Retirement

Here is some advice on retiring that you have probably given others yourself. When it comes to retirement, the best way is to “start early and never finish”.  Most GPs warm to this idea once it is explained. So let us explain it.

Once the peak-costs years have passed and the kids are off mum and dad’s hands, attention focuses on the next phase of life and, morbidly, mortality. This often happens at around age 55, or perhaps a little later, as the kids finish their education and (finally!) become financially independent.

Mum and dad can spend money on themselves for the first time in perhaps 30 years.

By age 55 most GPs have accumulated a reasonable amount of wealth, even if it is tied up in the family home and super, or maybe the practice’s goodwill and/or premises. The 55 year-old GP is probably at their professional peak: years of experience grounded in extensive training and professional development mean most patient presentations are handled competently. This converts to a high level of employability: most 55 year old GPs can get as much work as they want anywhere in Australia. Provided health is ticked off, there is no reason why this is going to change for at least another fifteen years, or even more.

So, with a reasonable amount of wealth, a guaranteed high income, a full waiting room stretching inexhaustibly into the future, but only so many days left on earth, the rational GP often makes a smart decision. They cut back the working hours and spend more time on other things, like travel, sport, exercise, reading and further learning.

Obviously the more wealth a GP has, the more they can do this. But even GPs who have not accumulated that much wealth can cut back their working hours confident that they are not condemning themselves to an impecunious old age. With careful health management the working years can be spread out and blended with early retirement so the GP gets the best of both worlds.

We often suggest the 55-year old GP to cut back to four days a week for 10 months of the year. Over the years this trend continues so by age 70 the GP is working say four sessions a week for eight months of the year.

The other days are spent at the beach house or some other place where work cannot interrupt life, and the other months are spent somewhere warm or cool, depending on your preference.

This retirement strategy has numerous advantages:

  • the GP (and usually a long suffering spouse) can enjoy the time out while still (relatively) young and healthy. Travel gets hard after about age 70, so why not go now at age 60 while you can still enjoy yourself?
  • tax-planning strategies remain effective, particularly if a spouse has stopped working and is not getting any income;
  • a longer working life creates a triple whammy that radically improves the economics of retirement. More particularly:
    • the GP continues to add to their capital base, usually through continuing super contributions and possibly other forms of saving;
    • the draw down and consumption of capital is deferred, compared to earlier retirement; and
    • a longer working life means a shorter (fully) retired life, which means the capital does not have to last as long compared to earlier retirement;
  • medical work has a high social utility, so working longer is fundamentally good;
  • medical work is good for GP’s sense of personal wellbeing. GPs are happier and healthier when they work longer; and most importantly,
  • spouses cannot stand the retired GP hanging around all day with nothing to do. This is serious: (typically) the husband’s retirement can be a flash point in the marriage, and often causes great stress for all concerned.

It’s a paradox that, from an economic point of view, the GP who starts to retire early will probably end up earning more than the GP who does not. The tortoise beats the hare, particularly if the hare has a heart attack from too much work.

But there is a further paradox: if the tortoise does not beat the hare, then being a tortoise makes even more sense. If the heart attack was coming no matter what, then the GP will hardly rue that he or she took more time off before it happened.

So, starting to retire early can lengthen your life. And if retiring early does not extend your life, then it makes even more sense to do it!

Planning that retirement

So, retiring early is a good idea. But how do you do it?

Investing early and well means the GP can retire early and well. If things are done properly then as the kids come off the GP’s financial hands the investment income starts to exceed the practice income. This is a great position to be in, particularly if the income consists largely of unrealized, and hence un-taxed, capital gains.

Interestingly, most GPs continue to practice even at this point. But thankfully they work sensibly, and take more holidays and long weekends. There is a huge difference between the 55-year old driving to work because she wants to, and the 55-year old driving to work because she has to. One is much happier than the other. One enjoys the drive much more than the other.

The major problem relates to the costs of general practice. Many costs do not fall when the GP does fewer sessions. Many costs, for example, rent, some wages, depreciation of equipment and so on, stay the same regardless of how many sessions are completed each week. These costs are called “fixed costs”. This is because they are fixed irrespective of how many sessions are completed each week. A common mistake is to assume that this is not so.

A GP completing, say, 10 sessions a week and making $240,000 a year may reason that his income will fall to, say, $140,000 a year if he cuts back to 5 sessions a week. Sadly this is not so. More probably, because fixed costs stay the same, profit falls by more than this, say down to $70,000, if not less. The high fixed costs mean that any drop in the sessions worked each week will produce a more than proportionate drop in profit.

Something has to change. The GP has to stop practising solo or in a group practice where costs are shared equally irrespective of the number of sessions. This can happen in a number of ways but they all get back to the same theme: the GP has to make changes to a practice structure where all costs (or virtually all costs) are variable costs not fixed costs. As that name suggests, variable costs are those that are only incurred when a fee is generated. Once all or most of the costs are variable, then cutting the number of sessions by half will reduce profit proportionately (in the above, example, by half, say from $140,000 pa to $70,000 pa).

There are a number of ways of doing this but they all get back to the same idea. A GP should leave their own practice and join another practice as an assistant on the standard fee split of, say, 40% to the host practice and 60% to the GP. One thing that can work here is if the owner GP sells the practice to another GP and then stays on as an assistant. From the patient’s point of view, nothing changes.

In some cases the purchaser can ‘sweeten’ the deal by getting a better than market fee split, say 30% to the host practice and 70% to the GP. The extra 10 percentage points are really a form of goodwill, an extra payment recognising the GP’s contribution over the years. Remember, good GPs are in short supply. Having an established local GP join the practice without cannibalizing the patient base is great for profit. Even 30% of the extra billings is well above the cost of the extra GP, so it’s a guaranteed profit.

Patients win too: their GP is still there and has made sure other good GPs are there to take over as they finally retire completely.

Sometimes, though, if there are no buyers, the older GP simply shuts the doors and walks away. Patients cope.

GPs who part-own a group practice might not move away from the practice. These GPs may instead re-negotiate their co-ownership agreements to facilitate the older GP reducing their hours and retiring gradually over time.

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