Real client story. Names and some details have been changed to protect our clients’ privacy. Figures were estimates at the time of advice and outcomes are not guaranteed. Every situation is different.
David and Melissa came to us in a position many couples in their early 60s would envy. Strong super balances, a mortgage nearly gone and a clear picture of the retirement they wanted. What they did not have was certainty. Would the money last as long as they did, and how much of it would reach their children?
Where they stood
David is 62, earns $200,000 a year and has $950,000 in super. Melissa is 60, earns $90,000 and has $850,000 in super. They had deliberately built up Melissa’s balance to even out their positions, and they held no investments outside super, a choice made for tax efficiency. The mortgage was on track to be repaid by the time David retires. For Age Pension purposes, they expected to declare about $80,000 of personal assets, mostly cars and household contents.
Their goals were clear. They wanted $150,000 a year to travel and enjoy time with family. David planned to retire at 65, with Melissa working on for two more years. They wanted to keep the family home where the grandchildren come to stay. They wanted to cut the tax their adult children might pay on inherited super. And they wanted to know they could draw on their home equity later if they ever needed to.
What we found
We modelled their super under a standard account-based pension paying the income they wanted. On the projection at the time, the money ran out at about age 85, roughly ten years short of their life expectancy. That was the turning point. It showed the plan as it stood would not hold, and it gave us good reason to look harder at how they would spend and how they would draw their income.
What we did
We started with spending. Most retirees spend more in their 60s and 70s than in their 80s, so we built an income plan of $140,000 a year in early retirement, stepping down to $100,000 from age 80. On the projections at the time, that alone stretched their super to about age 94, with the Age Pension estimated to start contributing from age 79.
Next, we recommended placing a quarter of their super into a lifetime income product linked to balanced investment returns, with payments continuing to the surviving spouse. It pays for life, however long they live, although the amount can rise and fall with investment returns. Under the Centrelink rules at the time, only 60% of its value counted under the assets test at first, falling to 30% from age 84. On those projections, David was estimated to qualify for the Age Pension at about 76, three years earlier than under the account-based pension alone.
To reduce the tax on super left to their children, we recommended a recontribution strategy. Adult children generally pay tax on the taxable component of a super death benefit. Withdrawing money and contributing it back as a non-concessional contribution converts it into tax-free component. We set up a second super account for each of them to receive the recontributions and keep that money separate.
Using the caps at the time, the plan ran like this. In the first financial year after David retires, at 65 and 63, they would each withdraw and recontribute $110,000, the annual non-concessional cap. In the second year they would use the bring-forward rule to recontribute $330,000 each. In the fifth year, at 69 and 67, they would repeat the bring-forward, with a final round around 72 and 70 if any taxable component remained. The aim is for their super to be largely or entirely tax-free component by their mid-70s, so that under the rules at the time their children would receive it without death benefits tax. Contribution caps have been increased since this advice was given.
Finally, we looked at their home. If they sell after at least ten years of ownership, they can each contribute up to $300,000 to super as a downsizer contribution, outside the normal caps and even beyond age 75. Alternatively, the government’s Home Equity Access Scheme can pay a fortnightly income of up to 1.5 times the full Age Pension rate, secured against the home, with a no negative equity guarantee. The rate at the time of advice was 3.95%. It can top up income, but the loan and interest reduce what is left in the estate.
The result
On the projections at the time, David and Melissa’s savings now last to about age 94, with a lifetime income stream and the Age Pension underneath them. Their super is on track to pass to their children with far less tax, and they have two clear options for using their home if they need to.
What we took from it
The most valuable moment in this advice was the projection that showed the money running out at 85. Nobody enjoys seeing that, but it gave David and Melissa a reason to change course while they still had time and choices. Retirement planning works best when you are willing to look at the uncomfortable number first.
If any part of this story sounds familiar, book a free 15-minute chat and we can talk it through. You can also read more client stories.
General advice only. This story describes advice given to particular clients at a particular time. It does not take into account your objectives, financial situation or needs, so consider whether it is appropriate for you and read our Financial Services Guide before acting.
Wealth Effect Group (CAR 424768) and Andre Dirckze (AR 395157) are Authorised Representatives of Boston Reed Pty Ltd, ABN 89 091 004 885, AFSL 225738.