Smart Investor: Saving for the future

Smart Investor, January 2011

Smart Investor spoke to three people at different stages of their lives: an accumulator, a pre-retiree and a retiree. We asked each of them about their finances – than asked financial planners to come up with five strategies for their futures.

The Accumulator

Sunil Prasad (name changed) is at the very start of his personal financial journey. Aged 26, the Melbourne-based IT manager got married in October to Elisa, 25, a musician and music teacher.

It can be tough to think about getting ahead financially when one has just got married, but they are in better shape than many. They just moved in to a two-bedroom apartment in Melbourne’s Glen Iris, for which the home loan repayments take up about $600 a week servicing a $393,000 mortgage. Sunil recently sold an investment property in Brisbane, which helped him and Elisa to afford their new home, and leaves $105,000 in cash left over which he is now wondering how best to invest.

While their property arrangements are very solid, in terms of savings it is very early days: Sunil has $25,000 in super, Elisa just $10,500, and she also still owes about $20,000 in HECS debts. So the questions for them now are how best to build, where to allocate money, and how much to worry about saving while still leaving enough money to enjoy life.

“From the time I started working full-time, I’ve been investing my money,” says Sunil. “I’ve been thinking to invest aggressively while I’m still young, to help me build up my assets.” His focus for investment so far has been property, but the sale of the investment property gives him options, and he is thinking of high-growth managed funds.

With children probably five to 10 years away, “we have a plan to pay off the place in five to seven years, and we probably wouldn’t look to move out until we need to.”

Naturally, Sunil has not yet thought much about retirement, “besides the fact that I want to have as much super as possible working for me, rather than just sitting in the account. While I’m young I can still afford to take some losses in my super: I’ve got another 40 years or so until I need to dip into it.” Instead, for now his focus is more on career. Like many young people in his industry, he is already with his third employer, whom he joined a few months ago after five years at the previous one – “fairly long for someone my age in IT.” He describes himself as “pretty focused” on his career, hopes to move into more managerial roles and in 10 years would like to be doing project management for a larger company like IBM or HP. Elisa, as a music teacher, has somewhat unpredictable income.

Neither was especially worried by the global financial crisis, having not accrued a large balance of savings to be damaged. “I lost a bit of money in my super and in some managed funds, but other than that, life wasn’t really impacted,” he says.

DETAILS

Age 26; married to Elisa, 25

Salaries (taxable): $55,000 and $30,000

Salaries (Gross): $90,000 and $40,000

Super: $25,000 and $10,500.

Cash in the bank: $105,000

LIABILITIES
Mortgage debts: $393,000

Credit card debts: Approx $700 a month

HECS debts: $20,000 (Elisa)

THE AVERAGE WEEK:

After-tax income:

Sunil: $1,355 a week and Elisa approximately $1,000

Expenses:

Home loan $598 a week, and living expenses about $600 per week

STRATEGIES

1. Invest surpluses

“Cash in the bank and non-deductible debt are always a bad combination,” says Paul Moran. All the planners recommended Sunil invest his surpluses, though they had different views on how he should do so.

“Pay yourself first,” says Darren Johns. “Then set aside surplus cashflow in a savings or investment plan. Depending on your time frame, low cost highly diversified managed investments may be suitable,” which would allow for regular additions, and liquidity if needed. “ETFs are another possibility to provide highly diversified and liquid investments, but they can incur higher brokerage costs if you are making monthly contributions.” Sorting out surplus income is easily put off. “I would address this area as a priority, as surplus income can easily become absorbed in increased weekly living costs,” Johns says.

In thinking through how to invest the surpluses, there are several options. “If you buy an investment property, which he seems to be comfortable with, there’s a high up-front cost and the issue of what happens if it’s not tenanted,” says Berry. “Could they afford to pay the loan if there’s no tenant? And there is the risk of illiquidity. But there are good tax deductions for the interest.” Managed funds, on the other hand, “can be very liquid: if they didn’t like it, they could get the money back out, with the risk it may have fallen in value in the short term. It costs less, is liquid, flexible, and you can add as you go.”

In a twist on these ideas, Sergio Arcaini suggests putting the cash into the mortgage, then redrawing it again as an investment loan to establish a portfolio of high growth assets, so as to make the interest tax-deductible. He says “the goal of achieving repayment of the mortgage in the next five to seven years is doable if all their income surplus is directed towards the mortgage. With a bit of discipline and guidance it can all be achievable.” He recommends keeping $5,000 in cash as emergency funds.

