Chapter 02 – Financial Planning for Younger GPs

Introduction

Younger GPs are interesting economic propositions. Just out of training, they usually have high incomes but low assets relative to their age peers in other occupational groups. The 30-year-old accountant or computer programmer probably has a higher income and more assets. And if the GP is married with kids the gap may be even greater.

The gap is greater again if the GP’s training included a year or two overseas. Boston or London are great life experiences, and should not be missed. But expect the credit card to take a hiding, and the asset accumulations to be put on hold while life is experienced.

But as the young GP finishes training this is all about to change…

The investment dilemma

Young GPs without dependants usually have after tax cash flow above their living costs. The excess cash has to be invested somewhere. Young GPs with dependants usually have more claims on their cash flow but still tend to have excess cash that needs to be invested somewhere. (This phenomenon tends to disappear as the kids get older and morph into private school students with teenagers’ lifestyle tastes. More about this below in the chapter on middle-age.)

Three investments should get particular attention from young GPs. These are buying into a private practice, the family home and superannuation.

Private Practice

The first big decision is whether, when and to what extent the young GP should own a practice or work for someone else. Generally, owning a practice is financially more rewarding so most GPs will be better off owning a practice as soon as possible once they complete their training and feel comfortable with their experience and expertise.

That said, every person is different and many younger GPs prefer to hold off on buying a practice while they hone their skills and make decisions about the type and location of any practice that they may one day own.

The family home

Buying and paying for a family home will usually be a top priority for young GPs. Our advice is almost always “buy as much home as the bank will lend you, and then pay it off as fast as you can”. The reasons for this include:

home prices have increased significantly over the last two decades. History shows consistent returns (including rent) of more than 9% a year. The population is growing faster than ever and the experts agree houses will cost a lot more in 2037 than 2017, particularly in the major capital cities. It makes sense for younger GPs to buy as much house as they can as soon as they can;
interest on a home loan is not tax deductible. This means paying off the home loan early earns the equivalent of 10% pa or more and is effectively, capital guaranteed. It is unlikely any other investment will come close to this sort of return;
use an interest offset account rather than paying off the home loan directly. This allows equity to be transferred to a new home down the track, and the old home kept as a negatively geared investment;
increasing equity in the home, by paying off the home loan and from price increases, lifts the GP’s ability to acquire other investments including, for example, a practice or rental property. Using the home as security for investment loans minimizes interest costs and is a great way to expand the GP’s asset base; and
the home generates non-cash income: the ambience of a pleasant place and the peace of mind of knowing that you have somewhere to live are significant benefits even though they cannot be measured in dollar terms.

The family home is discussed in detail later in this book.

Superannuation

Super is a vexed question for young GPs. Some say the rules are forever changing and retirement is too far away, so super should be left for now and the cash instead used for other things. Others say that you cannot start too early and that the power of compound interest demands a maximum effort as early as possible.

We say have a bet each way. Make super contributions up to the aged based limit for a person under age 35, often for a spouse too (provided they are a genuine employee) and at the same time pay off the home loan and, possibly, get started on a negative gearing strategy for other investments.

Being a member of the highest paid profession in Australia certainly helps here! Most young GPs can afford to do it all. Especially in the years before parenthood themselves, when they can still live like a student while they earn like a… well, a doctor.

Two GPs went down the aisle…

It’s amazing how many young, and not so young, GPs are married to another GP or other high-income earner.

This presents a special case, financially speaking. Even with just one GP the household income is statistically high, but with two GPs the household income is sky high. Combined incomes well above $400,000 a year are not unusual. Add in an almost unique stability and longevity, and you have a mini-economic powerhouse on your hands.

Quite often each spouse works part-time, say 80%. This allows child-care roles to be shared and external child-care costs to be minimized. This augurs well for household harmony since both mum and dad can get the work and family balance they really want.

This augurs well for economic harmony too. Twice the number of GPs means twice the income, but not twice the living costs. This more than doubles the potential savings. Often all the second income, or more, is saved and invested: this is something we recommend: live on one income (or less) and save all of the other income (or more). You will be wealthy before you know it.

Being married to another GP also reduces risk. It’s a form of diversification (which is an entirely romantic way of looking at things, isn’t it?). If things go wrong for one GP its unlikely things will also go wrong for the other GP. So, overall, risk is minimised. This is especially relevant to debt management: the height, stability, scalability and longevity of the GP’s income, plus the natural hedge of having another GP as a spouse, means greater tolerance and capacity for debt based strategies.

Being married to another GP (or other high income earner) does not change the basic concepts and goals for younger GPs. It just makes them easier to achieve: the idea should still be to own a home debt free as soon as possible, get started on super and perhaps add a few rental properties to the portfolio.

Perhaps the home should be bigger, and better located, the super more ambitious and the rental properties more numerous. As a general proposition, the two-GP household can take on more debt than a one-GP household, and those that do tend to reap the benefits with larger capital gains over time. And the un-taxed unrealised gains coupled with the immediate tax deduction for interest and other holding costs drags down the average rate of tax on all income. This in turn creates more space for future investments, setting the stage nicely for what comes next.

Unmarried GPs

Does our advice differ for a solo GP? Well, in short, no, it doesn’t. The idea is the same, although the home is more likely to be a groovy city town house than an outer suburban ranch, with all mod cons including sand pit and swings. There are some differences in how assets will be owned, as well. But the differences are more in scale than in type.

Younger female GPs

One gender issue merits specific reference. This is the tendency for female GPs to be under- superannuated. This tendency is repeated in pretty much every profession or occupation group. Women have less super. This is al the more problematic because super is arguably more important for women. After all, women live longer, and have greater retirement needs.

Historically, women (including GPs) have been under-represented in the superstakes. They have lower incomes and spend less time in the paid workforce. This means less super at retirement.

While there is no doctor-specific data (at least that we have been able to find), the OECD estimates that Australian men are in the paid workforce for 38 years before retirement, which is almost twice the women’s equivalent of 20 years. There are also significant differences in pay rates (in 2012 women were paid on average only 82.4% of male salaries). This pay difference appears in general practice too: female GPs obviously face the same prices and costs that male GPs face, but the reality is they have lower incomes, and the statistics show the average female GP sees fewer patients per hour than her male counterparts.

The Australian Bureau of Statistics (ABS) says 49% of women expect super to be their main retirement income, compared to 56% of men; 18% of women expect to rely on their partner’s income, compared to just 4% for men; and 27% of women expect the old age pension to be their only retire income, whereas it’s just 25% for men.

The federal government has tried to balance the gender super bias with special rules for spouse contributions, contribution transfers and co-contributions. These have not had a significant effect to date.

It is critical that younger female GPs do not repeat the mistakes of their predecessors. Their super contributions should start as early as possible and be as big as possible, ideally the maximum allowed each year.

The earlier the super snowball starts, the faster it rolls and the bigger it gets. That’s the magic of compound interest.