Investment and Superannuation Strategy: An HPH Solutions Case Study

We discussed Personal Retirement Planning on our previous case study. Today we’ll be looking at another client case study about Investment and Superannuation Strategy and how essential it is to planning and creating a stable retirement fund.

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.

It is our anecdotal observation that it is common for people to reach their fifties and only then start thinking seriously about how best to maximize their superannuation and the potential of their other investments, to provide a solid retirement fund.

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

Nonetheless, we can still look at what they have accumulated in retirement capital and most importantly ask them what they want in life, before we craft a personalized strategy and provide financial consultations that would help them achieve their goals.

The Scenario

Our client couple, we’ll call them Ben and Sarah, came from another Perth financial advisory firm that provided a limited “investment-only” service.  The costs were higher than our full-service advice offer.

“Investment-only” advice or a predominantly investment-focused advice service should not be a high-priced service and by itself, it will fail as a comprehensive wealth-building plan as the case study below demonstrates. This is true of financial planning here in Perth and everywhere else in the world where Saving for Retirement is a primary concern.

Ben and Sarah are married, in their late 50s and have started to focus on their retirement. They had a relatively low balance self-managed superannuation fund of about $220,000. Around half 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.  This would preserve their current lifestyle and they weren’t sure if it was going to be possible.

The Solution

We first suggested that they shut down their self-managed superannuation fund. It would reduce their fees from almost $3,000 a year to under $700, but they declined, citing its flexibility.  The self-managed fund was established around 20 years ago by their accountant at that time.

Next, we recommended that they diversify their investments inside super to better manage portfolio risk.  Concentrated holdings in direct shares is a high-risk proposition.  Like any high-risk approach, it may generate high reward, but the empirical evidence proves it is a low probability approach to a successful investment experience.

Our financial advisors here in Perth always provide investment advice based on empirical evidence.  This is a clear contrast to many other advisors that advance an intuitively appealing narrative (baseless as it is), that an investment specialist can outsmart the market with superior stock selection.

Our next suggestion lay in taking advantage of their under-utilization of the superannuation system thus far. They could use the carry forward concessional superannuation contribution cap to help significantly reduce their tax burden.

A yearly contribution of $50,000 combined into superannuation will augment it considerably, but they still needed help in figuring out how to get the most from their money and hard work.

The tax savings alone will total 32 per cent or $16,000 per year in tax savings from their yearly $50,000 contribution. They can do this because they both have a marginal tax rate of 47 per cent including Medicare Levy.

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.

All in all, they 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 maximize 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 that they could distribute income out of the company after they retire.

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

They count on us for help.

Thankfully, in this case, our financial advisor team produced results well above expectations.

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