Are you wasting $112 per day

A common situation we encounter is physicians who have incorporated but receive advice that includes never taking any T4 income from their Medicine Professional Corporation (“MPC”), preferring instead the simplicity of receiving dividends.  By the time they turn 40, financial planners and advisors start to suggest that setting aside funds for retirement in a tax-sheltered account might be a good idea.

What does the math look like for a 40-year-old doctor who, until now, never took one dime in salary/bonus/T4 income and decides to set up a pension plan?

First, we need to assume a few things:

    • the MPC is paying the ‘maximum pensionable salary’ each year at a minimum.  For 2024 that’s roughly $181,000.  Of course, the physician can pull out more than that either via dividends or extra bonus.
    • they invest the contributions made to the pension plan and generate a conservative rate of return of 5% consistently every year
    • they plan to retire at age 65, 25 years from now.

With these assumptions nailed down, here is how the pension solution compares to one where we maximize contributions to the RRSP instead:

    • $646,211Additional tax-deductible contributions in excess of those allowed under RRSP rules.
    • $1,022, 079 – Additional registered assets available in retirement (at age 65) in excess of those accumulated by making maximum annual contributions to the RRSP account.

If we were to take the additional registered assets ($1,022,079) and divide those by 25 years, the average annual pension advantage would be over $40,000.

That $40,000 annual average advantage divided by 365 days, works out to a daily  ‘opportunity cost’ of $112 – meaning that for every day that this doctor waits to upgrade to a pension plan, it is as if the physician had taken $112 from their wallet and threw it down the drain.