Confirming Birch’s worst suspicions, the Whites were operating on a $6000 cash-flow deficit, which included $9000 that they were paying off their home loan. While Kim and Richard were trying to do the right thing by paying off the loan faster, they’d only done so by placing unnecessary financial strain on their lifestyle, Birch discovered. “By restructuring their insurance, making some minor sacrifices in discretionary spending and commencing a ‘transition to retirement’ strategy for Richard, we’ve managed to offset these extra payments to the mortgage and get the Whites ‘back in the black’ from a cash flow perspective,” he says. REFINANCING AND DOWNSIZING Equally integral to Birch’s overall recommendations was ensuring the Whites were in a trusting environment. Having lost faith in their current bank, the Whites indicated that they no longer felt any loyalty towards this lender. Understanding this, Birch put the Whites in touch with a mortgage broker who refinanced their home loan at a lower (by 0.25 percentage points) rate.
The net effect is annual savings of $875, which are now going towards paying down debt sooner. When Richard reached age 60 earlier this year, Birch also recommended that he commence a transition-to-retirement strategy, thereby salary sacrificing approximately $18,000 annually. The plan is for Richard to draw an allocated pension of $12,000 from his super fund – worth around $130,000 – with half of said funds going directly into the home loan. At Birch’s recommendation, the Whites immediately replaced the expensive direct insurance cover that Kim had hastily taken out with more appropriate cover, via their respective super funds. By paying for as much of their insurance cover as possible via super, annual tax savings of $1562 are now going directly to the home loan. “We will continually assess Kim and Richard’s required levels of insurance and adjust down where necessary, especially as debt is paid off, and following Richard’s retirement,” explains Birch. Part of the agreed strategy for the Whites was to sell the family home, currently valued at around $550,000. With their four grown-up children no longer living at home, Birch says it made sense for Kim and Richard to downsize to something smaller and more affordable.
“This will allow them to own their future home outright upon Richard’s retirement, with surplus cash flow – freed up from previous home loan repayments – going towards their retirement savings,” Birch says. “Kim and Richard will need to invest around $25,000 getting their home ‘sale-ready’, and the $5000 recovered from their bank has already been allocated to some badly needed landscaping.” By freeing up needed funds to complete “sale-ready” renovations – courtesy of refinancing and better cash flow management – the Whites have also been able to accelerate their home downsizing strategy by up to three years. Birch estimates that by applying the surplus cash from the downsizing strategy, and directing all future additional cash to the home loan, it will be paid off one year earlier. “The net effect is an approximate saving in interest payable of $37,500 over what would have been the remaining [six-year] life of the loan,” says Birch.
ROLLOVER AND REBALANCE On closer inspection of their industry super funds, Birch also discovered that both Kim and Richard were exposed to asset allocations that didn’t reflect their actual risk profiles. While they’d been assigned the default options of balanced and growth respectively, Kim and Richard both had moderate risk profiles. “Given their age and stage of working life, we agreed that it was wise to reduce unnecessary risks that current asset allocations were exposing them to,” adds Birch. To provide a more diverse range of investment choices for their moderate risk profile, Birch also recommended that the Whites’ industry super funds be rolled over to alternative providers, Macquarie. With mortgage commitments significantly down during the remaining years of the loan, Birch says there’s a golden opportunity to direct surplus cash to Kim’s super fund. “This, along with structuring super in the most tax-effective way – like an account-based pension – produces an estimated $120,000 extra in retirement funds at Kim’s retirement in 13 years at age 68,” says Birch. “The plan achieves this outcome while remaining cash-flow-positive throughout these years.”
DIRECTION AND CERTAINTY Based on the Whites’ disastrous experiences with their former adviser, Kim’s view of financial advisers had been downgraded to “wolves in sheep’s clothing”, who were only preoccupied with making a quick buck. She admits that they would have never proceeded past first base with Birch had he not been willing to invest time developing good rapport. “Given our lack of knowledge on financial matters, what we needed most was simple strategies communicated to us in layman’s terms,” Kim says. “Had we not given another financial adviser the benefit of the doubt, we’d have been in real trouble realising any future goals, let alone unravelling the mess we’d been saddled with.” She says the know-how that Birch provided in establishing and then implementing a clearly constructed and sustainable retirement strategy has created the “peace of mind” that seemed so remote only a few months ago. Due to Birch’s advice, Kim says she and Richard have also been empowered with the ability to manage their own financial affairs. She equates being taught how to budget with teaching a beggar how to fish – both provide needed sustainability. “We’d always wanted to caravan our way around Australia as ‘grey nomads’ during our retirement; and with our financial strategy back on track, we’re now able to turn this pipe dream into reality,” says Kim. “We now realise that there’s a strategy for everybody, regardless of age or wealth level – and that it’s never too late to seek valuable advice.”
