Clients: Darren & Margaret Patterson*
Life stage: Pre-retirement
Age bracket: 50-65 years
Creating an Income for a Holiday-Filled Retirement
At a glance
Darren and Margaret are long term clients who are now looking to consider the next phase of their lives as they move into and towards retirement.
Darren (62 years) has recently retired from a long, rewarding career as an operations support manager. Margaret (57 years) intends to continue to work as a part-time client services manager for the next 3 years to age 60. They have two adult children, Kellie (29 years) and Clinton (27 years) who are both financially independent.
Since Darren’s retirement, their annual income is now $109,335. This comes from a combination of Margaret’s salary, rent from their investment property and dividends from shares. They have $1,237,000 in lifestyle assets and a further $3,411,914 in investment assets including property, super and shares.
Darren and Margaret’s primary reasons for seeking advice were to:
- Complete renovations to their family home with an estimated cost of approx. $58,000.
- Always maintain a cash reserve of at least $50,000, giving them the ability to meet any unforeseen expenses that may crop up.
- Generate a retirement income of $2,000 per week or $104,000 per year throughout their retirement. On top of this amount, they’d like to take an annual overseas holiday and expect to spend approx. $25,000 each trip.
- Ensure that if either one of them were to die, the surviving partner could continue to receive the same level of income they had as a couple.
- Minimise tax that may be payable to their children from their superannuation funds in the event they were both to die.
As Darren is now retired and isn’t intending to return to work, we recommended:
- They retain existing cash reserves of an estimated $108,000 to pay for renovations and keep $50,000 available to call on.
- Margaret salary sacrifice $500 per fortnight to her existing super fund until she retires at age 60.
- Darren makes a spouse contribution of $3,000 into Margaret’s super account each year for the next 3 years.
- Darren cashes out $300,000 of his super savings and recontributes this back into a new super fund.
- They start account-based pensions with Darren’s super accounts (combined estimated total $1,169,586) generating an income of $8,667 per month.
- They nominate each other as either revisionary pensioners or nominated beneficiaries on their pension and super accounts.
- They draw lump sums as required to fund their planned holidays of $25,000 per year.
These strategies allowed us to:
- Provide them with a cash reserve to pay for their renovations and give them confidence they can always access $50,000 when and if required.
- Give them the ability to generate an after-tax income of $147,056 per year in retirement to meet both their living expenses and take overseas holidays.
- Reduce Margaret’s personal income tax by $4,225 per year thanks to the salary sacrifice strategy.
- Reduce the potential non-dependant tax liability if Kellie and Clinton were to inherit Darren’s super by $49,098 through the cash out and recontributions of Darren’s super.
- Use non-lapsing binding death nominations and reversionary nominations to ensure that in the event one of them was to die, the surviving partner could maintain the same lifestyle as they did as a couple.
Darren and Margaret are now confident that their retirement is secure. They have seen significant reductions in tax not only for themselves but also for their children. The couple admitted they weren’t even aware their children may have had to pay tax on their super benefits as part of their estate, and they really valued our knowledge.
Net cash flow increase: $108,179 per year
Total tax reduction: $1,374
The next stage
Going forward, we’ll continue to assess and advice them on their situation as Margaret works toward retirement in 3 years time, and we further reduce the non-dependant tax liability to their estate. They both understand that throughout their retirement government legislation will change, so will their objectives. Therefore, they wish to work with us over the long term to meet their needs and continue to consider intergenerational wealth transfer.
*This case study is based on real clients. Names have been changed to protect privacy.