Every person wants to reach a point in their life where they can retire. Retirement is when you can slow down, enjoy your golden years, and spend time with your family. But, retirement planning is crucial to leave your job and obtain that lifestyle. This is especially true for pharmacists.
Planning Directly Affects Your Retirement Income
Many pharmacists receive pension plans from their employers, especially working in hospitals. However, not all pharmacists can rely on their employers for their pension; many pharmacists are their bosses and business owners, owning and running their own independent pharmacies. As such, they need to complete thorough financial planning to ensure that they have the money they need to retire early.
Pharmacist Retirement Plans
To help you reach your financial goals for retirement, we have listed the various retirement accounts you can utilize to fund your retirement.
Be aware that some of the investments may only be available to business owners, not an employee.
- Group Pension Plans
An employee or group pension plan is a pension offered by your employer.
Rather than worrying about saving for retirement, your employer will do it for you; they will establish a pension fund. The amount of money you will receive depends on the type of pension your workplace establishes. There are two types of plans available: defined benefit (DB) and defined contribution (DC).
A defined contribution plan is when your boss makes an outlined monthly payment into your retirement fund. Their monthly contributions will help you save for your retirement. In contrast, a defined benefit plan is when the employer promises to pay their employees a specific amount of money during their retirement.
Defined benefit pensions are popular among hospital pharmacists, whereas retail pharmacists often receive defined contribution pensions. Check what pension your employer offers (if they provide one) by revisiting your contract.
- Canada Pension Plans (CPPs)
The Canadian federal government has created the Canada Pension Plan (CPP) to help make funding your retirement easier.
Every working individual has an established CPP. Employers then deduct the contributions from their employees’ salaries to invest in their CPP. You do not have to worry about arranging payments since your pharmacy will do it for you.
CPPs do have access and funding limitations. For example, individuals cannot access their CPP until they are 60, and even then, they will only receive reduced payments. The average retirement age is 65, and at that point, you will receive full payments.
- Old Age Security
The Old Age Security (OAS) is a pension plan available to retirees. It is offered based on the number of years you have worked in Canada. Those who are eligible can look forward to having free money paid monthly to them once they are 65 and over.
The OAS starts to get claws back if your annual income exceeds $80K per year. You can expect to receive nothing from the OAS when your income is around $120K per year. The clawback typically goes up annually with inflation.
- Registered Retirement Savings Plans (RRSPs)
RRSPs are savings accounts designed to help you cover the cost of retirement. Every year, you have an amount that you are allowed to contribute, whether it be in saving deposits, GICs, or stocks, ETFs, REITs, mortgages, and bonds. No matter what you choose, investing in an RRSP account will help you save money.
For added financial security, try a locked-in retirement account (LIRA). A LIRA is a type of RRSP that is available if you leave your employer that offered you a pension. The pension money is locked in your LIRA. You can invest it by yourself or with the help of a financial advisor.
Group RRSPs are becoming more popular in the pharmacy field. When employees contribute an amount to their RRSP, their employer will match the contribution. Typically, employers promise to contribute 3-6% of their employees’ annual salaries to their Group RRSPs.
- Individual Pension Plans (IPPs)
If you are an incorporated pharmacy owner, you should consider opening an Individual Pension Plan. An IPP is a pension established and contributed to by an employer for one person. It offers remarkable savings for both your company and yourself.
For instance, IPPs have a larger contribution limit than RRSPs, and that limit increases as you age. Another advantage of IPPs is that they reduce your company’s taxable income; contributions are not taxable as long as you remain within your yearly contribution limit. Therefore, your pharmacy can pay less in taxes and you can enjoy additional savings for your retirement.
- Tax-Free Savings Plans (TFSAs)
TFSAs are another way to put away extra money for your retirement. It will also reduce your tax bill; as long as you stay within your contribution limit, you will not have to pay tax on the money you invest.
- Permanent Life Insurance
Pharmacy owners who want to save for retirement should use a corporate-insured retirement plan, a permanent life insurance strategy. A corporate-insured retirement plan can be used as an investment vehicle to save for retirement. It is funded by your pharmacy and can provide you with a tax-free source of income during your retirement.
- Holding Company
For pharmacy owners, any excess profits can be transferred into a holding company and invested there. Investment choices are unlimited: stocks, ETFs, mutual funds, permanent life insurance, and real estate.
A holding company acts as a tax deferral because instead of withdrawing money and paying personal taxes, you take advantage of the lower corporate tax rate and have more money to start/build your portfolio.
If you ever sell your pharmacy, you keep this holding company. It belongs with you forever. So it’s important that you build this wealth inside a holding company and not your actual pharmacy corporation. When someone buys your business, they are buying your pharmacy – not your retirement fund along with it.
This portfolio builds over time and at retirement, you can start withdrawing funds to fund your retirement. You pay personal taxes at that time as you withdraw
Plan For The Future With A Financial Advisor
Pharmacists need, on average, a yearly retirement income that is 70-80% of their current annual salary. To save that much, you need to carefully and strategically plan your saving.
At Pharma Tax, we know that creating a sound financial plan for your retirement can be challenging. You do not want to make a bad decision and end up paying for it later. But not to worry! Our accountants have years of experience in the financial services industry. We can help you plan for retirement with proven wealth-building strategies.
Even if you have just left pharmacy school and are starting your career, setting up a pharmacist retirement plan is in your best interest. It’s never too early to start planning for the future. Call or e-mail us today to learn more about how we can help you.