Being a financial planner is fantastic when your client is a really nice person. Which is most of the time. But this particular time was especially pleasant.
The first twenty minutes was more like catching up with an old friend. What are your kids doing? Where have you been on holidays? What else have you been up to? It was very pleasant.
We had to wilfully drag ourselves back to today’s topic: how was Wilma’s financial plan proceeding?
We first met about seven years ago. It was a relatively simple presentation. It still is.
In 2009 Wilma was a recently divorced single mum, hurting, and trying hard to be super-mum. She did have an advantage, though. She was a qualified physiotherapist specialising in women’s health.
Wilma was working the double shift of primary income earner and primary care giver. Her kids were ten and seven, and taking up most of her time. They were renting. Wilma was working half time in a practice one hour away, and paying a 40% management fee.
It was not hard to get Wilma’s basic plan in place. The original plan was created seven years ago, and has worked beautifully ever since.
Step 1: improve your employment prospects
Step 1 was a big chat about her practice, ie her employment. That one hour travel added up to six unpaid travel hours a week, and that 40% management fee was a bit high. Wilma took the tip, looked around and found a better gig ten minutes away, with a management fee of just 30%. That’s a 17% increase in take home pay, for six hours less work each week. Wilma decided to work an extra 6 hours a week, so it was a double whammy: a higher hourly rate and a six extra hours a week.
The idea of a cleaner for five hours every Wednesday was a breakthrough. Wilma earns an extra $300 a week, and spends half of it on a cleaner. Everyone wins. Wilma, her patients and her cleaner. It’s nice to come home to a super clean and tidy house, at least once a week. Sometimes it stays that way for a whole 24 hours, especially if the kids are at their Dad’s.
Step 2: eliminate or minimise unnecessary costs
Step 2 was a big chat about schools. Would private school really be worth it? $50,000 plus a year, non-deductible? It’s not as if Como High is an academic desert, and a juvenile jungle. It is a good school, and Wilma’s kids are really smart. So she skipped the private school treadmill. So far so good, Wilma says. Her daughter is in year 12, gunning it, and on track for law at Murdoch University in 2017. Her son is still only 14 and loves his soccer, so he is on track too.
Step 3: the home
Step 3 was a bit more complex. Where would they live? Should she buy? Should she rent?
It’s all about the home. A strong economy, rising incomes, rising population and rising aspirations meant buying a three bedroom town house in Como seemed like a great idea. Borrowing seemed scary at the time, but proved prescient.
Wilma’s home cost $550,000 in 2009. It is now worth more than $900,000. CGT free. She has made more than $1,000 a week CGT free every week for more than seven years. Homes are great investments.
Wilma’s home loan, $400,000 in 2009, is now down to $300,000. Interest rates are 4% with Bankwest, so the three of them have great accommodation for just $1,000 a month interest.
The kids love the new pool.
Step 5: negative gearing is good
Two years ago Wilma discussed buying an investment property with us. We liked the idea. A nice little two bedroom unit in Munster fit the bill.
It cost Wilma $500,000, fully geared, with tax benefits, and is now worth about $550,000. That’s another $500 a week every week. But Wilma is thinking twenty years from now, not twenty minutes. And the idea that her daughter would always have a place to come to if she ever found herself in Wilma’s previous situation has a real appeal.
The tax benefits have been nice too.
Step 6: don’t stop working
We discussed Wilma’s expected retirement date. She is 56 now, and most women her age are leaving the workforce. And most will have left by age 60. Big mistake. Most women will live to be 90 or more. At age 56 they have more than 30 years to go, and their capital will not last that long.
Wilma is paying attention to her own health management plan and aiming to work to age 75, at least. Her work pattern will probably change: fewer hours at a less rushed rate. Its a marathon, not a sprint. Wilma will keep contributing to the community, keep in touch with other people and keep feeling good about herself as long as she can.
Wilma will keep adding to her stock of capital, primarily through super. Her capital draw down will not start until much later, and her capital will not have to last as long. The economics of her retirement will be very powerful.
