoy your golden years, you should have a sense of confidence that your finances have been well looked after. In many respects, retirement planning is about maintaining your independence and dignity throughout your lifetime. At times you may wonder, “Do I have enough to retire? How long will my money last? How much do I need to save for retirement?” These are very important questions and require thought and planning to give you the best chance of enjoying retirement to its fullest. There are many factors to consider when developing a retirement plan that pose a risk to achieving your goals: • Spending Patterns • Inflation • Longevity • Investment Returns & Volatility • Taxation The key is to recognize there are some factors that we cannot control and others that can be controlled, and each has its own characteristics. Spending patterns may be the largest determinant of how much capital needs to be saved to meet your retirement income needs. For example, someone who needs $150,000 per year will need to save twice as much as someone who needs $75,000. While this seems intuitive, it is extremely important to calculate how much is needed to cover not only fixed annual expenses (such as property taxes, food, clothing, auto, insurance, etc.) but also discretionary expenses (such as entertainment, recreation, travel, dining out, etc.). This simple yet important analysis is critical in building a realistic retirement plan. At today’s inflation rate, the cost of goods and services will double over 25 years. Advances in medicine and health care mean we are all living longer. For a 65-year old couple, the median life expectancy for the last survivor is 91 years old. These days, it is possible to live as many years in retirement as
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Tax Advisors to the Dental Community
Mike Lakhani, B.Comm., F.C.C.A., C.G.A., CFP, R.F.P.
working years! It requires a lot of capital to provide income for 25 to 30 years from savings alone. When calculating a retirement target, it is possible to use a simple rule of thumb—do not spend more than 4% of your initial capital per year. For example, an income need of $100,000 per year requires $2.5 million investment assets. While this may seem like a lot, it is a realistic amount given the financial risks mentioned above. So rather than feeling victimized by risks beyond one’s control, we can address risks that are within one’s control. Investment assets will last longer using a balanced portfolio containing stocks and bonds; stocks provide the ability to protect purchasing power over time, and bonds provide protection of capital. Volatility erodes portfolio values while consuming capital, so it’s important to choose investments to minimize volatility. Finally, tax planning can be utilized to effectively minimize the tax burden over one’s lifetime. The key to successful retirement planning is to identify your needs and carefully assess the risks within and outside your control. This is one of the most important tasks we spend time on for our clients to ensure a lifetime of hard work really pays off. In this issue of Tax Matters For Dentists, Chris Molloy presents a case study to demonstrate how effective tax planning in retirement can greatly enhance lifetime income and provide an improved sense of confidence during this important phase of life. Also, we are pleased to include a guest writer, Sandie Baillargeon to this edition. Sandie is a business analyst and dental practice management advisor at her firm Dental Office Consulting Services. Sandie comments on the potential pitfalls of incenting staff with traditional bonus methods, and offers the advantages of a Health Spending Account instead. For a second opinion on planning your retirement income or other matters to "Align Your Practice with Your Life ", please do not hesitate to contact my office at (905) 273-6605 or electronically at mlakhani@assante.com or www.ddstaxes.com. Mike Lakhani, B.Comm, F.C.C.A., C.G.A., CFP, RFP is Vice President, Senior Financial Advisor with Assante Financial Management Ltd. Mike has over 20 years experience as a f inancial advisor working in the Mississauga area. Mike specializes in tax, estate and investment planning for the dental profession. You can contact him at 905-273-6605 or via email at mlakhani@assante.com
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Case Study
Chris Molloy, CFP
Dr. Huang Needs $108,000 Annually During Retirement
r. Huang and his wife were looking forward to retirement after 30 years of running their successful dental practice. It was surprising to them how quickly time had passed, they certainly didn’t feel like seniors, in spite of the fact they each had celebrated their 65th birthdays. As fans of the Toronto Blue Jays, they planned to spend much more time watching games at the ball park tracking their favourite players and stats. Dr. Huang recently sold the shares of his practice for $1 million. Dr. Huang incorporated years ago and added his wife as a shareholder. Steps were taken prior to the sale to “cleanse” the company to ensure both spouses were eligible for the Capital Gains Exemption. For example, Dr. Huang was able to utilize the provisions of “terminal funding” to top-up the Individual Pension Plan (IPP) by an additional $75,000 to clear the last remaining investment assets from the company (see the previous edition Volume 6 Issue 1 for additional details on terminal funding). As a result, the sale was completed on a tax-free basis.
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With various sources of savings available, would the Huang’s have enough to last for potentially the next 30 years? When would be the best time to convert their RRSPs to RRIFs? What would be the best solution for money inside the IPP? All of these questions needed to be addressed.
Opportunity There are many variables beyond the control of retirees, such as longevity risk, inflation risk, and investment risk. But there are a variety of strategies within one’s control to improve the reliability and sustainability of one’s retirement income, and to do so in a tax-efficient manner. The Huang’s had taxable and non-taxable investment accounts (i.e. RRSP/IPP vs. Open). This presented a great opportunity to plan their sources of income in a manner that would minimize taxes over their lifetimes. If possible, we wanted to structure their affairs to avoid OAS clawback since this would put additional pressure on their lifestyle spending or undue expectations on their investment portfolio to accommodate the reduction in benefits.
