Introduction

Q: What is the retirement age?

A: There is no mandatory retirement age in Australia.

Conventionally retirement age was 65 for men and 60 for women, and these ages derived from the old age pension start dates. However, the baby boomers are seeing things differently and recent research from Adelaide University’s Australian Population and Migration Centre suggests as many as 74% of people age between 50 and 65 intend to keep working after age 65, even if this is on a part time basis.

Notwithstanding these good intentions, the time that most people call it quits tends to be earlier, and is strongly influenced by two critical qualifying ages. These are:

  • the superannuation preservation age, ie the age at which super can be accessed; and
  • the old age pension qualifying age.

Changing demographics change the retirement planning rules

Most of us know that the Australian population is ageing, and faces a worsening ratio of employed persons to retired persons. One writer (Emily Millane writing on the Drum) has recently observed:

It is possible that we can reconceptualise retirement from a binary ‘work/non-work‘ condition to a staged process. This is beneficial for the individual and for society. It allows that individual to boost their personal retirement savings. It postpones the time at which the individual draws down fully on the aged pension, therefore meaning less strain on public resources. There are also less tangible, less measurable benefits, for example, the value to an individual of the social networks of a workplace or the sense of purpose that goes along with ‘going to work‘.

We have long recommended that GP’s retirements not be an all or nothing proposition, and that they be staged, starting in the mid-fifties and continuing into the seventies. Everyone wins:

  • the GP earns more;
  • the patients get better service;
  • spouses are happier (I am serious here);
  • the GP’s own health tends to be better; and
  • there are some great tax benefits, particularly after age 65, which mean average tax rates are often less than 10%.

Superannuation preservation age

A GP who has reached preservation age and stopped working can access their super as a lump sum, subject to taxation.

At age 65 super benefits can be accessed tax-free without stopping work. Your preservation age depends on your date of birth and the position is tabulated here:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

For example, Dr Fleming is 57 and was born on 4 May 1959. She has just stopped working and does not intend to work again. Dr Fleming is over her preservation age of 55 and can access her superannuation benefits as a lump sum without restriction (but will face tax charges unless she waits until she is age 60).

Dr Fleming could instead consider a transition to retirement pension, ie a pension able to be paid after the preservation age without stopping work, rather than a lump sum. She can access as much as 10% of her superannuation benefits each year. The amount is taxed until she is age 60: most GPs would not start a transition to retirement pension until age 60 for this reason. (And most GPs will start a transition to retirement pension at age 60, since doing so means the superannuation benefits are not taxed at all.)

Age Pension

The pension age is 65 for men and women. It used to be 60 for women, but was increased to 65 some years ago as a gender equality measure.

The Federal Government’s May 2014 budget announced the pension age will ultimately increase to 70 by 2035, subject to transitional rules.

The relevant dates are tabulated here:

Date of birth Eligible age
1 July 1952 to 31 December 1953 65.5
1 Jan 1954 to 30 June 1955 66
1 July 1955 to 31 Dec 1956 66.5
1 January 1957 and 30 June 1958 67
1 July 1958 and 31 December 1959 67.5
1 January 1960 and 30 June 1961 68
1 July 1961 and 31 December 1962 68.5
1 January 1963 and 30 June 1964 69
1 July 1964 and 31 December 1965 69.5
1 January 1966 and later 70

So, a GP born on 4 May 1961, ie between 1 January 1961 and 31 December 1961 will not qualify for the old age pension until age 68.

How should GPs retire?

Thirty years ago the magic age for retiring was 65 for men and 60 for women.

These dates were based on the age when men became eligible for the old pension in 1908: this was the average lifespan at that time, and if you lived that long you got a basic government pension to sustain you until you finally dropped off the perch. It was not a luxurious lifestyle and for most it was a pretty short lifestyle as well.

Things have changed dramatically in the last thirty years. The 2014 Federal Government Budget sums it up: strong and controversial measures to limit the amount of the old age pension and the number of people eligible for it, with the rate of growth cut back and the eligible age progressively increased to age 75 at 2030.

