Generating a Retirement Income & Minimising Death Tax

At a glance

Clients: Richard & Theresa Latham
Life stage: Pre-retirement / retirement
Age bracket: 60-65 years

Background

Richard and Theresa are new clients and were concerned that in supporting their children through university, they may now not be in a position to enjoy a comfortable retirement.

Richard (64 years) and Theresa (63 years) live on the South Coast of NSW. Richard is a self-employed medical consultant; Theresa is a retired university lecturer. The couple has three adult children David, Geoff and Peter. All are financially independent with their own families. They are both in good health and look forward to enjoying their retirement years with family and travelling overseas.

Richard and Theresa have a joint annual income of $76,960, primarily from Richard’s consulting work supplemented with interest from a bank account. They have $945,000 in lifestyle assets and a further $2,620,682 investment assets, including an investment property in northern NSW, super and cash. Unfortunately, the costs of owning the property are greater than the rent received.

Objectives

Richard and Theresa’s primary objectives were to:

  • Generate a retirement income stream of $72,000 per year.
  • Retain a cash reserve of at least $100,000 to provide them with access to immediate funds if required.
  • 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 super funds in the event they were both to die.

Strategies

Based on their objectives and existing financial portfolio, we recommended:

  • They retain their estimated $300,000 in cash holdings. Note: These funds are being held to invest later once we’ve addressed their retirement strategies, and they become more comfortable with volatility.
  • They both restructure and consolidate their super accounts. This should be done in several stages over several years to take advantage of contribution limits to improve tax-free amounts in their super balances.
  • They cease their existing pensions and start new pensions on combined balances. Richard draws pensions of $32,390 per year and $6,724 per year. Theresa draws pensions of $24,390 per year and $7,442 per year.
  • They nominate each other as either revisionary pensioners or nominated beneficiaries on their new pension and super accounts.

Outcome

These strategies allowed us to:

  • Provide them with a cash reserve of at least $100,000, with a further $200,000 available to invest when they’re comfortable.
  • Maintain a similar level of cash flow. Richard and Theresa will continue to receive enough income to cover their $72,000 living expenses.
  • Save $4,167 in product fees in the first 12 months through the restructuring of their current retirement savings. This saving is expected to increase each year.
  • Reduce the potential non-dependant tax liability by $118,547 thanks to the 3-year cash out and recontributions strategies across both their super funds.
  • 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.

Richard and Theresa are now confident that their retirement is secure. They have also 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, so they really appreciated our help.

Year one increase in net cash flow: $28,008
Predicted residual legacy: $2,716,995

The next stage

Going forward, we have several pieces of work to complete over the next 3 financial years to achieve Richard and Theresa’s objectives. Theresa would also like our advice in considering how they may be able to support their children in the future by reducing their mortgages or supporting grandchildren through education.

*This case study is based on real clients. Names have been changed to protect privacy.

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