Financial Planning Seminar

1. Financial Planning Seminar Presenter: Franca Matsos Date: July 30th, 2008

2. MD Mission Statement We will assist CMA members, their families and sponsored clients to achieve their financial well-being by providing professional, objective financial advice and competitive, quality products and services throughout their lifetime. ‘For physicians…by physicians’

3. About MD Financial Group • MD Financial Group provides advice to over 100,000 clients and over 30,000 physicians. • Over $22 billion of assets under management. • Over 200 investment professionals in 47 offices across Canada to serve physicians and their families.

4. Products and Services: MD Management • Financial Planning • Risk Management, Estate Planning, Portfolio Analysis and Optimization, Cash Flow Analysis, Retirement Planning, Incorporation Analysis • Mutual Funds • Fixed Income • Discount Brokerage • Stocks, Bonds, GIC’s, Mutual Funds, Equity Research, Online trading • Family Trust • IPP’s

5. Products and Services, Continued • Physician Services Group • Practice Solutions • Healthcare Software • Tenant Lease Services • MD Private Trust • Estate Planning, Professional Executor, Trust Management • MD Life • Tax planning, tax deferral, estate preservation, corporate savings • MD Private Investment Management • Strategic and Tactical Asset Allocation, Discretionary Money Management

6. Life as a Resident

7. Financial Issues You Face As You Start Residency • Possible negative cash flow • Start repaying debt • Possible relocation • Possibly starting to contribute to RRSPs • Additional issues that will differ from person to person

8. Scope of Financial Planning • Debt management • Cash management (budgeting) • Retirement planning (RRSP & Non-RRSP) • Investment choices • Tax planning • Life and disability insurance • Estate planning (Wills, POA, Executor)

9. Role of Financial Consultants • Assess your overall financial health • Gather and review data related to your finances • Practice preventative financial health • Create and monitor your personal financial plan • Know when to refer to a specialist • Advise regarding needs for accountant, lawyer, insurance broker, practice management, etc. • Financial planning includes family members

10. Evaluating Insurance Needs • Resident Contract (PAIRO) • 2x annual income (life insurance) • 70% of gross income (disability insurance) • Limitation of disability coverage = any occupation definition • PAIRO coverage ceases upon completion of residency Insurance needs likely to increase with increased income and lifestyle

11. Life & Disability Insurance • The primary purpose of insurance is to protect your most valuable asset - your earning power • Is a very important aspect of every financial plan • Insures you against the risks of: • becoming disabled - unable to work / earn income • premature death

12. FAQ - Disability Insurance • When do I need it? • Regular occupation vs Own occupation? • What elimination period should I choose • Why is a FIO important? • What are the other essential riders? • Private vs Group medical association plans • Portability? Quality? Cost vs value?

13. Disability Insurance - What & How Much What if I become disabled? • Income Replacement: • Insurance benefit should replace 60-70% of pre - tax income • Office Overhead Expense • Pays for overhead expenses (rent, utilities, wages) incurred during disability period • More important for GP than a specialist

14. Recommendation • In most cases, it makes sense to start with a 30 day elimination period, especially if you are: • single • have substantial level of debt / high loan payments • have a young family • Once your practice is established and you’ve paid down your debt / built an emergency fund you can request a longer elimination period to reduce your premium

15. Definitions of Disability Own Occupation: • The benefits are payable as long as the insured is unable to perform the major duties of their own occupation. The insured may choose not to work in another occupation, even if able to do so. • Better suited for Specialists

16. Definitions of Disability Regular Occupation: • Is a much more restrictive definition. After two years of receiving benefits, if the insured is able to perform his/her regular occupation, the insurer can stop / reduce benefit payments.

