CASE STUDY – YOUNG FAMILY INVESTING FOR CHILDREN’S FUTURE
Welcome back to the CASE STUDY series.
This week we are specifically talking about Connie and Steve who wanted to invest for their children’s education.
Connie and Steve are 37 and 35 years old and they have a daughter Ebony, who is 4. Connie is a Physiotherapist earning $77,000 pa and Steve is a management consultant earning $125,000 pa + bonuses.
They both work full time and Ebony is in childcare full time until next year when she will be going to public school.
Connie and Steve don’t plan on having any other children. As Ebony is the only child, they really want to gift her $50,000 on her 21st birthday if they can afford it to set her up for her future.
They have a Self Managed Super Fund (SMSF) which is managed by their accountant and they currently don’t want this reviewed. They do however know that they need to address their insurance as this is a mandatory requirement of having a SMSF as their accountant instructed them to do so.
They are renting and currently building their dream home, set to be finished in 5 months. The home loan is $700,000, they also own some shares that Steve has received through his employer as part of his bonuses, but would like to keep them.
In order to come up with the best plan for Connie and Steve we need to:
- Assess their insurance requirements for their SMSF and lifestyle
- Assess their cashflow to see how much they have available
- Investment options that will be suitable for Ebony’s 21st gift.
- It is a mandatory requirement that every SMSF must address any insurance needs of the members. When Connie and Steve set up their SMSF a few years ago, they cancelled any insurance that they had and closed down all superannuation funds. That means that they currently have no insurance. The first aspect that we need to cover is their income. They both rely on their income for their lifestyle, so it was important to get them adequate income protection insurance. We also addressed what would occur in the event of death or disability. They wanted to be able to pay off the mortgage of $700,000 as well as provide an ongoing income for the remaining partner to be able to stop working for 5 years if something were to happen. As their lifestyle expenses are $70,000 pa, we wanted to provide enough funds to ensure that they could have $70,000 pa for the first 5 years. Based on this, we applied for $1,045,000 Life and Disability insurance within their SMSF and Income Protection to cover their income. We worked with the accountant to make sure this went through correctly and to ensure it was incorporated into the financial documents within the SMSF.
- We spoke about Trauma insurance to cover a medical crisis like cancer, heart attack or stroke. Initially they wanted to cover the home loan, but after discussions around this they were happy to reduce the sum insured down to $350,000 – half of the home loan. I spent a bit of time discussing trauma insurance and the fact that this cannot be paid for from superannuation, and the fact that it can get quite expensive over time. We put in place ‘Level’ premiums meaning that the premiums are set at a steadier premium for long term affordability.
- We also attached $50,000 worth of child’s trauma for Ebony to this policy. This covers ebony for illnesses such as leukemia until she reaches age 18. We were able to get them $20,000 of free child’s trauma, so they have a total cover of $70,000 if something happens to Ebony.
- In order to create long term investment recommendations, we needed to figure out how much excess income they had available each year. After factoring in every single expense that they have throughout the year, plus a healthy buffer, we determined that they have $300 excess per month to invest. As they don’t need access to the cash until Ebony’s 21st birthday (17 years), we recommended a tax effective insurance bond investment structure. If held for 10 years, this investment will be tax free. As there is no need to get access to this money over the course of the next 17 years, Connie and Steve were happy to invest in this structure to ensure that there would be no Capital Gains Tax on the investment when they finally gifted it to Ebony.
- Based on their excess income and the projections they will definitely be able to meet their goal. Connie and Steve initially just wanted what is known as ‘Scaled Advice’, meaning they didn’t want us to assess everything. In the first instance we were only addressing Insurance and an investment option for Ebony’s 21st gift. We put in place the insurance and worked with their accountant to ensure it met the requirements of the SMSF. We also monitor the investment ongoing and make adjustments where necessary to ensure that Ebony will have the money when they are ready to gift it.
As with all of our clients we formally meet with them each year to complete a full review. After 1 year with Bounce, they have now decided that they would like us to review their SMSF as they have previously been doing this themselves. We are now working on phase two with these clients where we can assess the SMSF investments and make recommendations around structuring the superannuation and any additional contributions that need to be made. As part of this we will also assess other investment opportunities outside of superannuation that may be of benefit to them growing their wealth.
We work in with their accountant to make this happen and provide all the reports necessary at tax time to keep the SMSF auditor happy.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.