The Client …
Fred 60, and Betty, 54, own a small business retailing and servicing boats and marine gear. They have a net income of about $80,000. They employ 5 staff. They want to become better off financially, and although they enjoy their working life, recognise that they will have to retire sooner or later.
The Problem …
The GFC impacted on their business somewhat, but they remained profitable. Their staff are settled and see them as a good employer. Their retirement savings are about $80,000 in super, and they also have a further $90,000 in bank funds. These bank funds are not working hard, getting bank interest only. They will be able to sell the business for about $80,000 plus stock. This will not give them enough to retire on, although Fred says he would like to work for another 5 years at least.
They also felt a little lost in their business, as they felt their current accountant, who was a friend, wasn’t spending much time helping them develop their business.
The Process …
A thorough fact finding session found that they had no debt, owned their home and business outright, and were in good position to ride out the downturn.
They were, however struggling with some of the financial ebbs and flows of the business. It was evident that they could benefit from professional help in this area. We referred them to a trusted accountant who could help them.
We considered a range of strategies including investing, use of investment debt and superannuation.
Personal cashflow wasn’t an issue, as clients had no debt, and were close to having no dependants.
These clients are very clear that they wanted to keep working for another 5 years or so, but retire comfortably with no debt.
We also reviewed their personal insurances.
The Solution …
Someone had mentioned a geared investment property, but at this stage of their life, we didn’t think that would create enough liquid funds for them when they retired and needed to access cash.
In addition, because Fred was 60, he could make use of the non-taxable nature of superannuation type pension.
We commenced a $120,000 Transition to Retirement pension for Fred, giving him a maximum $10,000 pa tax-free income. He is now putting an employer contribution into super of $20,000 pa into super.
In addition, Betty is also putting $15,000 pa into super through tax-deductible employer contributions. They are also putting in $1,000 pa non-deductible contributions each to access the government co-contribution.
Betty will start up a TTR pension in her own right when she turns 55 next year. Each year we will increase the TTR pension and salary package further, particularly as the business recovers from the GFC.
We rearranged insurances through super to enhance cash flow while keeping adequate cover.
We arranged for them to speak to a local accountant who we knew was good at small business advice. For this they were most grateful, as he was able to streamline their processes and generate more time for them to build the business.
Finally, we are speaking to their staff to ensure they have appropriate super and insurance cover, and look at their personal financial planning needs.
The Outcome …
We estimate that the clients will have an extra $90,000 retirement funds when they retire in 5 years time. They will have saved about $43,000 tax. They remain adequately covered for insurance in a more cost effective way, their cashflow remains strong, and their business is running more effectively because of the new accountant’s help. They know they will be in good hands when positioning the business for sale when they retire.
In addition, they feel they have helped their staff get sound financial advice, strengthening the bond they have with their workers.
They were impressed with the result and are now referring other people.
This is a real case history where names have been changed for privacy reasons