17. Benefit Period • Is the length of time benefits are paid during the period of disability • Usually expressed in years i.e. 5, 10, to age 65 or lifetime • The longer the benefit period, the higher the cost • Benefits to age 65 is recommended

18. Must have Options • Riders & Benefits • Cost of Living Adjustment • Fixed % or linked to CPI • Guaranteed Future Insurability • No further proof of insurability required if you buy additional coverage in the future • Retirement Protection • Funds to supplement RRSP

19. Disability Insurance Options • Association plans (such as OMA) • Advantages: Group Insurance (savings of 40-50% in premiums) • Disadvantage: limited portability among provinces, premiums increase every 5 years • OMA Essentials plan - no evidence of insurability required - limited coverage available • Individual policies (Unum, Canada Life, etc…) • Advantages: unlimited portability and flexibility, premiums are fixed to age 65 • Disadvantages: higher premiums (initially)

20. FAQ - Life Insurance Life Insurance: • Who needs it? • How do I calculate how much I need? • Term Insurance - pros /cons? • Universal Life - pros / cons / when to buy? • Mortgage Insurance - Is it good? Options? • Where can I get objective unbiased advice?

21. Life Insurance • Insures against the risk of pre-mature death • Can be used to provide for financial dependants, payoff debts (credit lines, mortgages) & estate planning purposes • Your needs will vary throughout your life stages

22. Types of Life Insurance Term Insurance • For ‘temporary’ needs (short-term) • Lowest initial premium level • Premium increases at the end of each term • Offers terms of 1, 5, 10 & 20 years or to age 99 • ‘Face value’ only

23. Types of Life Insurance Permanent Insurance - Universal Life • Lasts for life (estate planning) • Includes insurance plus tax sheltered investment • Greater flexibility

24. How Much Do I Need? Payoff household debt • Mortgage, Credit Lines, Student loans, etc. Provide for capital requirements • Funeral expenses, legal fees, income tax, child care & education, emergency fund Replace income • On average, 70% of gross family income less surviving spouses income • Index for inflation

25. Life Insurance Analysis • Step 1: We help you review your cash-flow & net- worth, family dynamics • Step 2: Analyze existing coverage • Step 3: Determine your goals - short & long term

26. Case Study #1 Dr. A is married and has 2 young children. Both he and his wife are 30 years old and the children are 6 months and 2 years old. He is a resident making $60,000 and his wife earns $40,000 for a total household income of $100,000. They have a total debt of $320,000 including a mortgage. Their lifestyle currently is $70,000 which will probably double to $140,000 within the next 5 years. They would like to ensure that their children’s education needs are accounted for. They plan to retire at 65. For illustration purposes we have used 2.1% inflation and 6.0% rate of return in our calculations for insurance.

27. Case Study #1 - Solution • Therefore, the need is calculated at $2,500,000 insurance for the doctor to cover debt and income replacement. A recommendation for OMA insurance for the maximum of $1,000,000 and $1,500,000 term policy with a third party insurer would be made. • Insuring the spouse for $1,000,000 is also recommended to cover the additional household costs and allow the doctor to take some time off work.

28. Case Study #2 Dr. B is married and has 2 young children. Both he and his wife are 30 years old and the children are 6 months and 2 years old. He is a resident making $60,000 and his wife is not employed outside the home. They have a total debt of $320,000 including a mortgage. Their lifestyle currently is $50,000 which will probably double to $100,000 within the next 5 years. They would like to ensure that their children’s education needs are accounted for. They plan to retire at 65. For illustration purposes we have used 2.1% inflation and 6.0% rate of return in our calculations for insurance.

29. Case Study #2 - Solution • Therefore, the need is calculated at $3,500,000 insurance for the doctor to cover debt and income replacement. A recommendation for OMA insurance for the maximum of $1,000,000 and $2,500,000 term policy with a third party insurer would be made. • Insuring the spouse for $1,000,000 is also recommended to cover the additional household and child care costs and allow the doctor to take some time off work.

30. Case Study #3 Dr. C is single. He is 30 years old. He is a resident making $60,000. He has a total debt of $320,000 including a mortgage. His lifestyle currently is $50,000 which will probably double to $100,000 within the next 5 years. He plans to retire at 65. For illustration purposes we have used 2.1% inflation and 6.0% rate of return in our calculations for insurance.

31. Case Study #3 - Solution • Since PAIRO insurance is for double his income there is no need for additional insurance, unless there is a family history that would be a concern for qualifying for insurance in the future.

32. The Real Estate Market: Should You Buy A Home Or Rent?

33. Mortgage Fundamentals • Mortgage Pre-Approval • What is a mortgage pre-approval? • Why should you have a pre-approval? • What is the difference between a mortgage pre-approval and actual financing?

