Case Study: Superannuation
Let’s say Adrian and Sarah are both aged 40 and are thinking about plans for their retirement. Adrian decides to invest $1,000 per month for the next 20 years and Sarah decides to invest $2,000 a month, but doesn’t start her saving plan until she turns 50. They both want to retire at age 60 and it’s assumed that their investment will generate 8% per annum after tax.
The graph shows that even though Adrian and Sarah both invested $240,000 in the end, Adrian’s savings are larger because of an extra 10 years of compound earnings.
Case Study: Pre-Retirement Pension
Harold has just celebrated his 55th birthday. He was working full-time on a salary of $45,000 but now he’d like to work less so he can practice golf in preparation for retirement on the Seniors’ Golf Circuit. Harold’s employer is happy for him to work part-time on a reduced salary of $22,500. But Harold needs to supplement his income from other sources. Apart from his salary, he has $350,000 in super and $100,000 cash from the recent sale of an investment property.
As Harold has reached his preservation age, he’ll be able to access some (or all) of his super via a pre-retirement pension. He decides to contribute the $100,000 cash into super as a personal contribution (non-concessional contribution).
Harold places the entire $450,000 into a superannuation pension and draws a pension payment in the first year of $22,500, which includes a tax-free payment of $5,000. His pension payments in the second and subsequent years will be based on his pension account balance every 1 July and the impact of market returns.
The table shows the impact for Harold in the first year of starting a pre-retirement strategy. He has maintained his pre-tax income, reduced his tax liability, increased his after-tax income, and can contribute surplus income to super and qualify for a Government co-contribution. More importantly, he’s been able to reduce his work hours, follow his retirement ambitions and maintain his income levels.
It should be noted that with this strategy, Harold has started to draw down on his retirement savings so he’ll have less later on. How much savings you have for retirement is an important issue to consider before you undertake a pre-retirement pension strategy.
Case Study: Margin Lending
Peter & Sally are friends and have both decided to invest $10,000.00 in Woolworths shares. Peter has decided to invest only his own capital whilst Sally has decided to use a Margin Loan to borrow an extra $20,000 and making her total investment worth $30,000.00.
After 5 years Peter has made an unrealised gain of $12,671 and $2,347 in dividends whilst Sally has made an unrealised gain of $30,052 and $7,047 in dividends after interest costs.
Case Study: Retirees
Although Wayne and Mary were about to retire with a significant super nest egg, they were concerned that it might not last long enough to see them through retirement. They worked out that they would have to seriously reduce their standard of living when they retired to make their money last.
When they spoke to a financial adviser, he confirmed their fears – to help avoid running out of money later on they would need to adopt three specific financial strategies.
The first was to invest their money in such a way that they would pay no income tax for the rest of their lives – a significant saving. This, in part, involved directing more money into their super funds for a tax-free income when they turned 60.
Secondly, they needed to use investments which would allow them to qualify for a reduced Social Security pension plus the benefits associated with it (such as a pensioner concession card).
Finally, after taking into account their attitude to risk, they would need to invest part of their money in growth assets such as shares and property. While this would mean that their portfolio would have fluctuating returns in the short term, it would generate greater returns over the long term.
The financial adviser showed them a computer simulation of how the three strategies work and then developed a detailed financial plan for Wayne and Mary using these strategies. The end result is that Wayne and Mary can confidently expect their capital to last well beyond their life expectations, with no reduction in their desired standard of living.
Case Study: Redundancy
Gemma, an executive, accepted a redundancy offer from her company. As she has another job to go to and didn’t need her termination payout for income, her well-meaning colleagues suggested that she “roll-over” her golden handshake and super into another super fund. They told Gemma that by doing this she would not be liable for tax on those payouts. Gemma thought this sounded too good to be true and decided to seek professional advice from a financial adviser.
The adviser told Gemma that while her colleagues were right about the tax treatment in “rolling over” super, under superannuation law you have to meet certain criteria to be able to roll over these payments.
As Gemma does not meet the criteria she has no other option but to take her golden handshake and other employment termination payment in cash and pay the lump-sum tax due.
Case Study: Income Protection
Bob & Mary have been married for 5 years and currently have 2 children and one on the way. Bob is a plumber currently earning $ 85,000.00 and Mary is a stay-at-home mum who is not intending to go back to work. They currently have a mortgage of $500,000.00 and no current sizeable savings due to upcoming baby expenses. If Bob has an accident, becomes ill and cannot work or worse if Bob dies, how will Mary continue to meet expenses and repay the mortgage?