People are generally living longer, and many people, particularly women, will spend thirty years or more in retirement. Most people age 50 and above are concerned about their retirement. When will it start? What will it involve? What will their income be? How will they pay their bills? Will they be able to help their children? Will they leave a financial legacy? Will they have enough to live on?

GPs are no exceptions. Most meetings with GPs age 50 or more focus on when and how they should retire. The issues are almost always the same. GPs want to retire, in the sense of getting a break and enjoying a bit more time to themselves. At the same time GPs do not want to retire, because they will miss helping patients and working with their colleagues. This tug of war is complicated by the GP not knowing how to retire, ie not knowing how to disengage from practice and how to re-set the financial levers to reflect their new circumstances.

The good news is most GPs can afford to retire.

More than 80% of retirees receive all or part of the old age pension, and most experience a significant drop in lifestyle on retirement.

We do not have figures for retired GPs, but we would bet less than 10% receive all or part of a pension and most do not experience a significant drop in lifestyle on retirement. The reason is simple: the height, stability, scalability and longevity of the GPs’ income means most GPs can build up enough assets to pay for a comfortable retirement.

About 80% of Australians over the pension age receive a full or part pension.

Most need it to live, ie they rely on the pension to buy food and other life necessities. Old age can be bleak. It’s particularly bleak, and particularly stressful, if you do not own a home and do not have somewhere secure to live.

Others do not need it to live. It’s a bonus, something used to fund extra life luxuries. Assets tests and income tests apply, but it is still possible to receive a part pension with close to $1,000,000 of assets plus a family home. Millionaires get the pension too.

What is retirement like for GPs?

GPs see patients at all ages, and can often predict long-term health outcomes. Similarly we see clients at all ages and can often predict long-term financial outcomes. The good news is, as we stress throughout this book, the height, stability, scalability and longevity of the GP’s income means everything goes right in retirement for most GPs, at least eventually.

This makes GPs, and doctors generally, the most independent of all occupations. Let’s use a client example to explain how well most GPs retire.

The story of Simon and Mary

Dr Simon is a valued long-term client, a good GP and a friend. He and Mary raised six kids in a mid-north Victoria, and at age 70 Simon and Mary moved to Melbourne to be closer to their grand-kids and part of their children’s lives.

Simon and Mary had done everything right planning their retirement. They had:

  • owned their practice, and enjoyed a higher than average income (even for a rural GP) for nearly forty years;
  • lived well, but not wastefully, and used their left over cash-flow to pay of their home loan, pay maximum super contributions for themselves (Mary was the practice manager) every year, invest their SMSF in blue chip Australian shares and index funds, and buy three negatively geared properties back in the 80s and 90s as investment properties, using their family trust (which back then doubled as a service trust);
  • from about age 55 on they really concentrated on the SMSF, paying large non- concessional contributions whenever they could. Simon and Mary knew the SMSF would tax free once they turned age 60, and that very little tax would be paid before then, particularly if they never That’s one of the reasons why they only bought blue chip shares and index funds;
  • put sensible wills in place, leaving everything to the survivor, and on the death of the survivor leaving everything to a testamentary trust controlled by their six children and run for the benefit of their children and grandchildren. The assets in the SMSF and the family will end up in the testamentary trust too;
  • helped their kids when they could, guaranteeing early home loans and, once or twice, business loans to help good ideas get off the ground;
  • travelled a lot, including taking the extended family on several tropical cruises;
  • sold the old family home and bought a more manageable town house, not an apartment, in a Bayside suburb. It’s easy to live in and easy to clean and close to all urban amenities;
  • not worked too hard after about age 60, once the kids were off their hands and down in the city,
  • let their life insurance lapses around age 60. They just didn’t need them; and
  • most importantly, enjoyed life. They are involved with their family and active in their ommunity. Simon and Mary, like most GPs, are givers, and they will keep giving for as long as they can.

Simon and Mary were particularly diligent about migrating their wealth to their SMSF as they got closer to age 60. They knew using the soon to be tax free SMSF as the investor would significantly improve long run after tax investment returns, and that this would compound and compound making the investments ever better and better.

