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.
Kate and Andrew are 47 and 48, with three children in secondary school and two busy careers. Between them they earn $225,000 a year. Their living costs run to about $110,000 after tax and the mortgage takes another $34,000, which left a surplus of around $33,500 a year. They were doing well, and they knew it. What bothered them was a sense that their money was standing still while the years went by.
What we found
Their super was invested far more cautiously than their stage of life suggested. About 38% sat in cash, 50% in growth assets and 12% in bonds, earning roughly 4.9% a year (3.11% income and 1.8% growth). That mix can suit someone on the edge of retirement. Kate and Andrew had at least 15 years to go, stable incomes and a moderate to high tolerance for risk. Their goal was to grow their retirement savings, not simply protect them.
The way things were set up was holding them back too. Income and dividends were not being reinvested automatically, and new contributions were not being put to work in growth assets. There was no salary sacrifice in place to reduce their tax. Their insurance sat in group cover inside super, and with three dependent children their estate planning needed attention.
What we did
Andre recommended moving their super into a professionally managed separately managed account (SMA), with about 85% in growth assets and 15% in bonds and high-yielding cash. The target return at the time was 8 to 8.5% a year. That is a target, not a guarantee, and returns can be lower or negative. The SMA is actively rebalanced, reinvests income automatically and puts new contributions to work as they arrive.
Each of them agreed to salary sacrifice $15,000 a year into super. We estimated that would save about $3,500 each in tax, around $7,000 a year between them, and that saving went straight onto the mortgage.
The mortgage itself was $350,000 at 5.95%, with repayments of $3,000 a month. After a referral to our mortgage broking team, they refinanced to 5.25% and lifted repayments to $4,500 a month, using their surplus cash flow and the tax savings. Assuming the rate and repayments stayed the same, the loan was estimated to be repaid in about 11.3 years in place of the original 30-year term. That is roughly 18.7 years sooner, with an estimated $114,000 less interest.
We also reviewed their insurance. Moving from group cover to individually underwritten policies, still funded through super, was estimated to save $5,800 a year in premiums while improving the structure of their cover and protecting their personal cash flow.
Finally, Andre arranged wills, enduring powers of attorney and binding death benefit nominations on their super, with a referral to a specialist estate planning partner, so their children would be looked after with less administrative burden.
The result
At the time of advice, assuming an 8% a year return, Kate’s super was projected to grow from $220,000 to about $1,343,838 by age 65, and Andrew’s from $160,000 to about $1,030,967, with each contributing $15,000 a year. Combined, that is around $2,374,805. These projections are not guaranteed and will depend on returns, fees, tax, contribution caps and legislation over time.
Alongside that, the mortgage was projected to be cleared about 18.7 years early with roughly $114,000 less interest. Their $7,000 a year of tax savings was working on their debt, their insurance was costing $5,800 a year less, and an estate plan was in place for the children.
What we took from it
Kate and Andrew’s story is a common one for families in their 40s. Nothing was broken. Each part of their finances had simply been set up on its own and then left alone. The gains came from making the pieces work together, so the tax saved through super pays down the mortgage and the insurance is funded without touching the family budget. Small changes made in the busy years can make a big difference later.
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.