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It’s not all about retirement

The Client …

John and Joan are professionals in their late 20’s.  John earns approximately $75,000 per annum and Joan earns around $118,000 per annum.  Joan owns the home they live in which is clear of mortgage, however they wish to extend their home at a cost of approximately $80,000.   Their superannuation balances are accumulating nicely and retirement looks like it is well taken care of.  John has accumulated approximately $75,000 in a parcel of managed funds and has a margin loan of around $25,000 against those managed funds. Joan has little in personal savings.

The Problem …

Joan and John wish to have children in the next 4 to 5 years and Joan intends not going back to work until the children reach school age, at which stage she plans to purchase a business for flexibility of working hours. John would also like to reduce his workload to spend time with the family at that time.

The problem is that they will lose $120,000 per annum income as a result and could not support their lifestyle.  What they required was a plan to accumulate capital now to partially replace the lost income until Joan returns to work.  At the same time, they need capital for the home extensions.

The Process …

To address these problems we considered what additional income they will need in 4 to 5 years time to compliment John’s income, retain their current lifestyle and raise the children.    They agreed that the capital needed to stay intact to fund the business purchase, therefore the assets must provide both income and capital growth during the years Joan is not working.

We agreed that capital of approximately $300,000 would be required.

Finally, we considered investment alternatives such as

  • How best to fund the extensions
  • Regular savings plans
  • Geared strategies

Discussion with the clients during the development of the solution meant the clients were involved every step of the way.

The Solution …

As a result of our discussions the following was implemented

John sold his managed funds, repaid his Margin Loan and has minimum capital gains tax to pay

  • The cash from the sale together with the couple’s excess cashflow over the next few months will fund the extensions without the need to borrow.
  • A geared investment of $60,000 with an additionally monthly investment of $1500 into managed funds was commenced to provide Joan with tax savings and capital for additional income and the planned business purchase.
  • All surplus cashflow over the next few years will repay Joan’s Margin Loan to ensure tax savings are best managed when Joan is no longer working.
  • John also commenced a geared investment of $40,000 with a monthly investment of $500 into managed funds.

The Outcome …

It is estimated that John and Joan’s investments will be worth approximately $328,000 returning an income of around $13,000 per annum to fund the shortfall in income.   This will be a growing income stream.

In the meantime, they have saved a considerable amount of tax and accumulated assets in John’s name. John is able to reduce his working hours when the family arrives and Joan will be able to stay at home with the children as planned.

The clients are now comfortable that the quality of their lifestyle will not be compromised when they commence their family.