Problem A couple of years before putting the practice up for sale, Dr. Huang and his wife wondered whether they would have enough funds set aside to meet their retirement income needs. Without a traditional employer pension for either of them, all of their retirement income would be derived from Dr. Huang and his wife’s savings (aside from modest government pensions). It was important to know whether their money would outlast them, or regrettably, if the opposite might occur. After a fair and reasonable assessment of their spending patterns, the Huang’s anticipated fixed annual expenses of $72,000 per year to cover typical items such as property taxes, utilities, food, clothing, auto, and insurance premiums. In addition, they wished to allocate $36,000 per year towards discretionary expenses, such as season’s tickets for Blue Jays games, travel, entertainment and dining out.
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Solution There were various planning strategies available to the Huang’s to structure their income in a tax-efficient manner and improve their retirement income. Conventional wisdom suggests one should delay the conversion of an RRSP to a RRIF until age 71 to defer taxable income as long as possible. However, the Huang’s could begin RRIF income immediately and avoid a spike in their taxable income at a later date from the larger RRIF values. This would effectively be like income splitting with themselves, or income averaging. While it does result in paying more tax in the early years of retirement, it avoids OAS clawback by allowing their taxable income to remain below the threshold in later years. This effect alone can save thousands over their lifetimes. Based on the minimum annual withdrawals, the Huang’s could expect to receive $12,000 each per year. Tax Advisors to the Dental Community
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receive $80,000 per year Due to changes in ($24,000 split evenly from Canadian tax law a few years RRIFs, and $56,000 split evenly ago, seniors now benefit from from Open investments). the ability to share sources of IPP / LIF $ 275,000 The final remaining pension and RRIF income. RRSP / RRIF $ 600,000 suggestion is to maximize annual This allows spouses to contributions into Tax Free minimize taxes. Thus, we Open Account (Proceeds of Sale) $1,000,000 Savings Accounts (TFSAs). This were able to equalize their Open Account (Other Savings) $ 400,000 could be accomplished simply by RRIF income for tax purposes shifting investments from their and cause effective income Investment Assets $ 2,275,000 Open accounts. Current laws splitting. Home $ 750,000 allow contributions of $5,000 per Another strategy is to person per year. Over time, the attempt to match fixed Net Worth $ 3,025,000 Huang’s would be able to transfer expenses with sources of a significant portion of fixed income. This their investments into provides a great degree tax-free accounts, of stability and reducing tax on p r e d i c t a b i l i t y, investment income. particularly desirable Income per Spouse for those who no longer earn Result Cash Flow Taxable Income employment income. Due to the identical CPP $11,000 $11,000 It was suggested all the sources of taxable funds from the former income from pensions, OAS $ 6,000 $ 6,000 IPP be used to savings, and Life Annuity (IPP / LIF) $ 9,000 $ 9,000 purchase a life annuity. investment income,
Net Worth
Cash Flow Projections
This would not only we were able to RRSP / RRIF (Annual Minimum) $12,000 $12,000 provide a guaranteed provide them with a Inv. Withdrawals (Open) $ 28,000 source of income, but sustainable income of ($1.4M @ 4% x 50%) it would also avoid $114,000 per year net Interest $ 7,000 immediate tax after tax (exceeding consequences on their goal of $108,000). Dividends (Grossed up) $14,500 transfers from the IPP The Huang’s were Capital Gains (Realized) $ 3,500 to a Life Income Fund comforted knowing (LIF) for amounts they would be able to Net Income Before Tax $ 66,000 $ 63,000 above the prescribed exceed their goal, and Less: Personal Taxes ($ 9,000) ($ 9,000) transfer limit. Between achieve a high degree of the CPP, OAS, and predictable income Net Cash Flow (per Spouse) $ 57,000 annuity income, it was without taking undue Family Cash Flow (Two Spouses) $ 114,000 estimated the Huang’s investment risk. The would be able to tax planning provided Desired Lifestyle Spending $ 108,000 Goal Exceeded receive a guaranteed relief from draining *OAS Clawback avoided with taxable income below threshold ($66,733 in 2010) lifetime income of their investment $52,000 per year from accounts quicker than these sources. This necessary, allowing the was sufficient to cover two-thirds of their fixed expenses. funds to last longer. Perhaps that little bit of extra savings They were satisfied with this level of coverage because will allow them to bring their grandchildren to Blue Jays they also intended to rely on the remaining $2 million games on the weekends, too. of savings for their other expenses. For a free consultation, please contact the Lakhani As a general principle, it is fair to say that a broadly Team at 905-273-6605 or mlakhani@assante.com. diversified and balanced portfolio can last 25 to 30 years provided withdrawals do not exceed 4% of the Chris Molloy, CFP, is a Financial Planning Advisor with Assante original value. There are various independent studies, Financial Management Ltd. Chris has over 15 years experience as a not to mention historical empirical data, to support f inancial advisor working in the Mississauga area. Chris specializes in tax, estate and investment planning for the dental claims that this level of consumption is sustainable profession. You can contact him at 905-273-6605 or via email at during retirement. With the Huang’s remaining $2 cmolloy@assante.com. million of investment assets, they could expect to Tax Advisors to the Dental Community
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Bonuses vs. Benefits
Sandie Baillargeon
Advantages of a Health Spending Account
