Consolidating tax savings and diversifying their portfolio have put two baby-boomers back on track to achieve ambitious retirement targets. Mark story explains how they did it.
With their faith in financial advice shattered after a former planner unexpectedly went bust, it took a friend’s referral many years later for Brisbane-based butchers, Madge (58) and Frank Oliver (60) to again seek long overdue financial guidance.
In May 2008, a few years before they were ready to retire, the Olivers looked to financial adviser John Duncan for a wealth creation strategy that would help their transition from full-time work into a worry-free life of leisure.
Having concluded early in their careers that financial planners weren’t to be trusted, the Olivers spent the next 20-odd years cobbling together an eclectic basket of investments based on the recommendations of friends and acquaintances. And when they first approached Duncan, at face value they appeared relatively well set-up to be self-funded retirees within a few short years.
Despite being self-confessed novices in the investment stakes, the Olivers had successfully managed to pay off the family home, held three personal super funds, life insurance bonds, whole-of-life policies and two rental properties.
They’d also amassed $390,000, split between direct equities and term deposits. These were held within a self-managed super fund (SMSF) set up earlier by their accountant as an appropriate tax structure for these assets.
‘Their current – albeit ad hoc – investment strategy would be a costly one’
“Intuitively we knew we weren’t investing as professionally as we could have been. So it was uncertainty over retirement options and tax strategies that prompted our long overdue call to John Duncan for advice,” says Madge.
REBALANCING ACT
Duncan quickly identified that unless the Olivers tax-effectively rebalanced their assets, their current – albeit ad hoc – investment strategy would be a costly one.
“Had Madge and Frank simply continued what they were doing, it’s a safe bet they would have never delivered on stated financial expectations,” says Duncan.
With a four-year window before Frank planned to retire at age 64, Duncan was charged with helping to deliver on key outcomes, including: After-tax income of $100,000, an additional $130,000 to cover myriad travel expenses, new car purchases, and significant renovations to a family residence – plus $35,000 on call for unexpected expenses.
Duncan’s best estimates suggested that to deliver this outcome within four years, the Olivers would need to amass around $2 million in assets.
“Given that they already had existing capital of $1.65 million, they needed a sound strategy to deliver the shortfall – of around $147,000 annually – over the stated time frame,” says Duncan.
“Given the expected returns of their existing assets, this meant that they needed to tip in $32,000 per annum.”
INVESTMENT CONSOLIDATION
With much of the Olivers’ expected growth wired to a super strategy, Duncan’s first recommendation was to redeem their existing Colonial insurance bonds and contribute the proceeds to the SMSF as undeducted contributions. This had the net effect of reducing the annual tax on earnings from 30 per cent to less than 15 per cent annually. It also enabled them both to qualify for the Government’s superannuation co-contribution.
“Given that the crediting rates were above the 7 per cent annual earning rate required to reach their goal, the Olivers’ ING whole-of-life insurance policies were kept with the intention of converting to endowment policies,” Duncan says.
“And to avoid a double-dipping of fees, their three personal super funds were then consolidat- ed within the SMSF they’d set up for their direct equities and cash.”
ASSET CLASS INVESTING
Funds within the super fund were initially held in cash before being invested within a diversified portfolio using an “asset class investing”, or index investing, philosophy. According to Duncan, asset class investing should provide superior performance when compared to actively managed funds by avoiding exposure to unrewarded risk, transaction fees and tax costs.
