40’s & Pre-Retirees | Abound Financial & Lifestyle Planning
40’s & Pre-Retirees
Chris and Sue Smith have children in their late teens. They have repaid a significant portion of their mortgage and have significant equity in their home.
They have both progressed in their careers and are thinking about their working future and beyond.
The Smiths would like to continue enjoying life and going on holidays while at the same time they would like to help their children in the future and save for retirement. While their mortgage has been the focus of their financial situation to date, they now have a number of different goals they would like to address.
Chris and Sue discussed their situation and lifestyle goals with their financial planner and provided their financial details as part of the financial planning process.
Current Income and Expenditure| Chris’s gross income | $70,000 pa |
| Sue’s gross income | $55,000 pa |
| Mortgage Repayments | $35,000 pa |
Current Lifestyle Assets
| Principal Residence | $550,000 |
| Home Contents | $8,000 |
| Motor Vehicles | $30,000 |
Current Lifestyle Liabilities
| Mortgage | $110,000 |
Current Investment Assets
| Bank Account | $15,000 |
| Chris’s Super | $210,000 |
| Sue’s Super | $130,000 |
After a thorough analysis of their finances the advice provided the Smiths includes the following:
Cashflow
An analysis of Chris and Sue’s income, taxation, expenditure and savings illustrated their overall cashflow position. It was discovered that at their current rate of mortgage repayment they should have their mortgage repaid within a few years. This allowed the luxury of being able to reduce the mortgage repayments and redirect the free cashflow to investments.
Financial modelling indicates that the Smiths are able to save approximately $4,600 per annum.
Investment Gearing
While retirement is a consideration for the Smiths, and superannuation is an obvious choice as a savings vehicle, they were after a long-term investment which could be accessed prior to retirement as a means of assisting their children in the future. Utilising the equity in their home they established a new loan for investment purposes and placed the proceeds in an investment with the aim of providing a return in 5 to 7 years time. Interest-only repayments are to be made on the loan in order to maximise the tax benefit and potential return on the investment.
The Smiths were advised to reduce their mortgage payments to $25,000 pa, which should allow them to repay their mortgage in less than six years time. The additional free cashflow would be used to fund interest-only payments on a $150,000 investment loan at a 7% interest rate.
The loan proceeds are to be invested in a growth managed fund with estimated growth of 5.22% per annum and income 3.40% per annum. The income from the investment is to be reinvested. It is projected that in approximately 8 years time the investment balance would almost double and the Smiths could sell the investment, repay the loan, and use the net proceeds to assist their children.
Retirement
A long-term goal for Chris and Sue, their retirement income needs were established and this was used to calculate the investments they would need at the commencement of their retirement in order to provide the retirement income they desire. Various options for funding their retirement were considered and it was established that superannuation would be the most efficient vehicle, considering the tax benefits it can provide now and in retirement.
The Smiths would like to retire when they are 60 years of age and provide for expenditure of 50,000 pa in retirement. Based on this income need it was established that they would need capital of approximately $900,000 (today’s dollars) at the commencement of their retirement.
Based on Chris and Sue’s current superannuation balances, investments and contributions it was projected that they may have total superannuation of approximately $770,000 (today’s dollars) at the commencement of their retirement. This may provide them with an income of $42,000 pa in retirement but it would not be adequate to provide the retirement income they desire.
Salary Sacrifice
One of the most efficient ways of contributing funds to superannuation is via salary sacrifice. This involves paying Chris and Sue’s salaries directly into superannuation before the payment of income tax. Due to the reduction in the mortgage payments there was an increase in free cashflow which they could contribute to superannuation via salary sacrifice and in this means increase their retirement funding.
Following the repayment of their mortgage in 6 years time the Smiths should have a significant cashflow surplus and could implement salary sacrificed superannuation contributions. If they contributed $15,000 pa each via salary sacrifice for 8 years starting in 6 years from now, they should have capital in excess of the $900,000 (today’s dollars) required to fund their retirement income.
In addition to being able to achieve their retirement goal, the salary sacrificed superannuation contributions of $30,000 pa should provide tax savings of almost $5,000 pa compared to paying income tax on the same amount at Chris and Sue’s marginal tax rates.
By analysing their financial position and considering their plans for the future we were able to help Chris and Sue and provide some certainty around their future lifestyle and financial position.