Mid 50’s Couple At The Crossroads…
Many in their 50’s get to a point where they are unsure of the direction they should be going when it comes to their finances & retirement planning.
It’s confusing and the stakes are high. Get one move wrong and there’s little time to correct it.
Many times we have new clients come into us with exactly these issues. They want the dream retirement, but uncertain the direction they should be taking to make it a reality.
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Hero clients Henry(57) & Christine (55)
Henry & Christine were a lovely couple. However, after working hard all of their working life, they were facing the retirement dilemma.
It was coming a lot sooner than they had thought. Christine’s health had deteriorated over the last few years. Henry had been made redundant a number of years ago.
He had started a small business, providing lawnmowing and gardening services. The physical nature of his work was starting to take its toll.
They were feeling stressed about their money and felt they had to keep working to fund their dream retirement.
There was one major thing on their mind, how to pay their mortgage off. This would allow them the freedom to make a decision about working or not. It would also mean they could slow down a bit and enjoy life a bit more.
They were stuck, stressing about what the was the right direction to head.
While their major focus was paying their mortgage off asap, they also wanted to make sure they had enough to live their dream retirement.
Something we see so often.
Having their mortgage paid off would provide them the freedom to live their dream retirement.
On the surface, this may not seem like a major thing, but for Henry & Christine, it meant they could give away work, take some time and enjoy life a little more.
Like most, they had heard of strategies to facilitate this, however, did not know where to start. Nor whether it was the right way to go.
Working with many clients heading towards retirement, this is one part of their finances they want to be sorted before taking the big plunge.
We’re going to take you through the exact discussions we had with Henry & Christine. Hopefully, so you can take something away and implement yourself.
Sometimes the answer is not may look to be the obvious one…
Henry & Christine’s Backstory
Henry & Christine had two good jobs. They earnt good salaries. They had brought up two kids who were now finishing University studies, both still at home.
One had recently bought their own car with cash and was well on their way to becoming independent. Something for them to very proud of, to see their daughter become financially responsible.
Henry & Christine had been a great influence on their kids and had done a great job.
However, their plans got turned upside down. As with a lot of jobs, the business Henry worked for most of his working life was shut down.
At the time it was a big shock.
Henry, being the main provider in the household didn’t know what he was going to do. After all, who’s going to employ someone in their 50’s, it’s hard these days.
Henry did have some skills, so rather than just throwing in the towel, he started his own small business. While Christine continued to work in her role part-time.
Given the physical nature of Henry’s work, it was starting to take its toll. They wanted to make sure they had something to aim for. Something that would allow them to take life at a slower pace if they wanted too.
So, we delved deeper into what they wanted going forward.
The Dream Retirement
Henry & Christine were living a modest lifestyle. They wanted to maintain it.
Their priority was paying their debt paid off asap.
Henry wanted to buy Christine a new car at retirement, how cute:)
They wanted enough to experience the odd overseas trip but weren’t big travelers.
They generally bought second-hand cars in the past and didn’t unless absolutely required. We needed to account for a change of car from time to time in their plan.
As we discussed their financial position, I was a little surprised.
Their super balances were quite healthy, to the extent they wouldn’t be relying on Centrelink anytime soon.
I was curious how their balances were quite healthy given there were minimal assets outside of super.
Henry informed me he started adding to his super when it came out and guess what happened? That’s right, good old compounding interest took over.
A great lesson to many who say they can’t afford to add to super. If these guys managed, anyone can. They should be really proud of themselves.
Just want to make a quick note here. At this stage, there was no mention of which super fund to use or what type of investments they should be using.
I don’t mention this to brag, but to point out if advisers are doing their job, in most cases it won’t come up until much, much later in discussions. It’s the tactics that are employed when the direction is clear.
I’ve had many conversions with people who have said they felt they were being sold something. Our sole focus is on helping people, like you, living life while not sacrificing your tomorrow…
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Henry & Christine’s options?
