“Having kept a very tight rein on expenditure, Rick and Vikki are significantly further ahead on their mortgage repayments compared with the initial projections,” Shugg says.
The ongoing plan is to continue using surplus income to reduce the mortgage to around $180,000 by 2013. Once the mortgage is down around these levels, Rick and Vikki will start channelling surplus income into super using a salary-sacrifice strategy, thereby reducing their marginal tax rate to 15 per cent. It’s early days, but Shugg envisages the Morgans saving an estimated $5000 in tax annually by deploying an effective salary-sacrifice strategy.
ASSET CLASS INVESTING
Meanwhile, Shugg suggested rolling over the Morgans’ two company super funds into a Client Portfolio Service platform administered by BT. By adopting an “asset class investing” approach through a passive fund manager, Shugg has been able to deliver returns that have consistently outperformed the relevant benchmarks by around 2 per cent annually.
Differing from a traditional index fund, he says enhanced asset class investing is a smart way of focusing on the types of risks which are consistently rewarded.
“Due to the unique nature of the associated risk/return relationships, this approach seeks to capitalise on the size and value of return premiums available from the market itself,” Shugg says.
ADDED INSIGHT
The other vexing question the Morgans needed an answer on was whether or not they could afford to spend $200,000-plus giving their two children a private high school education. Based on cash-flow modelling and cost of living projections (indexed out as far as 2029), Shugg identified that the Morgans would have $1.7 million (excluding their home and the Malvern property) to retire on if they chose not to pursue the private education route, and $1.3 million if they did.
Shugg based these projections on 1) acceleration in superannuation – currently worth around $270,000 – and non-superannuation investments in later years, once the mortgage is extinguished, and 2) an assumption that Rick will continue working until age 65 (or 2029).
“Surplus income resulting from the state school approach will help retire debt significantly earlier, and compound growth on additional funds,” Shugg advises.
Having this level of clarity so far out into the future gave Rick and Vikki sufficient insight into how income allocation would affect their future financial position. Shugg says this also made them question whether expected financial outcomes would meet their future living needs.
He says it made them evaluate how much they’d need to live on, what their idea of retirement would be like, and how they’d spend their time.
“We chose not to enrol our kids in private schools, but we had the comfort of knowing that it was affordable, and what this commitment would have done to our future earnings,” recalls Rick.
“We could have hired an accountant to run a cash-flow analysis for us, but we wanted the holistic input that an adviser should bring to the table.”
According to Shugg’s modelling, Rick and Vikki would need around $960 a week to live on in retirement – a significantly smaller amount than they’d initially envisaged.
“[And] $1.7 million in 2029 is equivalent to about $1 million in today’s terms, so assuming they want to draw $50,000 annually from this to meet living needs, the Morgans’ money would last 25 years on a conservative assumption of a net 5.2 per cent return, or 30 years at 6.0 per cent. They would still have income from their investment property on top of this,” says Shugg.
FUTURE PLANS
Adding to the family’s income, Vikki has subsequently started working as a self-employed naturopath, and plans to commit surplus income to super once the mortgage is well under the $200,000 level. While there are no immediate plans to radically change their investment dynamics, Shugg says buying another unit in the same block as their current investment property may be a prudent move. He says the opportunity of owning all the units in a single block could provide some up-scaled value into the future.
Despite unforeseen events, such as the global financial crisis, Shugg says the Morgans are still tracking very close to the road map laid out for them in 2004. Having recognised that Rick – now a contractor – may be exposed to future stints of unemployment, Shugg says the Morgans also saw the benefit in income protection.
Based on his recommendation they have subsequently implemented death cover and loss of income policies on Rick to the value of $700,000 and $110,000 respectively.
THE PLANNER
Nick Shugg
An authorised representative of Shadforth Financial Group, Shugg’s qualifications include a Bachelor of Science degree, Diploma of Financial Planning and a Diploma of Superannuation Management. Having cut his teeth within investment markets working within the actuarial department of a large insurance company in the late 1980s, and a stockbroking firm in the 1990s, Shugg has been a financial adviser since 1994 and a Certified Financial Planner since 1998.
A specialist in superannuation and retirement planning, wealth creation, aged care and Centrelink issues, Shugg works with a cross-section of clients Australia-wide. An adviser to the boards of various foundations and arts bodies, he’s also the finance committee chairman on his local school council.
Advice structure
Shadforth Financial Group operates exclusively within a fee-for-service model. Commensurate with funds under advice, the firm’s three-tiered fee structure – capped at $3 million – reflects the volume and complexity of work undertaken, and the associated risks.