The SMSF was easy to manage. It only had 12 shares and one large holding of Vanguard Australia Shares Index Fund. Keeping it simple and never selling meant more than $2,000,000 of equities were managed easily and simply every year, with accounting and audit costs less than $2,000. The properties were easy to run too: they use a Bayside estate agent as a property manager and everything is done for them, to the extent the property manager sends the financial reports direct to their accountant. There is nothing much for them to do, which irks Simon because he likes to keep busy.

Good long term planning, smart use of investment structures (ie a SMSF and a family trust), hard work and favourable taxation laws combine to produce great results for Simon and Mary.

Simon started to see his own GP at age 55, and developed a health management plan. Previously Simon self-diagnosed, which is not a smart move. The main problem was Simon worked too hard, which meant he did not exercise enough, ate too much and slept poorly. It was not too late, and now Simon is much fitter and healthier than most men his age.

Their income and tax profile looks like this:

Capital Income Tax Comments
Simon’s net practice income $30,000 Nil No tax paid on income less than $34,000 for over age 65 taxpayers
Mary’s salary $10,000 Nil As above
Car fringe benefits $20,000 Nil Tax free under concessional rules
Super contributions $70,000 $10,500 15% tax
SMSF dividends $2,500,000 $60,000 ($20,000) Franking credits refunded because SMSF tax free
SMSF unrealised Capital gains $100,000 Nil SMSF tax free
Family trust rents $2,500,000 $60,000 $6,000 Rents distributed to adult children
Family trust unrealised capital gains $100,000 Nil Unrealised capital gains not taxed
Family home $1,000,000 Tax free
Total income $6,000,000 $450,000 ($9,500)

Mary and Simon are in good health, travel a lot, spend time with each other and their family and generally enjoy themselves. Simon is working two days a week, sometimes more when the practice is really busy. Keeping his hand in as a GP means Simon feels he is contributing to the community, and his younger colleagues and older patients appreciate his efforts.

Simon does not have to work: the investment earnings on $6,000,000 of assets are more than enough to live very comfortably, forever. Simon works because he enjoys it, and feels that it keeps him vital and in touch with the world.

Mary is glad Simon is out of the house most days: he would drive her crazy if he could not work.

Simon and Mary are proud they will leave each of their six children at least $1,000,000 each, and that they are still investing and living well on much less than they earn each year.

Simon and Mary never had a retirement plan as such. They just used common sense strategies that adapted to their changing circumstances as the decades slipped by and the new generations grew up. They just acquired sensible assets, properties and shares, using tax efficient investment structures, and then let time do the rest.

Are most GPs like Simon and Mary?

Happily most GPs are like Simon and Mary. It’s part of being a GP: the height, stability, scalability and longevity of the GP’s income means everything goes right in retirement for most GPs, at least eventually.

Successful late retirement planning

The good news is even if things go wrong, and the GP has no assets and no independent income, good results can still be achieved with careful planning. This is, once again, due to the characteristics of a GP’s income: its height, stability, scalability and most importantly, longevity mean even older GPs who have left retirement planning too late can still catch up and install sound strategies for their advance old age.

The only condition here is good health, in the sense of being healthy enough to work at least part time as a GP. Strangely, one of the key advices to an older impecunious GP can be to get his or her (but its usually his) own GP and develop a health plan based on maintaining the capacity to work into his or her seventies.

This brings our mind back to Angela, 2007. She was an unusual presentation: an itinerant GP, almost literally a GP with no fixed address. She travelled from rural locum to rural locum, sleeping on site, even camping out between engagements. When she needed a longer break she stayed with a sister in Manly.

Angela worked about one week in three, and her income was just a bit over $100,000 a year. Statistically it was quite high for a 60 year-old woman, but for a GP it was at the low end of the scale. Angela was at Monash Uni in the sixties, and deep down she never stopped being a flower child. She was a good GP who heard a different drum.

That drum was changing beat by 2007. She was sixty and feeling it. She had no assets except for about $30,000 in the bank, and owed nearly that on her tax. She was two years behind with her tax returns. In her words, she needed to ‘grow up and settle down.’ We preferred to suggest she simply ‘nest somewhere.’

