Creating healthy pay days until the grave

The following piece was written by Martin Johnston for the current issue of New Zealand Doctor and is based on a presentation by MFAS Director Hamish McPhail (pictured) at the recent GP CME Conference in Rotorua.

With nearly a third of GPs intending to retire within five years, many will be thinking about their income through what they hope will be a long and active retirement.

A GP can retire on a monthly after-tax income of $7000, on top of New Zealand Superannuation, explained authorised financial adviser Hamish McPhail to the Rotorua GP CME conference last month.

“We often find with GPs that their target is $7000 to $10,000 per month; that is quite typical,” said Mr McPhail, of the firm MFAS – Medical Financial Advisory Services.

His case-study GP, who is fictitious, is 65 and plans to retire at 67. He or she has annual income of $200,000 before tax – about $11,600 after tax a month – and they want an inflation-adjusted $7000 a month after tax from investments for a hoped-for 23 years of retirement, to around the age of 90.

They might also want to give some money to their children and spend some on overseas travel.

In his calculations, Mr McPhail uses a traditional annual inflation adjustment rather than the current “rampant” level, and he excludes NZ Superannuation. The fictitious GP expects to sell their general practice for around $200,000. They have $100,000 in a KiwiSaver account. They plan to sell their home and buy a cheaper one around five or six years after retiring, yielding a further $500,000 for investment.

The GP also has $750,000 available, after “accumulating reasonably well”, bringing the eventual investment total to $1.55 million. The GP has a moderate appetite for investment risk.

Mr McPhail’s investment strategy for the GP is based mainly on managed funds, plus possibly bank deposits for cash. The split is:

  • 8 per cent in cash
  • 18 per cent in income-based assets such as bonds
  • 41 per cent in inflation-based assets such as utility companies and consumer staple companies
  • 34 per cent in growth assets (riskier but producing higher returns over the long term). All but the growth asset class are considered largely defensive assets, says Mr McPhail. The calculations rely on 15 years of data from a fund manager, but carry no forward guarantees. Stress-testing the strategy with a severe downturn like the 2007– 09 global financial crisis showed losses for two years followed by 3.8 years to recover. However, the defensive assets would provide income for at least seven years before the person would need to dip into the growth assets.

If the client wouldn’t be comfortable with such volatility, a conservative asset allocation could be used instead, in which case the investment portfolio would all be spent two years earlier. However, they would still have their home and NZ Superannuation.