WHETHER it is a total financial overhaul or a prod in the right direction, almost everyone can benefit from some level of financial advice from a professional.
A lot of people might ask family and friends, others look to their accountant but how much do these people really know about personal circumstances and goals?
Financial Review Investor asked readers to present their financial information and a couple of key questions to two leading, independent, advisers: Suzanne Haddan of BFG Financial Services and Mike Ingham of Godfrey Pembroke, Camberwell.
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Michael Tarulli: see below for case study. Photo: Ken IrwinFINANCIAL SNAPSHOT: Stephen Feitsma
Age: 43
Occupation: Senior consultant, recruitment
Salary: Between $60,000 and $100,000, including super.
Assets
Property: $400,000 and $275,000
Super: Approximately $70,000
Investments (managed funds or shares): approximately $40,000 in total.
Cash in the bank: $1000
Liabilities
Mortgage debts: $463,000
Other loans: Car hire/purchase: $13,000
Credit card debts: $6000
The average week
After-tax income:
Salariy: $1090
Rental income (per week): $250
Total: $1340
Expenses
Home loan: $277
Personal loans: $98
Investment loans: $401
Investment property costs: $70
Living expenses: $300
Total: $1146
Insurance policies
Life Insurance: $54,000
Total and permanent disability: approx $600,000
Gross income protection: approx $8000
OWNING a home outright and retiring at 60 on an income not too dissimilar to what he has now are goals for Stephen Feitsma, 43.
With $179,000 owing on his principal place of residence, he is unsure whether to continue paying it off, rent it out or sell it and buy something closer to the Melbourne city centre, which is his other goal.
‘‘My aim is to pay off a home or own a home outright in the future,’’ he says. ‘‘I also want to be able to move into a location closer to the city to be closer to work.’’
One consideration is to buy something and rent it out for a few years before moving into it himself. He already owns one investment unit on the outskirts of Melbourne. This loan is combined with one to invest in Almond Investors Ltd, a managed investment scheme.
Stephen has been in this scheme since 2006 and Macquarie Forestry since 2005.
‘‘The harvest for Macquarie Forestry is projected to take place in 2016 but I don’t think the return on it will be that great based on the drought we’ve had,’’ Stephen says. ‘‘Also, the almonds are sold in US dollars, which impacts on returns as a result of the high Australian dollar.’’
The schemes were suggested to him by a financial adviser as a good way to offset his income tax. Stephen wonders how they should be placed in his overall strategy.
‘‘Ultimately, I would like to retire at 60,’’ he says. ‘‘If I canwork out a way that moves me in that direction, it would be great. I’d like an income of at least $60,000 a year through investments and so forth.’’
With no financial dependants, Stephen’s focus is on paying off his mortgage, which is helped along by commissions earned in his job, contributing about $10,000-$20,000 a year.
Loan reduction is smart move
Mike Ingham
Godfrey Pembroke
THE three issues that stand out when evaluating Stephen’s progress in achieving his long-term financial goals are the tightness of his cashflow, the slow rate at which his regular loan repayments are paying off his home loan and the need to ramp up his superannuation savings.
About $40,000 a year or nearly 55 per cent of his annual income is being consumed by his loan repayments. That leaves him with only a small surplus cashflow of about $4000 a year, or even less if he lives on more than his estimated $15,600 a year.
He is right to focus in the short term on reducing his home loan. His regular loan repayment of $277 a week is barely covering the interest. Apart from reducing the amount he will ultimately pay to the bank, accelerating the repayment of his home loan is tax effective because, unlike his investment loan, interest payments are not tax deductible.
He is currently on track to retire with about $275,000 in super (in today’s dollars). This should provide him with a pension of $60,000 (in today’s dollars) for a little under five years or $30,000 for about nine years — hardly a great outcome! If he cranks up the super savings by salary sacrificing $10,000 each year into super he could have about $550,000 by the time he retires. Salary sacrificing would save him tax and also enable him to draw a pension income of $30,000 for about 24years. All additional commission income and surplus cashflow should be directed towards reducing his home loan.
How to hit retirement goal
Suzanne Haddan
BFG Financial Services
THE best way to achieve a minimum income of $60,000 a year in retirement or earlier is to determine how much you need to have invested in retirement. For this figure you can use a rough rule of thumb of 20 times your required income. This formula assumes you would achieve a real return of 5 per cent a year.
This means given Stephen’s goal is an income of $60,000 a year he ideally should aim to have $1.2 million invested.
The next step is to calculate how much Stephen will need to save and invest to reach his retirement goal. This figure is impacted by what he has already accumulated in assets that would be used to provide his retirement income. For Stephen this would include superannuation of $70,000, the equity he has in his investment property and other investments of $40,000.
While it is a good strategy to diversify investment types and also use different tax structures, investing via superannuation will be the most tax-effective for Stephen. Salary sacrificing to super should be considered.