The consultation took a few meetings over a few weeks and in the end a strategy hatched. It was for Angela to:

  • settle down and stay in one spot, a semi-rustic and semi-rural enclave in Melbourne’s outer southern suburbs;
  • sell her practice to Primary Health Care for $500,000, subject to an ATO advance opinion that this amount would be received on capital account, and be treated as a tax free capital gain;
  • practice for at least five years at a Primary Health Care centre, with an expected net income of $200,000 a year;
  • pay $35,000 a year into HESTA Super fund (you could do this back in 2007);
  • teach yoga at a nearby yoga centre, join the rural ambulance as a volunteer medic and generally become involved in community life; and
  • buy a small home on a ten-acre block for $1,000,000, using the $500,000 from Primary Health Care and a further $500,000 borrowed from NAB. Remember, the NAB did not see a 60 year old woman with no savings. They saw a GP, and a GP’s earning capacity.

Seven years down the track Angela has left Primary Health Care and is working at a community health centre closer to home. She has paid off all but $200,000 of her home loan, and is about to withdraw her super benefits from HESTA tax free (she is over age 65) and pay off the last bit of the home loan.

Angela is working two days a week, but is only making about $50,000 (the community health work does not pay as well as other medical centres). She intends to continue working for as long as she can. Her tax profile is very efficient: she does not pay any tax because the first $34,000 is tax free and the rest of her income pays for her tax deductible four wheel drive and her $6,000 a year super contributions.

Angela’s home is now worth $1,300,000.

Angela will retire on the old age pension. It’s about $20,000 a year plus some benefits. Her cash flow will be augmented by $150 a week ($7,600) board from her grand-nephew who lives with her, and studies at Monash, and a draw down on a reverse mortgage of as much as she wants, even $800 a week.

Angela’s reverse mortgage merits more comment. It was deliberately recommended that Angela buy a relatively expensive home back in 2007 because homes don’t count in the old age pension asset test. Assuming capital gains of 4% a year, Angela can borrow say $40,000 a year every year and not cut into her equity of $1,300,000.

This means Angela’s annual cash flow is as much as $67,500, and is completely tax-free. This is more than Angela was earning after tax when we first met back in 2007.

Angela is enjoying herself, is in good health and is not worried about her financial future. Once again, it’s the nature of a GP’s income coming into play: its height, stability, scalability and longevity means Angela was able to create and implement an effective retirement plan at age 60, ten years after most women her age had left the workforce.

It’s easier to forever be a flower child if you do not have to worry about money.

Are many GPs like Angela?

There are not many GPs like Angela. Angela was unusual because she was there pretty much by choice, not by circumstances beyond her control. She was a free spirit who did not want to be bothered by money matters. Similar techniques can be used with other GPs with few assets – perhaps coming out of bankruptcy (caused by poor investing, not poor medicine), GPs who have suffered poor health, including extended incapacitation, and GPs coming out of drug addiction.

The shortage of GPs is a blessing. It means these GPs have been able to set a short term, ie ten year, goal of owning a home and making sure they are eligible for the old age pension, and augmenting cash flow by continuing to work part time and using reverse mortgages.

Reverse mortgages

Reverse mortgages have an undeservedly bad reputation. Unfortunately unscrupulous spruikers have grabbed the concept and ripped off vulnerable old folk, charging ridiculously high fees and interest rates, and borrowing far too much and even losing their homes.

Used sensibly reverse mortgages can be powerful financial planning tools and can maximise a retirees’ quality of life and reduce financial stress on the younger generation.

For example, Dr Sam has three siblings, and his parents’ will, quite rightly, divides things four ways. His parents are pensioners, and own a home worth about $800,000, and not much else. Dr Sam and each of his siblings will inherit $200,000 when their parents pass away.

Dr Sam was annoyed that his impecunious parents always looked to him for financial support. He shelled out for a new car, a trip to the UK to visit a daughter (Sam’ sister) every two years, house repairs and some large payments like health insurance, water rates and so on. It was costing about $20,000 a year. Dr Sam did not begrudge his parents this support, but thought it unfair that his siblings did not chip in. They said he was the well-paid GP so he could well pay for the parents.