In our first meeting with Henry & Christine, we covered a lot. Knowing their financial picture we also discussed some options that they might consider.
They could downsize the home, with proceeds being used to pay down the remainder of their debt. They were open to this option.
They could pay the minimum amount on their mortgage. Withdraw a lump sum from super in five years time and the mortgage would be paid.
Or, they could convert Henry’s super to an income stream, and use the funds to pay down to the debt over the next 5yrs.
Given it takes some time to analyse all the information and run all the scenarios we arranged another meeting.
This allowed us the time to investigate all options thoroughly. This would allow a meaningful discussion the next time we met so they could make the decision on what they felt was best for them.
Let’s look at the Options…
#1 Downsize the house
While pretty dramatic, it was an option we discussed at the initial meeting with Henry & Christine.
Downsizing the house would certainly allow them to be mortgage free. Putting them in the position decide whether they continued to work or not.
It would have allowed them to stop work now, pay off the mortgage and start living their Dream Retirement.
#2 Contribute to super and withdraw a lump sum in 5yrs time to pay the mortgage
They could continue to work for the next 5yrs and then be in a position to retire.
They could take advantage of the tax benefits of making contributions to super. Build on their super balances. Pay a small amount of the mortgage.
In 5yrs time, retire and withdraw an amount from super to extinguish their mortgage. Given Henry would be over age 60 and retired from the workforce, it would all come out of super tax-free.
Quite a common strategy if you are not already maximising your super contributions.
In short, interest rates are quite low, most around the 4% mark and look to be staying that way in the near future.
If you are in the 34.5% tax bracket (includes Medicare levy), you are far better off contributing money to super.
Let’s compare taking $1,000 salary or contribute to super.
If it’s paid straight to you, you pay $345 in tax leaving you with a net $655.
However, take that $1,000 and contribute to super via salary sacrifice. While you don’t receive it in your hands, you have $850 to invest. That’s $195 more.
That’s a 30% return straight away plus the compounding effect over time.
We ran some projections based on different scenarios, and this was by far the best option for them to take.
It would enable them to build up their super a little more and have more to pay down the mortgage in 5yrs time.
On paper, it was the best option for them.
#3 Convert Henry’s super to a transition to retirement pension and use the income to pay down the debt
The last option we examined was starting a transition to retirement pension and paying out 10% of Henry’s balance each year.
Henry had the larger super balance and due to Christine not quite being able to access her super, we could only use Henry’s super.
Henry, being under age 60, he was 57 at the time, it would mean paying tax on part of the income paid from super.
While this option would allow them to pay the mortgage down quicker, it was not the best option.
Implementing this strategy would mean they would be approx $30,000 worse off when they retired.
That’s a nice European holiday:)
What course did Henry & Christine take?
#1 Sell the family home, downsize and use proceeds pay off the mortgage
When we got together with Henry & Christine a couple of weeks later. They had had some time to think over some of the discussions we had.
As we were explaining all the options, it became clear they didn’t want to sell the family home and downsize. This option was off the table
#2 Contribute to super and withdraw a lump sum in 5yrs time to pay the mortgage
We explained how this option would be them in the best position financially. Essentially around $30,000 better off.
In our opinion this what we would normally recommend it as it was the best option.
However, from Henry & Christine’s perspective, not the option that felt right for them.
#3 Convert Henry’s super to a transition to retirement pension and use the income to pay down the debt
We explained how this option would play out, while also stating it was not the option financially would place them in the best position.
However, as we were discussing all the options, Henry & Christine were attracted to the transition to retirement option.
Here’s where sometimes what a planner thinks is the best option is not necessarily the options clients want.
That’s why we act as a guide to help our clients make the right decision for them.
We do all the hack work, they use our expertise, present our findings and they make a decision that works for them.
I know of many advisers who would have pushed them down the pay later stage.
Nevertheless, Henry & Christine decided it was more important to see progress in paying down the debt rather than retaining it and paying it later.
