Drawing a better road map to retirement could be pointless unless the journey makes for an enjoyable lifestyle. Mark Story explains.
When you’re married with kids, a mortgage and have just been made redundant, there’s really only one question that needs answering: How long will this wad of redundancy money tide the family over before you need to have found alternative employment? Faced with this quandary, and some lingering uncertainties over what tax liabilities a $30,000 lump-sum payment – plus some executive share options – might throw up, Melbourne-based IT contractor Rick Morgan (39) and wife Vikki (36) went in search of alternative financial advice.
INCOMMUNICADO
In 2004, having concluded that their adviser at the time was neither an effective communicator, nor genuinely interested in offering non-transaction-based advice, Rick and Vikki – at the instigation of a neighbour – knocked on the door of professional planner Nick Shugg.
“We got the distinct impression that our adviser was out of her comfort zone and just didn’t have the ‘head-space’ needed to straddle the very delicate whole-of-life issues confronting us,” Rick says.
“Unless she could provide a product-based solution, her interest was next to nil.”
SILVER LINING
Admittedly, nobody wants to find they’re unexpectedly out of work, but Shugg says it did have a silver lining. He says finding themselves in this predicament forced the Morgans to bring a level of scrutiny to their personal finances that may have otherwise gone begging indefinitely. Unbeknown to them at the time, he says, the Morgans were by default handed a golden opportunity to develop a road map for future wealth creation.
While the Morgans remained optimistic about the future, Shugg says they needed a well constructed plan to help them identify both where they wanted to go, and the things most important to them in life, like family, health, quality time together and relationships.
“It was clearly impossible to advise them what to do with their lump-sum payout without assessing their current financial position in light of myriad considerations – including their future dreams and aspirations, plus ongoing family commitments,” advises Shugg.
He says what the Morgans clearly needed was an adviser willing to work with them to identify where they might be financially at various future junctures.
“They were more interested in an adviser prepared to invest the time to develop ‘what if’ scenarios, rather than someone only willing to offer opinions on which investments to be in,” says Shugg.
During an initial meeting it became clear to Shugg that the Morgans wanted to know how their financial position would be affected if they a) decided to put their two primary-school-aged children through a private high school education, b) if Rick decided to retire at age 60 instead of 65 as originally planned, and c) if they undertook badly needed renovations to the family home.
“We did some projections based on various options, including increasing the size of their home, private school fees versus state schools in the area, plus other more assertive options, such as borrowing to invest,” Shugg says.
ULTIMATE TRADE-OFF
Given that Rick was a well respected IT professional, Shugg says the issue was less about whether he’d land another top level position than about how long he wanted to endure the stress of this high-pressure industry. Together with Shugg’s assistance, Rick and Vikki set aside a $27,000 cash reserve to meet their income needs for a six-month period – the timeframe within which Rick realistically expected to have accepted a new job.
The purpose of a cash reserve, adds Shugg, was to allow Rick to make a smart choice about his next job, without the financial stress of needing to take the first thing that came along.
“Rather than simply wanting to stuff as much money away for retirement as fast as possible, Rick and Vikki were looking for a trade-off between an enjoyable lifestyle today, and adequate savings for tomorrow,” advises Shugg.
“That meant knowing what they wanted to achieve, both personally and financially, and how they were going to get there.”
REDUCING DEBT
Rick and Vikki also had an ad hoc basket of investments beyond their personal super funds ($46,000 and $42,000 respectively). In addition to holding around seven ASX-listed blue chip stocks and managed funds – collectively valued at around $100,000 – they’d also inherited a $400,000 rental unit at Malvern some years earlier.
Having weighed up their ages and capacity for future earnings against their current financial position, Shugg recommended deferring a salary-sacrifice strategy in favour of first paying down their non-deductible $206,000 home loan.
In 2006, at Shugg’s instigation, managed funds, direct equities, and Rick’s NAB employee share options were sold down to help fund the needed renovation work on the family home.
As well as enhancing the family’s quality of life, home renovations also increased the capital value of their Fairfield home to around $1.2 million.
While Rick and Vikki originally budgeted $100,000 for renovation work, Shugg suggested a more conservative approach and assumed a cost of $150,000 in the original projections, which was a lot closer to the final outcome.
The total mortgage following renovations increased to $300,000, but it has since been reduced to around $217,000, following additional repayments from Rick’s salary. By having all Rick’s income paid directly into an offset account, Shugg says they are able to maintain the lowest possible debt level at all times.
