You don’t know what you don’t know: An HPH Solutions case study

In some recently released results from “The Australia Talks National Survey” of more than 50,000 Australians, it was an unsurprising insight for us that 62 per cent of people surveyed ranked “saving for retirement” as a problem for them.

It was the second-highest worry behind climate change.

In our experience (as a financial advisory firm that’s been around for nearly 20 years) it’s common for people to reach their fifties and only then start thinking seriously about how best to maximise their superannuation and the potential of their other investments, to provide for a comfortable and worry-free retirement.

Often, our clients have used strategies for years or even decades that did not give them maximum benefit.

This was the case for Ben and Sarah.

Investment-only advice is not comprehensive life planning advice

Ben and Sarah came to us from another firm who’d only been providing them with advice around their investments. They were definitely not deriving maximum benefit from the fees they were paying to that advice firm as those fees were higher than what we charge for full-service advice that covers all aspects of financial life planning.

It’s important to note that ‘investment-only advice’ or predominantly investment-focused advice should never be a high-priced service. Investment-only advisors are simply not doing enough to justify charging high prices. And, as you’ll see from the below, an investment-only strategy is not the most comprehensive wealth-building strategy either.

We always start with understanding life goals

Ben and Sarah’s situation when they first came to see us was that they were a married couple in their late 50s, and had started to look towards planning for retirement. At the time, they had a relatively low balance self-managed superannuation fund of about $220,000. Around half that balance was invested in cash and the other half in just 10 direct Australian shares.

They had also recently purchased a business with the plan to use future profits to pay down debt, then ultimately sell out entirely to help fund their retirement.

Their principal reason for seeking advice regarding financial security was to create a plan for retiring on around $90,000 per annum net of taxes as this would preserve their current lifestyle. But they weren’t sure if that goal was realistic.

Our financial life planning advice

After taking the time to understand Ben and Sarah’s situation, their goals and the wealth creation options available to them, it was time for us to provide them with advice.

We first suggested that they shut down their self-managed superannuation fund as it would reduce their fees from almost $3,000 a year to under $700. They decided to decline this option in favour of the flexibility they felt that fund provided. (The fund had been established around 20 years earlier by their accountant at that time.)

Next, we recommended they diversify their investments inside super to better manage portfolio risk. Why? Because concentrated holdings in direct shares (which was their original position) is a high-risk proposition. Like any high-risk approach, it may generate a high reward, but the empirical evidence proves it is a low probability approach to a successful investment experience.

(It’s an intuitively appealing, but baseless, narrative that an investment specialist can outsmart the market with superior stock selection. This is why our financial advice team always provides investment advice based on empirical evidence.)

Our next suggestion lay in taking advantage of their under-utilisation of the superannuation system to that point.

With both Ben and Sarah’s income being taxed at the marginal tax rate of 47 per cent including Medicare Levy, utilising the concessional superannuation contribution cap of $25,000 a year each/$50,000 a year for both would result in $16,000 a year in tax savings.

After six years (using last year’s carry forward super cap plus five years to retirement), they will have just under $100,000 in tax savings.

In addition, the business profits would also enable Ben and Sarah to pay off the debt associated with the business purchase.

A more secure financial future and retirement funds that can support their lifestyle

After implementing the above, and carrying this plan through to retirement, Ben and Sarah can now expect to have a $1.8 to $1.9 million retirement fund when they sell their business and take advantage of the small business retirement rules to maximise their final superannuation balance.

Based on a conservative return of 4.75% per annum in retirement, they would be able to draw down $90,000 per annum in retirement until around 85 years of age and then $60,000 per annum thereafter.

There are other strategies that we are still considering for Ben and Sarah, including a potential bucket-company strategy. The debt repayment is a really big focus for them but if we can save taxes in the short-term and spread their bulky five-year income out over a longer period, say 10 years, there may be considerable additional tax savings.  Particularly given they could distribute income out of the company after they retire.

This case study reveals an important truth: One of the biggest obstacles to people getting the most from their money are the unknown unknowns. Most people do not have time to research the fine details of finance.

At the risk of sounding self-serving, this is the benefit of having financial advisors. We know the right questions to ask of you. And we know about strategies that are available to you that you might not be taking advantage of. Most importantly, this is what we do all day, so we have the time to research and provide advice about those strategies to you. And we have the experience to do this in the most efficient way possible.

More HPH Solutions real-life client experiences:

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