Clients: Paul & Alison Graham
Life stage: Retirement
Age bracket: 70-80 years
Downsizing, Investment Strategies & Funding Retirement
At a glance
Sydney residents Paul and Alison Graham approached us for advice on how best to invest surplus funds from downsizing their family home.
Both Paul (77 years) and Alison (74 years) have been retired for just over 10 years and are now settled into looking after grandchildren and taking local trips within Australia. They have three adult children – Andy (49 years), Bill (47 years) and Timothy (42 years). Andy and Bill are self-sufficient with their own families; Timothy still requires ongoing financial support.
When we first met, Paul and Alison had a combined annual income of $46,513, primarily from their account-based pensions. They have lifestyle assets of $1,222,300 and investment assets totalling $441,814. Their required costs of living were $870.00 per week or $45,240, and they are happy to spend their savings to fund their lifestyle.
Paul and Alison’s primary reasons for seeking advice were to:
- Invest $190,000 – the proceeds from their recent home downsize.
- Meet their planned expenses of $25,000 to furnish their new house.
- Generate a retirement income stream of $45,240 per annum, or $870 per week, for the next 19 years (Alison’s life expectancy plus 5 years = 93 years).
- Retain a cash reserve of between $20,000 and $30,000.
- Explore strategies to maximise funds left to their sons through their estate.
- Understand how downsizing their home will impact their Centrelink Age (Aged Pension) entitlements.
- Ensure death benefit beneficiary nominations are put in place on any new retirement accounts.
- Ensure their estate planning documentation is up to date and accurately reflects their wishes.
Based on their objectives and existing financial portfolio, we recommended:
- They set aside $25,000 in cash funds to meet their new property furniture costs and retain between $20,000-$30,000 in a cash reserve.
- Increase the value of their estate by reducing potential non-dependant tax liability by cashing out a portion of their existing account-based pensions (Alison – $163, 560 and Paul – $246,440) and combine it with $190,000 available funds before recontributing this as a personal after-tax contribution back to super.
- Contribute $300,000 each back into super as a downsizer contribution.
- Paul rolls the remaining balance of his super account ($195,374) to a new account to be combined with the $300,000 contribution and draws the minimum pension payments of $2,477 per month.
- Alison draws a pension from the new super account of $1,295 per month.
- Both nominate each other as beneficiaries.
- They contact Centrelink to update them of their circumstances as we believed they would lose their Age Pension due to the increase in assessable assets.
- They update their wills as a matter of priority.
- They seek legal advice to review or establish powers of attorney, enduring powers of guardianship and any medical documentation they want to have in place.
These strategies allowed us to:
- Provide them with a cash reserve to pay for their renovations and give them confidence they can always access up to $30,000 when and if required.
- Allow Paul and Alison the ability to generate an after-tax income of $45,264 each year in retirement to meet both their living expenses and take local holidays when needed. They also maintain the ability to access lump sums when and if required.
- Support them by making an application for the Commonwealth Senior Health Care Card, as they were no longer able to access the Aged Pension.
- Reduce the potential non-dependant tax liability for their children by $41,845 thanks to the opportunity to use the downsizer contribution, combined with the cash out and recontributions strategy of their super funds.
- Restructure their current retirement savings, saving them $1,488.77 in product fees in the first 12 months. This saving is expected to increase each year.
- 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.
Paul is well-versed in financial matters and understood how the downsizer strategy works. However, he didn’t know this could be used in conjunction with a recontribution strategy. They were delighted to see a potential tax savings of $41,845 for their children.
‘It’s so nice to know you’re thinking about our families future and not just where we are today’ – Alison
Year one increase in net cash flow: $3,869
Reduction in potential estate tax: $41,815
The next stage
Going forward, Paul is comfortable they can manage their own finances and will reach out to us when needed. He knows there will be a point in time when this becomes a little to difficult for him to manage. But he has confidence that we’ll be there to help them when required. Especially if something happens to him and Alison needs help.
*This case study is based on real clients. Names have been changed to protect privacy.