Clients: David & Chloe Peterson*
Life stage: Family/Pre-retirement
Age bracket: 40-65 years
Reducing a Mortgage & Saving for Retirement
At a glance
We first met with David and Chloe in March 2016, after they were referred to us by Chloe’s parents. David (61 years) is a bus driver who moved to Australia from the US 20 years ago. Chloe (43 years) works as a childcare centre manager.
The couple has two daughters Zoey (15 years) and Tamara (11 years). Both attend the local public school. Their home was valued at $690,000 with a mortgage of $189,000. With only moderate savings held in traditional bank accounts, their only other investment assets were their super funds – David ($90,669) and Chloe ($149,000).
David and Chloe’s primary reasons for seeking advice were to:
- Repay their mortgage of $189,000 as soon as possible. David was concerned that they still have a home loan and will need to work the next 15 years to repay it.
- Accumulate savings that will allow David to retire by the time he is 70.
As David was approaching 65, this gave us the opportunity to consider using his accumulated super savings to repay their home loan. However, it was apparent that the balance of his super wouldn’t be enough. We, therefore, recommended:
- Chloe starts making pre-tax contributions to super of $700.00 per fortnight from her salary of $18,200 per year.
- David set up an account-based pension with his super savings, drawing an income of $750 per month or $9,000 per year to offset the reduction in income created when Chloe began salary sacrificing so they could continue to meet their living expenses.
- At the end of each financial year, for the next 3 years, we move or ‘split’ 85% of Chloe’s total contributions across to David. This was approx. $21,250 per year.
These strategies allowed us to:
- Reduce Chloe’s income tax by approximately $5,915 per year by replacing her taxable income with David’s tax-effective pension income.
- Increase David’s retirement savings to $142,782 over the 3 years.
- (Fast forward to July 2019, David has just turned 65) Use David’s super to completely repay their mortgage. This has been reduced to $139,468 through a strict budget and repayment program.
- Repay their home loan in full in less than 3 years, saving them $53,881 in interest and reduce their loan term by 15 years and 4 months.
David and Chloe are thrilled they’ve been able to completely repay their home loan in 3 years. David is especially happy as he feels he can consider retirement at 70.
Interest savings: $53,881
Loan term reduction: 15 years, 4 months
The next stage
Our focus has now turned to increasing David’s retirement savings. We’ve recommended that Chloe stop her voluntary contributions to super and David maximise his contributions by making pre-tax contributions of $1,560 per month from his salary or $18,720 per year. This strategy will reduce David’s personal income tax by $6,694 per year. Based on our projections, he’ll accumulate approx. $181,500 by age 70 and Chloe approx. $299,963 at the same time. They both realise we have a long way to go in securing their future and we look forward to working with them over the long term.
*This case study is based on real clients. Names have been changed to protect privacy.