Stephen is eligible to contribute up to a maximum of $25,000 a year on a pre-tax basis. The contributions attract a 15per cent tax which is less than half of what Stephen would pay in tax by taking the money as cash and investing elsewhere. Further, by age 60 he would have in real terms about $730,000 invested which meets 60 per cent of his required goal. The balance of the funds required would need to come from his other investments.
FINANCIAL SNAPSHOT: Michael Tarulli
Age: 44
Occupations: Disability pensioner/student
Salary: $1382 fortnightly (net pension)
Assets
Four properties worth: $2,145,000
Super: $68,875
Investments (managed funds or shares): JBWere Margin Lending facility – $208,420
Individual holdings (trading under company name): $91,050
Cash in the bank: $110,000
Liabilities
Mortgage debts: $820,000
Other loans: Margin loan on equities $82,000
HECS debts: Higher education loan program $11,000
The average week
After-tax income:
Salary (per week): $690
Rental income (per week): $1380
Total: $2070
Expenses
Investment loan on margin lending (per week): $100
Investment property loan (per week): $1304
Investment property costs (per week): $307
Average living expenses (per week): $673
TOTAL: $2384
AS A victim of a road traffic accident in 1993, Michael Tarulli, 44, will receive a disability pension for the rest of his life. His investments in property and shares have come from a lump sum payment received in 1996.
Getting the investments together has been something he has enjoyed and wants to do more of, along with owning his own business.
‘‘I took the time to understand the mechanics of investing and diversification, how to best manage my finances and how to invest in growth that will appreciate in value, particularlyproperty,’’ he says.
‘‘I buy and sell stocks for short to medium periods hoping to make a profit when the opportunity presents, usually as a result from a targeted company being bought.
‘‘Shares purchased for long term I hold believing its price will rise in the future. I look for companies that have healthy balance sheets with high dividend returns, consistent cash flow and projects in the pipeline.’’
Property is also something in which he has taken an interest and wants to invest more time and money. He has already dabbled in a subdivision and is keen to look at development. A key interest is the Victorian government’s urban renewal policy, where developers are being encouraged to utilise existing land and housing rather than keep expanding. ‘‘I ultimately want to invest more in property,’’ Michael says. ‘‘Even though the subdivision was a painful process, I enjoyed the challenge. It has given me an interest to follow through.’’
Michael’s main financial goal is to ‘‘make as much money as possible’’. He has no plans to ever retire but would like to make enough money to continue his extensive voluntary work, including speaking on behalf of Road Trauma Support Services.
Further scope for growth with right strategy
Mike Ingham
Principal consultant, Godfrey Pembroke
OWNING his own home outright at such a relatively young age has put Michael in a sound financial position to further grow his wealth. He has a range of investment options including borrowing to buy another investment property, increasing his margin lending share portfolio or contributing to super.
Assuming Michael has an appropriate risk tolerance for borrowing to invest (“gearing”) and growth-oriented investments, his current gearing level of 52 per cent of the value of his property and share investment portfolios and his estimated surplus cashflow of about $10,000 per annum provides scope to make further geared investments. His property investment loan repayments are almost being funded by the rental income he receives from his three investment properties, after making an allowance for property expenses and the value of the tax deduction he receives for his loan interest payments.
There is, of course, a risk that the Reserve Bank will increase interest rates but he has a cash reserve of $90,000 and a $20,000 term deposit to cope with a spike in loan costs or an unplanned property expenditure. He should consider increasing his relatively modest $69,000 in super benefits. He should be eligible to make personal tax-deductible super contributions that will both reduce his taxable income and introduce a regular savings discipline. True, he won’t be able to access his super until 60 years of age but it is a lower-risk strategy than gearing property or share investments and it diversifies wealth across investment classes other than Australian shares and residential property.
Cashflow key to funding investment
Suzanne Haddan
Director, BFG Financial Services
BEFORE Michael decides on the investment suitability of a particular business venture he needs to determine how much he can afford and is willing to invest. Consideration must also be given to the cashflow needed to support the business venture and the funding of the purchase price or set-up costs.
At present, Michael’s income appears to cover his outgoings for living expenses and loan repayments. This means that there are no significant amounts available from his cashflow to assist with the repayment of any further loans arranged for the purchase of a business venture unless he changes his existing investment property loan to interest only. This would release $18,500 per annum to repay additional borrowings.
Michael’s current net assets, excluding his own home and superannuation, total just over $1 million. To enable an investment in a business venture, he would either need to sell some investments or borrow further amounts against his assets. The extent of the rearrangement would depend on the capital needed to buy or fund the business venture. Caution is recommended as investing in business ventures in the small-business sector have a high failure rate.
Michael is highly likely to be increasing his investment risk and reducing investment diversification if he sells down existing assets or borrows to fund the business venture. Should he decide to borrow to fund the business venture, he needs to closely look at the expected cashflows as many business ventures are not cashflow positive initially and, hence, require extra capital from owners.
Read more: http://www.theage.com.au/money/investing/wealth-engineering-for-security-20110716-1hizc.html#ixzz1TBHdApcS
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