Step 7: get the tax planning right
So far the meeting was business as usual. But then the earlier social chat paid off. I suggested:
- as her daughter will turn age 18 in June, and will need a car next year to get to University, Wilma’s practice trust will buy a car costing about $10,000 as a concessionally taxed fringe benefit. This means she gets a 10% GST credit and a tax deduction for 100% of the $10,000 in the year ending 30 June under the accelerated depreciation rules, and the operating costs are largely deductible too; and
- as the kids are now getting old enough for overseas travel, we discussed the tax deductible overseas travel rules for medical conferences, and how this can work really well for solo travelers as you automatically meet others, still get to do some great tourist things and can have a few days for private stuff each side of the conference.
This was all good news for Wilma. The car bit was particularly well received. Wilma remarked it meant she could buy a better and safer car than she had first contemplated. That made a lot of sense. Her daughter faces the biggest risk of injury in the first few years of driving. She will be in a safer car.
Basic tax planning for financial planners. Deductible super. Invest in a CGT free family home. Invest in a CGT concessional negatively geared rental property, and never sell. Borrow to pay deductible super contributions. Use cash to pay off the expensive non-deductible home loan. Tax efficient cars. Tax efficient travel. No need to go over any of this. We nailed it years ago.
Step 8: take the twenty year view
This bit is easy. It’s business as usual. The same as it’s ever been.
I gave Wilma the 2015 Russell ASX Long Term Investment Report, as I always do. It says the 20 year average annual return for Australian shares is 9.5% and the 20 year average for Australian property is 9.8%. Thius is worth remembering in Perth. Investing is not hard. Just select representative/average Australian shares and Australian property and let time do the rest. Your minimum holding period must be 20 years, or more. That’s all there is to it.
Wilma’s future investment strategy is simple:
- keep Como, forever
- keep Munster, forever
- keep paying $35,000 a year to First State Super, in high growth mode (this falls to $25,000 a year from 2017).
This is an extremely tax future efficient investment strategy. Como is CGT free. Munster is CGT free, if held forever. First State Super is very tax efficient, and will become completely tax free in 2020, and remain so for about another thirty years.
Step 9: pay as much super as you can
Wilma pays $35,000 a year concessional super contributions to First State Super, using a line of credit in her PSI practice trust. She keeps her cash for paying off her home loan. She is in high growth mode because she expects to live for another 34 years. Most women will live to age 90. Therefore most 56 year old women should be in high growth mode for the next thirty years.
It’s too risky for a 56 year old woman to not be in high growth mode.
There is a good chance Wilma will draw out some super, tax free, at age 65 and pay off whatever loans she has left at that time. She will then put her head down and pay maximum contributions for another ten years, or more, until she finally retires.
Step 10: financial products
Notice we have not mentioned financial products yet?
Wilma has $800,000 of life cover with TAL, through First State Super. That’s enough. If she dies prematurely there will be more than $1,000,000 for each of her two children, controlled by a testamentary trust, with her siblings (and her kids as they hit age 18) as trustees.
Wilma has the First State Super income protection, and a separate external policy that runs to age 65. The external policy has a 90 day waiting period and a sum insured of $60,000 a year. Wilma is not worried about a temporary short term incapacity, but is worried about longer term risks. The $60,000 is about half what she is earning, so the experts say she is under-insured. She knows this, and she accepts it. She would rather take the kids on a better holiday each year. Wilma will get along just fine on $60,000 a year if she needs to.
We recorded the truth that Wilma knows some would say she is under-insured. Most clients are, and it’s not really a problem for them.
And keep in touch
This was Wilma’s regular annual check-up. It’s like catching up with an old friend. I really enjoy seeing her, and it’s gratifying to see the strategies paying off so well over time.
It’s all about advice that it’s in your client’s best interests and is appropriate to your client.
It’s not rocket science. It’s plain common sense. It’s real financial planning, and it has almost nothing to do with financial products.
I am already looking forward to next year.