By Toby Stewart, Financial Adviser - Hartmann Planning
Discover how Bill and Jennifer* retired three years ahead of schedule using proven strategies in financial planning. Planning for retirement can be complex, especially when navigating various assets and structures to optimise for your ideal retirement.
This case study will demonstrate how Bill and Jennifer, a couple in their late 50's, leveraged strategic financial planning to retire three years earlier than initially planned. While also achieving greater financial security. Although Bill and Jennifer were in their late 50’s, it’s never too early to start planning for your retirement! With the right strategy and time frame, you might be surprised at what is possible.
Before we dive into those details. Let’s talk about the difference between an accountant and a financial advisor.
The Difference between an Accountant and a Financial Adviser
An accountant plays a critical role in analysing and reporting on your business finances, to support budgeting and forecasting your cash flow. Providing strategic advice that will help your business grow and operate profitably, while ensuring you have effective tax strategies in place to meet your tax obligations. Accountants can also administer and manage your self managed super fund (SMSF) in accordance with ATO regulations.
In contrast, a financial adviser will help you plan for your long-term financial future. They will understand your financial goals and then offer advice on investments, retirement planning, estate planning, and overall financial strategy. Then manage complex investments and balance risks, adjusting these as markets change and providing ongoing guidance to achieve your financial objectives.
When you have an accountant and a financial planner working in their respective areas of expertise on your finances, you can achieve the most effective outcomes for your business and personal goals.
Now let’s get into the case study.
Initial Scenario: The Plan
After their adult children had moved out, Bill (58) and Jennifer (56) sold their home to downsize. Following the purchase of their new property, they found themselves with a surplus of $350,000 sitting idle in their bank account. Both were keen on ensuring this lump sum worked effectively towards their retirement goals.
Their initial plan was to retire in seven years when Bill turned 65, with an annual income of $120,000 per year. However, they were open to strategies that could optimize their finances and potentially allow them to retire sooner.
The Financial Planning Strategy: Retire Early
To help Bill and Jennifer achieve their retirement goals more efficiently, we implemented several proven strategies.
>>> Utilizing Catch-Up Concessional Contributions
Bill and Jennifer met the eligibility criteria to take advantage of the catch-up concessional contributions provisions. This strategy allows eligible individuals to make extra contributions to their superannuation (super) using unused portions of their concessional contributions cap from previous years.
By contributing a portion of their surplus funds into their super accounts as concessional (before-tax) contributions, they immediately improved their tax efficiency. This move also boosted their retirement savings.
>>> Investing According to Risk Profiles and Goals
We moved Bill and Jennifer out of their default investment option, into a portfolio more appropriate to their current risk profile.
Investments were selected based on their retirement horizon and liquidity needs. Ensuring funds would be available when required without compromising investment growth potential.
>>> Structuring Assets for Age Pension Eligibility
Their assets were structured to maximize potential eligibility for the Age Pension. This involved adjusting asset ownership and investment types to meet the means-testing requirements.
Bill initially believed he wouldn't qualify for any Age Pension benefits due to their assets. We demonstrated that with proper planning, he could receive at least a partial pension upon reaching the age of 67.
The Benefits of the Financial Planning Strategy
>>> Significant Tax Efficiency
By maximizing concessional super contributions, Bill and Jennifer improved their tax efficiency by over $30,000 in the first year. Over their retirement, these tax efficiencies are projected to accumulate substantially.
Earnings within super are taxed at a maximum of 15%, which is lower than most individuals' marginal tax rates, allowing their investments to grow more efficiently. Once moving to the Pension phase, the investment returns and income are entirely tax-free.
>>> Enhanced Investment Returns
Moving funds from low-interest bank accounts to higher-performing investments increased their potential returns.
Investments were chosen not just for returns but also for their suitability concerning the couple's retirement timeline and income needs. Their default option had not been personalised in this way.
>>> Retire Early and Comfortably
By helping them understand what was going to be truly important in retirement and improving their financial structure, Bill and Jennifer were able to retire fully within four years. This was three years earlier than planned.
They also entered retirement with increased savings, providing them with more comfort and security.
Questions You Might Be Asking
>>> What are catch-up concessional contributions, and am I eligible?
If you have unused concessional (pre-tax) contribution caps from previous years and a total super balance under $500,000, you might be able to contribute more to your super and reduce your taxable income.
>>> How can I structure my assets to become eligible for the Age Pension?
By understanding the means-testing rules and adjusting asset ownership, we may be able to help improve your eligibility for government benefits.
>>> Is my money working effectively towards my retirement goals?
Assessing your current investments and aligning them with your risk tolerance and retirement timeline can optimize growth and income. This is especially beneficial if you are currently in a default superannuation option, or if you set your investment strategy many years ago.
Can I retire early?
Bill and Jennifer's journey demonstrates that with strategic financial planning, it's possible to achieve retirement goals sooner and with greater financial confidence. Whether it's through maximizing super contributions, smart investing, or tax optimization, taking proactive steps can make a significant difference in retirement outcomes.
If you're approaching retirement and wondering how to make the most of your finances, now’s a great time to seek strategic financial advice. At Hartmann Planning, we have our own Australian Financial Services Licence (AFSL) so we are not limited in the products and services we can recommend. This means we can explore strategies and diverse products that best suit your individual circumstances. You can read more about our services at Hartmann Planning.
Act now for a brighter financial future. In conjunction with your accountant, strategic financial advice may create opportunities you didn’t realise were available to you!
*Names changed for privacy reasons
General Advice Warning
Any advice contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs and because of this you should consider the appropriateness of the advice to your situation, before taking any action. If any financial product has been mentioned you should obtain and read a copy of the relevant product disclosure statement and consider the information contained within that statement in regards to your personal circumstances, before making any decision about whether to acquire the product. You should seek advice from an appropriately qualified financial adviser, before acting on any information in this article.
Important note
ABA. Advice Beyond Accounting are not financial advisors and cannot offer investment advice. ABA always recommends seeking investment advice from a licensed Financial Advisor and would be happy to recommend a financial advisor if you do not have one.