Buchan, too, suggests structuring investments around the mortgage. “They have a goal to pay off the current place which I agree with 100%,” he says. “I think a far better approach is to structure around the mortgage, get an offset account attached and deposit all monies into that account. Structured properly, that would allow faster reduction of the mortgage and future options should they wish to retain the flat upon the next purchase.”

Moran, too, believes the home loan should be repaid with all surplus funds, after which he could convert his non-deductible home loan debt to a deductible investment loan for the same amount. “He should be a little cautious of using high risk growth assets to help reduce debt as the possibility of significant loss is very real,” Moran adds. “In principle, using growth assets to accumulate wealth can be a sound strategy, but relying on it in the short to medium term (five years) makes the risk a little too much to take on unless you are a real high risk investor.”

Buchan says paying down the mortgage is “not a sexy strategy” but is “very powerful in a low risk manner. With a 7% mortgage rate, Sunil would need to achieve a return higher than 10.2% to beat putting the money into the mortgage or an offsetting account, and Elisa would require a return higher than 8.3%. While these returns are achievable, no one can guarantee them over the medium to the long term. If anyone does guarantee such returns, run a mile.”

2. Borrow to invest?

One method of making your savings grow quickly is to borrow in order to invest. But leverage works both ways: it increases risk as well as potential reward.

“If your cash flow, your appetite for risk and your ability to withstand losses permits, you could borrow to accelerate potential gains and provide some additional income tax deductions,” says Johns. Borrowing to invest, though, is not without risk. “The timeframe, the desire for gain versus the regret of loss, and cashflow certainty are the prevailing factors in putting this strategy into place,” says Johns.

Borrowing to invest has crossed the mind of other planners too. “He’s paying a lot of tax on his salary, that’s a key issue, so doing some borrowing and getting some deductions is an option,” says Berry.

Arcaini, too, thinks they could consider looking at gearing, perhaps through a protected equity loan. And Buchan suggests “maybe – a big maybe – a small gearing strategy putting $10,000 equity in Elisa’s name into an absolute international fund, and a $20,000 margin loan in Sunil’s name into direct Australian shares.” Moran doesn’t suggest gearing; he says “having a core holding in shares, with a small allocation to geared shares, emerging markets or smaller companies can be efficient.”

3. Assets in your partner’s name

Johns suggests that, if Sunil and Elisa think they’re likely to need access to their money within a relatively short timeframe – say, less than seven years, perhaps for a bigger home purchase – then they could consider a high interest paying cash account, in Elisa’s name. “That would provide a better net result, as you will lose less in income tax by having the interest taxed in her name,” as Elisa is on a lower tax band than Sunil.

Speaking of Elisa, it’s worth noting that she has a HECS debt which, Buchan says, “needs to be managed.” He says she needs to earn above $42,000 before she has to pay hers.

4. Salary sacrifice

“I think they could be making better use of their income by salary sacrificing,” says Julie Berry. “It looks like there’s excess cash, and that’s not useful.” Since the superannuation balances are very low, “there’s a massive opportunity to save tax and build up their super.” Pre-tax Super contributions using salary sacrifice can go up to $25,000 per year at their age, including the contributions from the employer. “You have to be careful you don’t go over that or you get done like a dinner,” says Berry wryly. “That’s a technical term.”

Johns has a very clear plan in mind for salary sacrifice. “At the next pay increase, I would commit 4% to salary sacrifice and maintain it forever more,” he says. “Then 3% more at the next pay increase, and another 3% at the next one. The objective here is to automatically save 10% of your pre-tax income before you have a sense of attachment to that income.” Doing so, and doing it young, has a big impact: saving 10% of your income for 25 years can increase retirement income by 25% a year, or, to look at it with a different objective, reduce your need to work for money by six to eight years, Johns says. “By setting this up as part of a pay increase, you are less likely to feel that you are sacrificing cashflow.”

Berry also encourages Elisa to make use of the co-contribution method – “free money from the government,” as she calls it. Elisa could put in up to $1000 and see it matched by the government. She also adds: “I don’t think they want to be directing all their excess income into super because they are young and it does lock it up. You need a happy balance.”

Arcaini takes a different view. “They are still very young, and at this stage I think it is pointless to focus too much on superannuation,” he says. “You don’t even know what super rules are going to be 40 years down the track. Instead I would focus on growth assets: Australian and international shares. When your timeframe is 40 or 50 years you owe it to yourself to leave as many options open as possible. All you require is a legal changes at some time in the future and bingo, all of your planning has gone.”

5. Know what you want – and insure for it

“Define what you want from your money, the accumulation of which is academic without a purpose for its application,” says Johns.

Related to this, it’s important to insure what you do have. “The big thing that’s missing is insurance: they don’t seem to have any cover,” says Berry. “You could argue they don’t have any substantial debts, but what if they didn’t have any income coming in?”