They were comfortable in the overall scheme of things this extra $30,000 was not as important as having and seeing the mortgage paid off.
While retaining their super fund, contributing more over the next few years and withdrawing a lump was better for them financially, it wasn’t what Henry & Christine wanted.
We helped them implement this strategy for thing along with creating a clear path towards their retirement, one where they can start to take life a little easier.
Henry & Christine’s retirement success story in 5yrs?
We are so looking forward to seeing Henry & Christine reach their Dream retirement in 5yrs time.
What does their plan look like?
While we have not gone into every little detail, here is a rough outline of the plan we implemented.
Firstly we set up a transition to retirement pension. Given we started around July, we arrange the income payment for the year to be paid at once rather than monthly.
Henry & Christine saw an immediate benefit of a lump sum coming off their mortgage immediately.
Under a transition to retirement pension, Henry could withdraw up to 10% of the balance as an income. His balance was around $900,000 at the time.
We estimated it would take approx 4-5 yrs for them to pay the remainder of their mortgage. They were comfortable with this timeframe.
Our focus then turned to help them map out their retirement plan.
How were they going to make it all happen?
Would they actually have enough to experience their Dream Retirement?
We starting set out their Dream Retirement Roadmap. Making sure they would not need to worry about external events like markets corrections or world events dictating their retirement. We wanted to make sure they had the money available when they needed it.
Most important for all our clients is have a pot of cash equivalent to approx 6mths worth of expenses. If you’ve read our posts previously you’ll know where we are heading with this.
Henry & Christine didn’t have a lot in the way of cash reserves, so we helped with a plan to get there over the next 3-5yrs so that when they hit retirement they are well positioned.
Should they have emergencies, they had the confidence there were funds ready for such a situation.
To fund their Dream Retirement, we costed it all out and estimated they would need $1,200,000. They were on track to make this happen over the next 5yrs.
However, we wanted to ensure they were protected or at least have levers they could use should investment markets take a turn for the worst in the future.
The biggest risk people face approaching retirement is what we call sequencing risk. It’s generally 5rs prior and 5yrs post-retirement that if not managed well can blow up your retirement.
It’s why we are meticulous when it comes to protecting our clients from external events that if not managed well can blow up someone’s retirement.
It would be horrible if you have to pare back your lifestyle or give something up because you didn’t have the right structure in place.
As with all clients, we take them through a very deliberate process about how they want their money invested. As a result of this and their current arrangements, we needed to make some changes.
What they currently had did not allow the flexibility to arrange and invest their funds in a way that was going to work and protect their capital and lifestyle.
We helped them restructure in a way that they could comfortably withdraw their required funds when they needed it. No need to worry about market gyrations.
We held enough in cash, around 2-3yrs worth of income in cash or very conservative investments. This was held in the transition to retirement pension.
The remainder was invested as per the risk we assessed they were comfortable with. The funds were invested in low-cost index funds. The portfolio would generate a good level of income to top up cash accounts throughout the year.
We also set out a schedule or timeline if you will when funds were required. We set in motion a plan to ensure we had those extra capital expenses tucked away a couple of years ahead of time. Once again allowing them to continue to live without the worry of external events.
There was a need to review their wills as these were out of date so we helped put them in contact with a great estate lawyer to assist with this.
While I haven’t included every little detail here, Henry & Christine now have a gameplan they will use to make decisions along the way. The power is now in their hands.
Like all plans, life happens, so at reviews, we will rinse and repeat and keep iterating their plans as life happens.
Henry & Christine are now very comfortable with the direction they are heading in and now have something to work towards.
It’s easy to follow, not complicated and will see them have their mortgage paid off and enough in their super to fund their retirement lifestyle.
In fact, now they know the direction they are heading, they are already thinking of experiences they would like to explore that they had not considered previously.
Hope that’s been useful…
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Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth
Mob: 0401 253 729
Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at June 2018. This is an online information blog. It does not imply an offering of securities.