iring “the right people� can be tough and tedious work but it is arguably the most important function you will ever perform. You must have a top performing team in place to give you the peace of mind that your patients are being well taken care of and that you are able to do what you do best - practice dentistry. To attract and retain high quality staff, employee compensation must include fair practices and reward employees based on the merit of each individual's performance. What happens if your practice has top performers who are at the peak of their salary range? Cutting hours and salaries is not the answer and bonus systems don't work. Here are five reasons why:
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1. This comment is not popular with employees, but it is worth considering, why should you give your staff a bonus for doing the job that they were hired to do? It seems to me that this is a redundancy that doesn't make much sense and many practices cannot afford. 2. Incentive bonus plans are labour intensive to administer. They require monitoring, analyzing and tracking. This requires that time and attention of your manager is focused on production only instead of being committed to excellence in the quality of services provided. 3. Bonuses become an expectation. If financial targets are not achieved, employees may feel that they are still entitled to receive a bonus. What if your production is down and your practice is losing money and you cannot afford to provide a bonus? If employees do not receive bonuses that they were expecting, they may view it as punitive and morale is affected in a negative way. 4. If bonus plans are not administered well they create a sense of unfairness in your office and result in employee unrest. The dynamics change from being patient focused to looking at the monetary rewards
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which leads to internal competition. This is not good for your practice. Even if you create a bonus system where everyone at your practice receives a bonus, then you are ostensibly rewarding poor performance as well. If you have to discipline or terminate an employee, then you may run into difficulties with employment labour laws because you have rewarded the employee even though he/she was not meeting performance expectations. 5. Some offices will choose to only provide bonuses to the hygienists based on production goals. This type of system is not patient-centered and it may encourage hygienists to rush through patient care to meet their production goals. It does not reward the hygienist who creates value for the patient by taking the time to educate them about oral health thus creating patient loyalty and trust. It also neglects the other supporting team members who have worked hard to make the appointments, to prevent cancellations and process the payments.
"What happens if your practice has top performers who are at the peak of their salary range? Cutting hours and salaries is not the answer and bonus systems don't work." So how do you continue to motivate and retain those star team members while staying within your budget? Here is a win-win solution - provide your employees with a Health Benefits Spending Account as part of your employee benefits package. Traditional group benefits programs have been too cost prohibitive for many dentists and eligibility requirements and group size often made the idea of offering health benefits not feasible or practical. Tax Advisors to the Dental Community
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Health Spending Accounts provide your employees with the flexibility of obtaining services that suit the individual needs of each of your employees while providing the dentist with a tax deduction. Your employees will be able to choose what is right for them and not be restricted by plan designs that don't address the individual needs of your employees. Health care spending accounts allow employees to make personal decisions about their health care spending and actually save the employer money. Now dentists can provide the same type of benefit programs for your employees and enjoy a tax deduction. It is a win-win solution that helps dentists retain high quality
staff members. Adding a health spending account to your personnel policies is a great way to keep the good employees and provide them with a meaningful reward for their dedication to your success. Sandie Baillargeon is a leading authority on how to increase the effectiveness of medical and dental business systems. Ms. Baillargeon is author of two text books, Dental Office Administration and The Canadian Dental Office Administrator, published by Nelson Canada. Sandie is the owner and operator of Dental Office Consulting Services, which specializes in dental business planning, staff development, consulting and continuing education seminars. Visit her website at www.dentalofficeconsulting.com or contact her directly at (905) 336-7624
Health Benefits
For Dentists
ITCC Estate & Insurance Services Inc. Are you or your staff currently paying for any of the following*: • • • • •
Prescription Drugs Chiropractic & Naturopathic Services Prescription Glasses / Lenses / Contacts Laser Eye Surgery Elderly Parent & Dependent Care
• • • • •
Dermatology Services Hair Replacement Surgery Massage Therapists Physiotherapist Services Fertility Drugs and Treatment
As a dentist, you may have considered a health plan before, but now it's time to put one into action! A Health Spending Account can help you control costs compared to traditional insurance plans. All contributions are 100% tax deductible to your practice, which can be far more tax efficient than claiming these medical expenses on your personal tax return.
*List of eligible services subject to change.
For more information about implementing a Health Spending Account for yourself and your staff, contact Jeff Meier or Raj Lakhani at ITCC Estate and Insurance Services. Tel: (905) 277 7915
Website: www.ddsbenefits.ca
Learn how a Health Spending Account may be right for you and your practice.
An Open Book… Discover how you can keep more of what you earn. Coming this spring. To obtain your copy, call us at 905 273 6605 Email: info@ddstaxes.com
Tax Advisors to the Dental Community
Website: www.ddstaxes.com
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