34. Mortgage Fundamentals • Term • Time during which your interest rate is locked-in and will not change (3 months to 10 years) • Amortization • Period over which your loan will be repaid (up to 25 years) • Pre-payment • Annual over-payment that you are entitled to make directly towards the principal balance

35. Mortgage Fundamentals (continued) • Payment frequency • Monthly is most common • You can also choose to “accelerate” your payments either weekly or bi-weekly

36. Types of Mortgages • Variable rate mortgage • Loan which carries a floating interest rate, similar to your line of credit • Capped variable rate • Same as above but with a ceiling or pre-set limit on the maximum interest rate you would pay over the term • Fixed rate mortgage • Loan which has a set interest rate that will not change over the term

37. Types of Mortgages (continued) • Open mortgage • Open loan, payable in full at any time, available for 6 months to 1 year • Closed mortgage • Closed loan with a pre-determined maximum annual overpayment amount (usually between 10-20%)

38. Finding the Right Mortgage • Determine your tolerance to risk • Over the long term, a variable mortgage could save you thousands in interest payments, but you need a cash flow that can tolerate payment fluctuations • Alternatively, fixing your payment at a higher $ value/month, still gives you lowest rate & allows you to budget payments

39. Four steps to help determine what you can afford • 1.Prepare a statement of your Net Worth and Cash Flow • To help establish your debt ratio & determine your capacity for a mortgage 2. Debt Ratios - 2 different calculations • GDS - Gross Debt Ratio • 32% of gross income towards mortgage debt service • TDS - Total Debt Service Ratio • 40% of gross income towards total debt service

40. Buyer Beware! • A debt ratio calculation alone does not take into account all of your short- and long-term financial goals!

41. Four steps to help determine what you can afford • 2.Determine how you will finance the down payment • 20% or more for a conventional mortgage (no mortgage insurance) • Less than 20% will require mortgage default insurance (between 0.5% and 3.10% of the value of the mortgage loan) from Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada

42. Four steps to help determine what you can afford • 2.Determine how you will finance the down payment (cont) • Home Buyers’ Plan • First-Time Home Buyers can borrow up to $20,000 tax-free ($40,000/couple) from their RSP • For all the details, speak to an MD Financial Consultant

43. Four steps to help determine what you can afford • 3.Estimate all of the other one-time and ongoing costs • Appraisal, inspection, water quality, survey, lawyer • Land transfer tax, PST, GST (new house) • First-time Home Buyers’ are eligible for a refund of up to $2,000 of the land transfer tax paid • Moving costs, pre-paid bill reimbursement, utilities/services hook up • Ongoing costs include property taxes, house & life insurance, maintenance; condo fee (where applicable)

44. Four steps to help determine what you can afford • 4.Establish your objectives for price & housing requirements • Price - Use the goals established in your MDM financial plan to buy a house that you can afford & ENJOY

45. Four steps to help determine what you can afford 4.Establish your objectives for price & housing requirements • Housing Requirements: • What type of home - single family, condo, town home? • What features are important - # rooms/bathroom, size of kitchen? • Where do you want to live - close to the hospital, out in the country? • What amenities are important - shopping, schools, recreation? • Build or buy? • If you buy, what is excluded/included - appliances, lighting fixtures? • If you build, what is excluded/including - front walk, driveway, deck, landscaping, air conditioning?

46. Assemble a team of pros that you trust • Real Estate Agent • Are they experienced in type of home/location of choice? • Lawyer or Notary • To review offer, do title search, draw up mortgage documents, tend to closing details • Insurance Broker • For property insurance • MD Insurance Consultant • Reassess your life insurance requirements • Building Inspector • To conduct “physical” on the property • MDM Financial Consultant • To integrate home buying into your personal financial plan

47. Debt Management

48. Resident Debt Analysis • Common medical student / resident • debt load: $100,000 - 200,000

49. Debt Management • Student loans / Credit lines • What is the interest rate? (fixed or variable) • When does the repayment schedule start (blended payments)? • What is the amortization of the loan (repayment period)? • Will the credit line remain revolving or converted to a term loan?

50. Debt Repayment Strategy • Variables to consider: • Cash-flow (discretionary income) • Other debts (mortgage, higher interest credit cards) • Short / Medium term goals • Interest rate environment (increasing or decreasing) • Interest rate expense