A WE. Client Case Study.
Improved their financial position retirement by $720,000 (10 years)
Debt restructure saved $18,000 interest payments per year.
Saving tax $4,328 in tax per year using concessional contribution strategies
Confidence to move into retirement knowing they can fund the life style they desired.
A couple from Gold Coast came to us wanting clarity about their future financial speaking and wanted to know how they could structure their current investments to provide them with a retirement income stream to last their lifetime.
Matt and Andrea were in their early 50's and are now successful GP's with a healthy investment and property portfolio.
They needed us to assess how these investments would provide them with the comfortable retirement lifestyle they had worked so hard for, as well as what decisions would need to be made to ensure they had a retirement income stream that would last them from 60 (their ideal retirement age) well into their 90s.
Matt and Andrea are high-net-worth individuals (HNWI). Their primary residence is in Clear Land Waters, and they own investment properties in Palm Beach, Red Cliffe personal names, and St Kilda through their SMSF.
Their initial thought was to try to keep these properties throughout retirement, and they were prepared to downsize and use the downsizer contribution to super as an option to boost their retirement nest egg.
They also wanted to update their insurance coverage and SMSF/investment strategy to better reflect their goals and position as they near retirement.
We projected the couples financial position considering scenarios that sold their investment properties along with the timing of the sale/s to see clearly what impact this would have on the retirement they planned.
Because Matt and Andrea also wanted advice on how to best structure their finances and other non-real estate investments, we advised on strategies to reduce their tax bill while also growing their super through concessional and non-concessional contributions.
Even though Matt's income exceeded the highest marginal tax rate, which meant he is subject to the Div. 293 tax, (which is an additional 15% tax rate on super), the concessional contribution strategy still saved the couple $4,328 per year in tax.
We also suggested that after 2023, when all non-deductible debt will be offset and recommended the couple save an additional $100,000 buffer and sit against their tax deductible debt, the strategy after this is to re-prioritise super growth over paying off all their debt by retirement.
As part of our service to Matt and Andrea, we conducted a debt review and were able to identify $18,000 in interest savings per year.
Despite the fact that these solutions improve the couple's retirement prospects, our analysis revealed that selling the property owned by the SMSF would eventually be required to free up liquid assets during retirement. We discussed the risks of holding SMSF property indefinitely, including "concentration risk," which occurs when all of their investments are concentrated in a single asset class.
We considered strategies that involved the couple selling down a number their investment properties post-retirement at different points in time, to ensure they minimise capital gains tax liabilities when selling the properties.
Our recommendation to postpone the sales until they retired was consistent with their preference to keep the properties longer and would result in a lower amount of tax payable if done post-retirement. Creating a more diverse investment portfolio, by moving away from property and lowering their debt exposure, reduces their overall risks as they approach retirement and saving thousands in capital gain tax.
We also showed them how holding all their investment properties throughout retirement would expose them to the risk of interest rate rises, which are likely to occur by the time the couple retired, leaving the funds in property in their personal name also left a large slice of their assets in a less tax effective environment, compared with Superannuation.
With this in mind, we advised the couple to sell both the Red Cliffe outside of super property and the other inside super the St Klida property selling as tax free capital gain if sold when 60 and fully retired. Making a combination of concessional and non-concessional contributions for the funds received from the sale outside of super reduced tax their overall tax liability while boosting their super balance. This strategy also, directly reduced debt heading into retirement, protected the couple from future interest rises, and reduced their over exposure to one asset class (Property).
Our team's analysis and projections on selling off these investment properties also revealed that the couple's decision to downsize did not need to be a financial decision that they had to make, but rather a personal decision. Giving them the freedom to choose where to live during retirement based solely on what was best suited for them and the life they wanted to live.