Getting the Porsche continued...

Lisa Dudson
Acumen
Lisa Dudson’s interest in finance and investment was fired at age 16, when she bought a small Kiwi share portfolio. The 2003 Inaugural Young Financial Planner of the Year set up Acumen, which specialises in investment and financial advice, in 2000. Dudson co-authored the best-seller The Complete Guide to Residential Property Investment in New Zealand, and her recent book, Take Your Head Out of the Sand, is a guide for everyday Kiwis on how to grow their money. She’s held a number of committee and executive roles with industry bodies, including the Auckland Financial Planners and Insurance Advisors Association, and the New Zealand Property Investors Federation.

HER ADVICE: Bruce and Judy
Based on the limited information supplied, I would recommend that Bruce and Judy use the proceeds from the sale of their land to reduce their mortgage. They currently have $240,000 of debt and if they receive $130,000 from the sale (after costs), their balance would be $110,000. If they then used their inheritance of $100,000 to further reduce their debt, they would be left with a balance of $10,000.

Bruce and Judy currently spend all they earn. Like many people my feeling is that as their income increases, so may their spending. Therefore they should draw up a household budget and spending plan to live off, say, $3,000 after tax per month (based on a conservative estimate of what they may earn this year). This may not sound a lot but it will not include any mortgage payments or savings.

Anything above this can go to firstly paying off the remaining $10,000 of debt then go into starting a savings plan, their children’s education fund and saving for part of the renovations. The balance of the renovations could be paid for by a mortgage.

Bruce and Judy’s aim is to retire on an income, in today’s dollars, of $60,000 per year. Let’s take off $15,000 for the state pension (after tax) which means that they need to have an investment portfolio that will give them a net income of $45,000. Therefore they will need to have approximately $900,000 (in today’s dollars) in investment assets to achieve that level of annual income. If we work on the standard retirement age of 65 and base it from Bruce’s age of 40, they need to save approximately $2,000 per month for the next 25 years using an investment return of 3% (after inflation of 2% taken out) to achieve their desired income levels in retirement.

Bruce and Judy will also need to consider ownership structures for their personal and business assets, wills and powers of attorney, business and personal insurances. It’s important to note that your personal finances need to be reviewed at least once a year to ensure that you are on track, taking into account changing circumstances and goals.

John and Maria
John and Maria have fairly ambitious plans to retire in five years on an income of $40,000 per year each, which is a total annual income of $80,000. Given the information provided I am not sure how they plan to do this as they would need to pay off debt of $271,000 plus increase their investment portfolio by $1,500,000 (current investments are approx $110,000). This is worked out using the rule of 20, that is, income x 20 = an annual return on investment of 5%. Currently they are spending over $100,000 per year on top of their current mortgage payments so I am not sure how they will live on $40,000 per year (each) when they want to retire in five years unless there are some serious cutbacks made on their spending.

I would recommend that they use their inheritance of $100,000 to reduce debt on one of their mortgages, which I understand are for their home and holiday home. Also to put together a budget and spending plan so they are aware of where their money is being spent rather than wondering where it went. Then put any spare cash into paying off the balance of their mortgages as fast as possible.

John and Maria seem to be involved in some property investment. If that is how they are planning on accelerating their wealth they need to put a clear plan in place to increase their investment net worth by $700,000 in the next five years. This may be achievable; however, they will require a high level of skill and knowledge, good professional advice and a lot of hard work and focus.

They will need to consider ownership structures for their assets, wills and powers of attorney, and insurances.

Cost: $200 (ex GST) per one-hour consultation.

Jeff Matthews
Spicers
A practicing financial advisor for over 17 years, Jeff Matthews has been with Spicers since 1991. He studied international economics in California, spent six years working in Sweden and on returning to New Zealand in 1979 worked for a number of years in merchant banking. Matthews advises individuals and professional trustees on developing investment strategies for family trusts and has particular expertise in estate planning. He’s a Financial Planners and Insurance Advisers Association member, and president of the Estate and Taxation Planning Council of New Zealand.

HIS ADVICE: Bruce and Judy
Bruce and Judy are asset rich and cashflow poor due to their reduced incomes. Based on their current combined incomes of $72,000, they have an after-tax income of $55,000. The annual interest on their existing mortgages is $18,585, which doesn’t leave them a huge surplus for other things, like living expenses, children’s education, retirement or house renovations, so getting out of debt would be a good starting point.

I would use the monies from the sale of the Kawhia property ($140,000 net of costs) to repay the floating-rate mortgage, and part of the fixed-rate mortgage. This gets the debt down to $100,000, but if they want to spend $150,000 upgrading their existing home, then they are back to a $250,000 mortgage. Do they really need to spend $150,000 on upgrading the existing home? With interest rates rising they would be better off to use any inheritance to reduce debt.

Bruce is self-employed and his future income is not guaranteed. If Judy does have another child, they will be dependent on Bruce’s income, so financial issues like income replacement insurance, and some term life insurance need to be considered. With a young child and possibly more in the future, they need to ensure their wills are updated, and they need to consider the issue of guardianship, should anything happen to them.

If Judy returns to working three days a week next year, it would make a big difference to the family budget. Their after-tax income would be around $74,000. Assuming a $150,000 mortgage at 7.9%, and fortnightly repayments of $1,200, the mortgage could be gone in six years, which would still leave them sufficient time to save for their retirement.

Part of their planning will be how best to use their existing property assets. Do they stay in Auckland and move to a smaller property? Do they sell their home, buy a small apartment and live at the beach? If we assume Bruce and Judy want a $50,000 a year income for 25 years, then the lump sum needed to generate that income is about $900,000.

By rearranging their properties at retirement, Bruce and Judy should be able to ‘unlock’ $500,000 from their existing properties. The balance could come from a regular savings programme from age 46 to 60.

John and Maria
John and Maria are in a good financial situation. They have net assets of $1.1 million. They have a good combined income, and the children are almost out of their hair at age 18 and 19. We estimate their after-tax income at $149,000, which according to their living expenses would give them the ability to save $49,000 a year. This could be improved if they weren’t paying $37,700 a year in mortgages costs.

Assuming an inheritance of $100,000, it should be used to reduce the existing mortgage on the family home. If the property development does produce an additional return of $100,000, that should also be used to reduce debt, unless it is tax deductible. With interest rates continuing to rise, paying off debt is a good investment, especially if you are a 39% tax payer.

To retire in five years’ time, with an annual income of $90,000 after tax is unrealistic. John and Maria have plenty of lifestyle assets in their home and beach property, but they need to develop a pool of investments that is going to replace their current work incomes. Those assets could be property, shares or fixed-interest investments, but the lump sum required to fund their retirement for a 30-year period would need to be about $1.7 million.

They would need to sit down with an advisor and make some adjustments, which might include working slightly longer, which would give them greater savings, and they would need to adjust down their income expectations.

If John and Maria repay $200,000 of debt, they should be able to save $68,500 a year, which could increase once the mortgage on the beach house is cleared. If they did this for ten years they could accumulate investments of about $840,000. We have assumed living expenses of $65,000 and no state-funded pension, and on this basis the funds would last about 15 years, or when John turns 70 — clearly not a great outcome.

To sustain their annual income of $65,000, they would need to reorganise their property assets in their late 60s, which could add a further $600,000 to their investments, and means their funds would last them until John is 85, at which point they would still own a valuable property, and they could review their options closer to that time. We haven’t considered the legal ownership of their existing assets, but a trust would be a good vehicle going forward.

Cost: Typically our advice would be $150 an hour (ex GST), so the cost to a client would be somewhere between $600 and $1,000 depending on how many hours it took.