Two solutions presented. The first was to ask the parents to sign a loan agreement covering past payments and all future payments so Sam could get his money back, plus a little bit of interest, out of his parents’ estate. This meant ultimately his siblings were paying one quarter each, which Sam thought fair. But Sam felt uncomfortable asking his parents to sign a loan agreement, and his parents felt uncomfortable having to ask for money.

The better solution was for Sam to arrange a loan for his parents, secured against their home, and guaranteed by Sam, at normal home loan rates (about 5%). Sam then arranged for an automatic transfer of $5,000 a quarter to his mum and dad’s bank account. They got their dignity and they got their cash. They now get $30,000 a year from the pension, and $20,000 a year from the reverse mortgage. They have $50,000 a year and is more than enough to enjoy life and pay for economy air fares to the UK and return every two years

If their home goes up by 3% a year they get a $24,000 a year tax free capital gain. They are only drawing $20,000 a year, so their net equity position should remain safe.

There is really no risk because obviously if things went pear shaped, and interest rates jumped up and property values fell, Dr Sam would bail his parents out. He has guaranteed the loan anyway.

The reverse mortgage achieves a better balance between material living standards now and inheritances to children. They can work for GPs who otherwise would be subsidising all their parents’ living costs, and they can work for GPs like Dr Angela, who has no children and no other significant assets.

ASIC’s view

ASIC has had some bad experiences with reverse mortgages and warns the risks include:

  • Interest rates are generally higher than average home loans
  • The debt can rise quickly as the interest compounds over the term of the loan – this is the effect of compound interest and is something you need to be aware of before making any decisions
  • The loan may affect your pension eligibility
  • You may not have enough money left for aged care or other future needs
  • If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die (in some circumstances)
  • If you fix your interest rate then the costs to break your agreement can be very high

The old age pension

It’s unusual for a GP to have to retire entirely on an old age pension.

Once again, this is due to the special characteristics of a GP’s income, being its height, stability, scalability and longevity. Most GPs have more opportunity to build up retirement reserves and, health permitting, have less need for them since they can work on high incomes into their 70s.
The single pension is around $800 per fortnight, or $22,000 a year, and the couple pension is about another 50% of that. The pension triggers certain other benefits.

An income test and an assets test apply, and the pension is reduced as assets and income increase. The family home is not included in the assets test. The part pension rules are generous
and it is possible for a couple owning a home of say $2,000,000 and other assets of say $500,000 and still draw a part pension and qualify for the extra concessional benefits.

Centrelink

The Centrelink website is a great place to find out more about pensions and other forms of social welfare. It’s free, informative, and worth a look if you are concerned about old age pensions and similar entitlements.

The staff are caring, confidential and discrete, and treat all clients with dignity and respect.

Planning for the old age pension

Normally GPs don’t need old age pension planning, and we confess it’s not something we frequently deal with. However, exceptions do arise where qualifying for the old age pension emerges as a sensible and safe strategy.

A tax-free pension of $30,000, effectively secured by the government, indexed by inflation, and payable for life with a reversion to a single pension of $20,000 a year on the death of one partner, is like an annuity or private pension, and has an equivalent economic value.

This value may range from $400,000 to $600,000 depending on health and age: remember, many women will live into their nineties and spend thirty years or more as pensioners. Planning for the old age pension can make sense in cases where the GP’s assets are light and other sources of income not reliable (for example, due to poor health or a disability).

Planning techniques include:

  • deferring retirement as long as possible, building up more assets and reducing the need for the old age pension;
  • genuinely gifting assets to children or uncontrolled trusts more than five years before the start of the old age pension
  • liaising with organisations like Primary Health Care, as Dr Angela did, and selling a practice for $500,000 CGT free. Although its fair to say this option does not suit every GP, particularly older GPs who realistically may not be able to work fifty hours a week for the following five years; and
  • reverse mortgages, as discussed above, can make a lot of sense, allowing the GP to access the equity in their retirement years.

A closing thought

Happily, an impoverished old age is rarely encountered by a GP. It’s the nature of the job: a high, stable, scalable, insurable and long income that virtually guarantees a comfortable lifestyle and a contented old age. This, coupled with intelligence and prescience, means most GPs are quite comfortable by retirement time, and enjoy a pleasant retirement.

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