Planning for retirement is a critical part of financial management. Pharmacists require tailored retirement strategies to ensure financial security and retirement incomes that support their planned lifestyle.
Planning Early and Developing a Good Strategy
Pharmacists, as high-income earners, sometimes don’t see retirement planning as a priority, believing they can easily prepare closer to the time. However, failing to prepare ahead could leave you not as well off as you would have hoped. Furthermore, pharmacists, especially self-employed pharmacists and pharmacy owners, face unique retirement challenges that require early and comprehensive planning.
Pharmacists typically earn above-average incomes and will likely exceed the maximum Canada Pension Plan (CPP) payments during retirement. The gap between a pharmacist’s pre-retirement income and a post-retirement one that doesn’t adequately supplement the CPP is a big jump.
Self-employed pharmacists and business owners often don’t benefit from employer-sponsored retirement plans or pension schemes. They need to take full responsibility for funding their retirement accounts and ensuring adequate savings for the future.
Unexpected circumstances can disrupt your income flow or retirement plans. Self-employed pharmacists and pharmacy owners, whose business relies completely on them, can face a complete loss of income in these situations. Preparing early and diversifying their retirement investments allows a financial cushion and flexibility.
Assessing Current Financial Status
Start with a comprehensive assessment of your current financial status. This includes evaluating assets, liabilities, income, expenses, and existing retirement savings. Consider all savings and any other expected sources of income, as well. Understanding where you stand financially enables you to chart the path forwards.
Reviewing All Potential Retirement Income Sources
Government Income
Estimate your expected Canada Pension Plan (CPP). You may also be eligible for Old Age Security (OAS); your residency and income will impact this. Delaying when you start receiving these will increase the amounts you receive. However, taking them as soon as you are able means you start benefitting right away.
Tax-Free Savings Account (TFSA)
A TFSA optimizes your savings by sheltering your investments from taxation and allows you to invest in a range of assets, including mutual funds, stocks, and bonds, while enjoying tax-free growth and withdrawals.
Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF)
RRSPs transition to RRIFs after retirement. RRSPs offer a tax sheltered way to save for retirement; you are taxed on these when you withdraw, but typically, you are withdrawing at a lower tax bracket.
Corporate Investments
Any excess funds inside a pharmacy corporation should be moved to another corporation, often called a Holding Company, and invested there. Investments held in Holding Companies often include real estate, stock/ETF/mutual fund portfolios, and permanent life insurance. These can all provide a source of retirement income and should be included in your planning.
Post-Retirement Income
If you plan to keep your pharmacy business, or are branching off into other income streams, such as real estate investments like rental properties, include this in your planning.
Employer Pension Plans or Individual Pension Plans
You may receive employer-sponsored pension plans. These could be from employers from before your pharmacy career, or you may receive one by your current pharmacy employer. If you own a business, you can consider setting up an Individual Pension Plan..
Other Assets and Investments
These include any other savings, annuities, and investments you have
Making Sure You Are Stable Financially First
Before preparing for retirement, achieve a stable foundation to work from. An emergency fund is critical, so you can handle unforeseen expenses without depleting your retirement savings prematurely. Consider life, critical illness and disability insurance, as well as business-related insurances. These support you through those difficult times that an emergency fund wouldn’t cover.
Setting Retirement Goals
Clearly define your retirement goals, considering your desired lifestyle, when you plan to retire, any uncovered healthcare needs, and legacy planning. Setting clear goals helps you budget for and align your financial strategies properly.
Maximizing Tax-Advantaged Retirement Savings
If you aren’t already, take advantage of retirement savings vehicles such as RRSPs, Individual Pension Plans, and TFSAs. Contributing consistently will significantly boost retirement savings over time, while ensuring you aren’t unnecessarily paying extra in taxes.
Diversifying Investments and Adjusting for Timelines
Diversifying investment portfolios is crucial for mitigating risk and maximizing returns. Consider a balanced mix of stocks, bonds, mutual funds, and other investment vehicles based on your risk tolerance and retirement timeline. Investing in real estate can diversify retirement portfolios and provide additional income streams. Rental properties, commercial real estate, or real estate investment trusts (REITs) contribute to your retirement strategy.
Obviously, it is ideal to aim to outpace inflation; however, how close you are to retirement may impact what rates of return you may be willing to risk. Since higher rates are associated with higher risk, and the closer you get to retirement, the less risk you are likely to tolerate, you may wish to invest in more secure, but lower return, options as time goes by.
Pharmacy Business Transition
Pharmacists who own pharmacy businesses face unique considerations when planning for retirement. Options include selling the business outright, transitioning ownership to a successor, or semi-retiring while maintaining partial ownership or involvement in the business.
Semi-Retirement
Some pharmacists may prefer a gradual transition into retirement by reducing work hours or responsibilities while retaining ownership of their pharmacy business. This allows for continued income while enjoying more leisure time and flexibility.
Selling
If your pharmacy business has grown to be more self-sufficient, it can provide ongoing income. However, selling the pharmacy business can provide a significant lump sum for flexible funding. It’s recommended to discuss with a financial planner what the best solution for you would be.
Pharmacists need to carefully consider timing, valuation, tax implications, and succession planning when selling their businesses to maximize returns and ensure a smooth transition.
Succession Planning
Whether you’re selling your pharmacy or simply stepping back from an active role, a comprehensive succession plan is needed to identify a successor, outline the ownership transfer arrangements if applicable, and ensure continuity of operations.
Reviewing and Adjusting Regularly
Retirement planning is not a one-time effort; ongoing reviews and adjustments to accommodate changing circumstances and goals, as well as market conditions, ensures you are still on track for your needs.
Professional Consultation
Given the complexity of retirement planning, pharmacists should seek guidance from financial advisors, accountants, and legal experts specializing in retirement planning and pharmacy business management. Professional advice can help pharmacists navigate regulatory complexities, tax implications, and investment strategies effectively.
PharmaTax can help you plan for your retirement, however soon or distant it is. We ensure you are maximizing your tax benefits, and are adequately prepared for the future.
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