After graduating and attaining certification as a naturopath, there are plenty of expenses to be thinking about. You’ll have the costs associated with setting up a new practice, the cost of living, and before you know it, it’s time to start paying off your student debt. On top of that, you know you’re supposed to be saving for retirement. So, what’s the best approach? Should you pay off your student loans as fast as possible, and then then begin to save that same amount for retirement? Or is it more efficient to pay off the loans slightly slower, but make a small contribution to your RRSP every month, increasing that amount once you are officially debt-free?
Let’s a take a look at a sample scenario to see how it plays out.
Dr. Brittany Carter and Dr. Nicole Armstrong are both naturopathic doctors in Vancouver, BC. They met in school and have been practicing for 40 years. This year, they are both hoping to transition out of their practices and as a result, are evaluating whether they are financially prepared for retirement.
Both doctors graduated from their naturopathic programs in 1978 and opened their practices the same year. They each graduated with $100,000 of student loans and their earnings over the last 4 decades have been fairly similar. Both doctors started repaying their loans 6 months after they graduated and had 15-year terms on the loan with 6% interest (a realistic estimate given that the historic rate of return of the S&P500 for the past 40 years has been 13%). The suggested monthly payment to meet the 15-year term was $843.86.
Dr. Carter’s goal was to get rid of her student loans as fast as possible, so she paid $1000/month in an effort to pay them off sooner. She paid off her loan in 11 years and 7 months. Then, she began making $1000 monthly payments into her RRSP, where she averaged 6% interest.
Dr. Armstrong wanted to pay off her student loans, but she also wanted to start saving for retirement, recognizing that it can take a while to build up capital. She contributed the recommended $843.86 to her student loans, plus an additional $150/month to her RRSP. Each year, she got a tax deduction of $540, and she paid off her loan in 15 years. After repaying her loans, Dr. Armstrong also put $1000/month into her RRSP.
In the above example, both doctors have paid out the same amount of money, roughly $1000/month for 40 years. Both have paid off their student loans and saved for retirement. Dr. Armstrong received a tax deduction of $540/year during her loan repayments, which Dr. Carter did not get until her loans were paid in full. This enabled her to save $540 in taxes which was helpful in the early years of her practice where her earnings weren’t as high. Both women received a $3,600 tax deduction in the years that they invested the full $1000/month in their RRSP.*
Dr. Carter paid off her loan 3 years and 5 months before Dr. Armstrong. She therefore contributed the full $1000/month to her RRSP for much longer. In the end, however, Dr. Armstrong’s $150/month contribution during her loan repayment term helped her enter retirement with $740,300 while Dr. Carter had $696,459. By saving something each month in addition to her loan repayment, Dr. Armstrong was able to amass an additional $43,841 even though both doctors contributed the same amount.
Each situation will be different, and the above numbers are hypothetical and used to illustrate the importance of starting to save early. When starting out as a naturopath, most doctors have a high level of student debt, and it may feel like it’s not feasible to save anything for retirement in the early years of your career. In reality, student loans are an investment in yourself.
As a self-employed person, you are completely responsible for your retirement. If you aren’t saving, there is no safety net and no employer contribution helping to prepare you for your exit from the workforce.
If a large contribution isn’t realistic now, don’t be disheartened—a smaller regular contribution now can still make a significant difference down the road. The BCNA Group Retirement Savings Plan is an excellent way to start. With low fees, carefully managed funds, and a portfolio specifically tailored to the needs of naturopathic doctors, it’s a great benefit of being a member of the BCNA.
To learn more about saving for retirement, find out if you’re ready, or set up a customized plan to help you prepare in a way that works for you, speak to a financial advisor.
* It is worth noting that while the interest paid on student loans is tax deductible, for the sake of this example it has not been factored in for the sake of simplicity.
This article was written by Saskia Vermeulen, Southlands Financial and Sindy Billan, SB Wealth Solutions**. The information in this article are presented for general knowledge and the content should not be relied upon as containing specific financial, insurance, tax or legal advice. Names were changed to protect the identity of persons mentioned. Practitioners must seek their own independent professional advice to discuss their personal circumstances before implementing this type of arrangement. **SBILLAN Wealth Solutions Inc. doing business as SB Wealth Solutions E&O/E 2018