About the client
We had recently been approached by a couple in their mid-60s who desired to retire. They didn’t have many assets however they did recently receive a large inheritance in the tune of $190,000, which until now had merely been sitting in cash. They both worked full time and owned their own home outright.
Why they sought advice
During our initial conversation with these clients, we identified that the main reasoning for them seeking our advice was due to the concern they felt around whether they had sufficient funds available to retire.
Their original retirement plan was to make do with an annual income of between $18,000 to $20,000, whilst they felt comfortable with this, it was clear that this wasn’t their desired retirement lifestyle.
In addition to this, they also had a variety of super funds with about $100,000 invested that needed consolidation, they also showed interest in any advice that we could provide that may improve their situation leading into retirement.
When preparing strategic advice, the first place we start is to work out how their current position looks if they simply continued on as they currently are, with the expectation that they’d retire in the next few years. This provides us with a baseline to contrast alternative strategies and allows us to determine how much value there is in any given strategic step being assessed.
The baseline projection showed the clients that even without implementing any of our strategies, that they would be able to afford their minimum retirement objective. This was because these clients were eligible to age pension benefits, where their entitlements would easily support this level of income. In fact, we showed them that their assets will consistently grow throughout retirement, which gave them greater confidence to retire sooner rather than later, which was welcomed clarity for them.
Despite this position suggesting they would have no issues achieving the bare minimum, we did identify steps that could be taken to further elevate their situation in retirement further.
To begin, their money had no clear investment strategy. The majority of their funds were held in cash, which was mainly due to their stated lack of knowledge around investment. Maintaining this strategy going into the future would most certainly incur opportunities costs due to lost returns through their retirement years.
Our advice to them helped strike the balance between keeping enough funds liquid to meet their income needs, whilst also investing funds that they felt comfortable with in assets that have historically consistently delivered better long-term returns than cash.
Further to this, our advice predominantly centred around superannuation. There were concerns about the fact that the rules regularly change, but we helped them understand that it is a purpose built retirement structure that is highly tax advantageous and provides a centralised & convenient way to manage retirement income payments.
Being over the age of 65, they had met a condition of release for super, meaning they had full access to their funds once contributed. However, to be eligible to contribute they would be required to meet the work test, which meant they still needed to be working 40 hours in a 30 day period. Lucky for them, they were.
This led to another component of our advice, whereby we took advantage of their eligibility to contribute to super and make non-concessional contributions to qualify for the government co-contribution, which they would then have immediate access to when needed. In their specific situation, this virtually gave them a risk free way of obtaining a free $500 each for three years, adding $3,000 to their savings.
With anti-detriment laws abolished, we recommended they both carry out a re-contribution strategy as a way to consolidate their super funds into one that meets their needs ongoing and has more tax-effective characteristics.
This strategy involved withdrawing the entire balance of their super and contributing it back to super non-concessionally, converting the “Taxable” element of their super balance into a “Tax free” element. This is an “Estate benefit” for their children, but with no detriment to themselves. We estimated this will save their children around $36,000 in tax.
From here we wanted to give the clients some idea of an amount they could consider spending that would allow them to live a less frugal lifestyle and even take the opportunity to travel. We looked at a spending level of double their original expectation (i.e. $36,000 p.a.) along with also allowing $7,000 p.a. for travel until age 80. The results suggested that despite the increased expenditure, their position still reflected a growing asset base, in other words they were still generating on overall net financial position surplus each year.
Had these clients refrained from seeking our advice, they may have found themselves living the frugal lifestyle they thought they needed to, when in fact they could have been enjoying the years they’d worked all their lives to earn.
This is unfortunately a common situation, where an individual understanding of retirement and how it may play out often differs to how it actually occurs.
Benefits of the advice
As a result of seeking our advice the client’s received the following benefits:
- Evaluating their Centrelink position allowed them greater understanding of their entitlements under the Age pension and improved the overall quality of life they could expect to lead in retirement.
- A recommended re-contribution strategy drastically improved the tax effectiveness of their estate. We estimated the benefit to the children could be a tax saving of roughly $36,000.
- Taking advantage of their low incomes and ability to contribute and access their super allowed them to utilise the government co-contribution. Effectively allowing them to obtain a free $500 each for three years, boosting their savings by $3,000,
- Consolidating funds to Super and investing in line with both their risk tolerance and investment horizon, would position them to make the most of their retirement savings, improving their retirement position.
Produced with our client’s permission
If this case study has resonated with you and you think that you or someone you know may benefit from getting personalised financial planning advice, please feel free to contact us for a no obligation and confidential discussion.