CASE STUDY – YOUNG FAMILY
Welcome back to our CASE STUDY series. Missed the start? Don’t worry, head on back to the beginning if you want an overview.
This week’s case study is featuring the McGavinachy’s.
The McGavinachy’s came to see me because their 3 children were now all at school and Bridget was going from part time work to full time work as a bookkeeper.
Charles works full time as a doctor (GP) and they wanted to start looking at their superannuation more seriously now that they are back on double incomes. Charles in 42 earning $147,000 pa and Bridget is 40 earning $65,000 pa.
Because Charles works for the government sector, he is already making additional contributions towards superannuation and has a balance of $330,000. Bridget on the other hand has only ever contributed the minimum amount of 9.5% and currently has a balance of $110,000.
Their children are all now in public school, they owe $120,000 on their mortgage and anticipate staying where they are for the foreseeable future. They put in place insurance about 8 years ago but haven’t looked at it since. They have no idea how much they need for retirement, but they do know that they want to have about $80,000 pa to live on when they do retire.
They have considered buying an investment property but haven’t got around to it and don’t really know if that is the best thing to do. They do manage their budget in a way that they are comfortable and currently have an excess $1,200 per month that they want to do something with.
As with everyone I meet, I sat down and talked to them about their future plans and teased out some overarching ‘life goals’. It’s important to know what they are trying to achieve.
Whilst they have shown interest in an investment property they admitted it was because they don’t really know how to invest otherwise and would be open to other options if they felt comfortable with it.
From our discussions and the information that I have gained from the McGavinachy’s, I needed to address the following:
- Review the insurance they have, make sure it is still relevant
- Review each of their super accounts – check the investments and set up
- Retirement adequacy – how much will they need and do they need to make extra contributions
- Can we reduce tax for Charles?
- Investment options for the $1,200 excess per month
- We looked at their insurance based on their current situation. We took into account their home loan and the children’s requirements. Charles income protection was only based on a salary of $98,000 which is not enough. We recommended to increase that to match his current income. He had Death insurance and Disability insurance that was too high for his needs now that his home loan was a lot lower. We recommended to reduce that in line with his current situation. We also recommended some specific medical professionals cover that ensures he is covered for any blood borne diseases that he is at risk of contracting due to his job.
- Bridget didn’t have any income protection, so we recommended that she apply for this insurance to make sure she was covered now that she is working full time again. Her Life and Disability insurance were fine, so we retained these for her. We also applied for Trauma insurance for both of them as they had never had this in the past. This pays a lump sum if either one of them are diagnosed with a critical condition such as cancer, stroke or heart attack. They didn’t realise this was an option. As part of the insurance, we also obtained $20,000 free child’s trauma for each of their children.
- We reviewed their superannuation funds, to see how the funds were invested. Both of them had never looked at the investments that they had within their super funds. We set up new super funds for each of them that had a lot more investment options which is beneficial now that they have substantial amounts within their account. We then recommended and organised the individual investments that they each needed within their super funds so that we knew that they money was working for them.
- We also assessed how much they would need in their accounts to ensure that they had $80,000 pa to live on in retirement. Our calculations show that they need $1,725,308 by the time they reach 65 (in future dollars). Based on their current trajectory, they will only achieve approximately $1,250,000. We recommended that Bridget contribute an additional $3,000 pa into super. This will reduce her take home pay by $1,195 pa but save her $1,805 in tax each year.
- We also recommended that Charles contribute an extra $7,950 into his super fund each year. This will reduce his take home pay by $3,450 per year, but saves him $3,330 per year in tax. We have set this at the maximum concessional contribution he can make to reduce his marginal tax down as much as possible. This will be assessed each year to ensure that we are on track, but with the above adjustments, we will be able to hit our target of $1,725,308 if we continue to make the above contributions.
- Now that we know they will have enough money in retirement, we want to decide what to do with the excess income. Once we directed some of their excess income towards super, we are left with approximately $600 per month ready to invest. We spoke about their ‘risk tolerance’ (ie, what they felt comfortable investing in) and they really didn’t want to get into more debt. They decided that investing in property was not something that they wanted to do, and that we should open a diversified portfolio for them that includes shares, term deposits and property trusts. They will direct their $600 excess cash towards the investment each month and continue to invest over time and build the portfolio.
- Once we had addressed their initial needs we also just wanted to make sure that their Will and Power of Attorney were up to date. It hadn’t been updated since they had their second child, so we worked with the solicitor to ensure it was up to date. We also got a mortgage broker to check over the home loan to see if they could save some money. As the loan was put in place about 12 years ago, if they refinance, they would be saving an additional $163 per month.
This is the first steps for the McGavinachy’s. It is then my job to monitor and invest for them ongoing through their super fund and investment portfolio. They have access to us throughout the year and we will help them at tax time with all of the investment and insurance information that they need for their tax return. We are on call should anything change and will complete a full annual review each year of their situation. It’s important to monitor the investments closely and make changes as they get older as we want to make sure they are in the best possible position when they eventually retire.
Charles and Bridget pay for our fees out of their superannuation and investment portfolios which means it doesn’t affect their income and they are able to obtain certain tax advantages by paying for our fees this way.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.