When Jim and Susan came to see us for the first time, they were five and twelve years away from retirement respectively.
They were both employed with an annual household income of $200,000, and both benefiting from super guarantee contributions made by their employer but not making extra contributions of their own.
Their original plan was for them both to work to 67 and pay off their $300,000 mortgage as much as they possibly could before they retired.
They planned to use Jim’s super when he retired, to pay off whatever they had left on the mortgage at that time which they estimated would leave them with roughly $20,000 to $30,000 in his super.
They then planned to take a holiday each year for the following three years while Susan continued to work for another five years after Jim had retired.
Financial planning for the future = big savings in the present
After examining their situation, we recommended they each top up their super via salary sacrifice to the annual $25,000 concessional contribution limit. This would save them around $6,000 in annual tax combined.
We then switched our attention to their mortgage. Their home was previously an investment property and their bank hadn’t realised they had moved in. Consequently, they were paying an interest rate of 4.89% on their $300,000 mortgage. We advised them to notify their bank that they had moved into the property. The bank switched the loan to an owner-occupier arrangement and the loan interest rate dropped from 4.89% to 3.18%. This saved them more than $5,000 annually in interest payments.
The next step was switching from the old AMP super fund that Jim had to a more modern, low-cost and diversified super account. This immediately saved them $4,500 in investment administrative costs per annum.
We subsequently reduced the investment risk profile for Jim by altering the asset mix to add more defensive assets into his super portfolio. He was 100% invested in growth assets and being only five years from retirement, we advised a more cautious approach.
All of these things – the reduced tax, the lower bank interest and the cutting of administration fees – totalled out to around $15,500 in annual savings.
The financial strategy going forward
After all the above was set up, it was time to make a plan for the future. In keeping with Jim and Susan’s goals for their retirement, we recommended they continue to maximise Super contributions until Jim retired. At that point, they would be able to:
- Pay off their mortgage
- Move his remaining super funds into Susan’s name, allowing him to claim an age pension.
Susan’s employment income would then continue for 4-5 years which would allow them to comfortably live off the $60,000 annual income instead of simply relying on the maximum $36,000 couple age pension.
It’s never too late to put a financial life planning strategy in place
When Susan and Jim first came to us, they had a retirement plan. But they felt maybe there were better options available to them that weren’t being taken advantage of. And, as the case study above demonstrates, they were right.
This is very common. And while we’d prefer that people come and see us to set up their retirements a bit earlier than Jim and Susan did, it was still very satisfying to achieve the yearly savings we did. And also know that they are now set up for a much more comfortable retirement.