Defining a new financial plan, post-separation

A Yield Case Study

About the client

Our client was in her 50’s and in the midst of separating with her long term partner. Whilst together, they had built up a healthy portfolio of property & shares, including their primary residence which she dearly loved and wished to retain as part of her settlement. Our client wanted our assistance in Defining a new financial plan, post-separation.

Why they sought advice

As part of defining a financial plan, post-separation, our client was interested in how her position may look after finalising the Separation and how she could work towards her retirement goal of transitioning to part-time work by the age of 60. She would then want to retire on an income greater than what she currently spent; essentially allowing her additional funds to enjoy retirement.

An important component of this advice was that she wanted to maintain the primary residence and together with her ex-partner, they had already worked a portion of the asset split that helped her retain the property, such as him receiving one of the other properties and a greater share of their liquid assets, along with their business.

In addition to reviewing how the Separation may look in terms of who was left with what, our client was also interested in understanding the impact of downsizing the property given differing circumstances. These variations came about through discussion and brainstorming these included:

• Downsizing to a smaller bayside town a few hours from Melbourne, this being how she envisaged where she may like to retire with the addition of renting an apartment in Melbourne; or
• Purchasing a lower valued property and then renovating it down the track to bring it back in line with her existing property.

Another consideration was that she beleived she could find a higher paying job, however, she wanted to understand the impact that not to taking up this employment opportunity would have on her financial position.

Finally, given that she was still a fair way off being in a position to retire, she wanted recommendations on a level of insurance and an appropriate provider that could help protect herself from a situation where she was unable to work due to illness or injury.

Our advice

To complete our analysis, we first needed to understand the level of debt she could afford to take on given that she is now a single income household. Considerate of this, one of the things she had going for herself was that she retained a lot of equity within her home. With her permission, we discussed her situation with a mortgage broker and were given guidance on the levels of debt she could take out on both her lower salary and a potential higher salary. These amounts were then used in our analysis of the separation as this was the last moving piece in her asset position.

Our analysis determined that if she chose not to find a higher paying job, she would likely need to part with a portion of her Super in order to ensure the separation was fair, however, if she did get a higher paying job she could then she would be able to borrow more and therefore would not need to make a Superannuation compromise.

Using her position, we prepared varying scenarios of how her financial position could look in the future and in doing so it became evident that meeting her goals based on her position was going to be difficult, such that, if she chose not to get a higher paying job, she might be needing to work full time until age 73. Alternatively, finding a higher paying job could see her being able to retire by age 69.

Having worked out her situation, we were then able to review the shortfalls in her financial position to recommend insurance that could cover the gap should she be unable to work due to illness or injury for an extended period of time.

The biggest impact on her situation was the fact that her primary residence makes up such a large portion of her assets. Given this is not an asset she would sell to fund her lifestyle, it meant that she would need to compromise on her goals, requiring her to work longer or accept a reduced level of expenditure through retirement.

Benefits of our advice

By seeking our advice, our client was set up to benefit in the following ways:

• Going forward, the client had greater insight into how she was tracking towards her desired retirement lifestyle. Knowing this enabled her to make informed steps to achieve her goals, such as having someone rent with her reduced her retirement age by up to 1 year.
• Our analysis on the downsize options available, helped her to decide on a path that she is extremely happy with, which also ultimately improved her ability to retire.
• The recommended salary sacrifice arrangement would save the client roughly $5,208 p.a. in tax, which instead would be directed towards her retirement nest eff. Doing this would also allow her to retire six months sooner, than if she didn’t.
• Identifying her insurance need and identifying an appropriate product gave her peace of mind knowing that in the event of her total permanent disablement her plans would not be put in jeopardy.

A core component of our projection process is the comparison between different scenarios based on the client’s financial position. This allows us to not only evaluate the impact potential strategies or situations have on the client’s situation, but also compare their position ongoing to how our advice expected they would be.

The following graph is a comparison between the client’s current plan, which is prior to implementing any of our recommended strategies against a situation where she implements all of our recommendations. To contrast these two projections, we’ve also included the lump sum needed for the client to live her desired retirement lifestyle.

Our analysis was based on a set of assumptions, such as rates of return on investments, interest rates, inflation, and current tax and superannuation legislation. We always take a cautious approach when forecasting figures to ensure that they are realistic and achievable. This means that If our client were to outperform our assumption, she may be able to bridge the gap between what she wants and what we’ve assessed as achievable. On the flip side, should she underperform our assumptions, it could see her needing to work even longer.

Produced with our client’s permission

If any of the information stated in this case study resonates with you personally and believe that you may benefit from a financial plan, please don’t hesitate to contact the team at yield here.