Arcaini, too, would like to see them look at income protection, “putting a fence around them should circumstances require.” In particular if they do opt for gearing, with a large mortgage outstanding, cover is key; he recommends looking at life, TPD, trauma and income protection.

Andrew Buchan says: “Their greatest asset by a country mile is their ability to earn income and this needs to be protected as soon as possible.” In addition to income protection, he would recommend life and temporary/permanent disability cover. “The first step would be to review their risk insurance, get a will and enduring powers of attorney in place.”

THE PRE-RETIREE: Danny De Vere

59-year-old Danny De Vere is approaching retirement, and like many Australians, is trying to work out exactly how and when to do it. Married for 31 years to Nerida, 57, his two children are in their 20s and have left home; he owns his home in Heathcote, Sydney, so there are no major debt burdens to worry about.

Like many of his generation, Danny has spent his working life with just two employers. He first joined ANZ Bank, and stayed with them for 25 years, the last 13 of them in the global treasury department, where he became a senior dealer and portfolio manager. Made redundant as a consequence of merged functions between the Sydney and Melbourne offices in February 1993, he moved to a job at Sydney Airport working for Downtown Duty Free – now SYD Airport Tax & Duty Free, part of the Nuance Group Australia. He started there as a clerk in the cash office and, 17 years on, is administration manager.

Also like many of his generation, Danny was hit by the global financial crisis. “I was hoping to retire between 60 and 62,” he says. “Now it’s looking more like 65.” With no debt and a paid-off house worth about $700,000, he’s in pretty good shape: a lifetime of contributions to superannuation funds have given him a total super balance of $510,000, on top of a healthy cash and shares portfolio balance. But he is pondering how best to switch to retirement, whether to leave the workforce completely or remain part time for a while, and when he will have saved enough for the life he wants after retirement. “I am thinking about some part time or casual work for two or three years after I retire,” he says. “I have a strong interest in the share market and no other strong hobbies, so health permitting, my wife and I think it would not hurt to keep an active mind by staying in the workforce.”

The question that most vexes him is about transition to retirement. He has considered switching his super, most of which is within ANZ funds, but has been troubled by high fees, worries about switching out without waiting for balances to recover to pre-crisis levels, and the logistics of conversion. But when he does retire, he hopes for an income stream from super of $45,000 to $50,000 – sufficient to have private health insurance, a modest car and a decent holiday every once in a while. “If I can achieve that at 65, particularly if I can get above $50,000, I may not bother taking part time work.”

IN BRIEF:

Age: 59; wife 57.

Owns home with nothing owing. Worth $700,000.

INCOME

Annual Salary     :                                               $61,000 ($1,004 per week after tax)

Additional Joint Income (Div & Int) :        $7,000

TOTAL                                                   $68,000

CASH & SAVINGS

Joint bank savings :                         $100,000

INVESTMENTS

Direct shares ownership :              $290,000 (of which $90,000 is in Nerida’s name)

EXPENSES

Living Expenses $550 per week

No loans of any kind.

Visa always paid in full when statement received

Superannuation (Danny only. Nerida has none and does not work)

ANZ Bank (Retail Fund) : $450,000 (High Risk strategy – about 90% shares)

R.E.S.T (Industry Fund) :               $45,000 (Medium risk, core strategy – about 65% shares)

AMP (Corporate Fund) :               $15,000 (Low risk – Age default)

TOTAL SUPER                     $510,000

OTHER ASSETS

Danny : Endowment policy maturing in 2015; approximate value $30,000

Nerida : 30% ownership, as tenant-in-common with brother, of house property in Gymea worth about $600,000. Receives no rent but contributes to its upkeep.

Income protection to 75% of salary, and death benefits policy, with AMP Super. Death benefit is around $70,000.

STRATEGIES

1. Transition to retirement.

As Danny correctly identifies, this is an important potential step. Transition to retirement (TTR) rules mean that, once you reach your preservation age – between 55 and 60, depending on when you were born – you can reduce your working hours and top up your part-time income with a regular income stream from your super savings. This is a recent shift from the old system under which you could only access super once you turned 65 or were fully retired. Up to the age of 60, the taxable part of your income stream is taxed at your marginal tax rate; once you’re 60, your super income from a taxed source is tax-free.

“There is no doubt, with Danny turning 60, a transition to retirement strategy is appropriate,” says Andrew Buchan, and the other planners agree with him. They also agree that it makes sense to maximize super beforehand.

“The key at this stage is to get as much as you can into the most tax-effective vehicle, which is super, then an account-based pension,” says Julie Berry. “Danny’s got all these non-super assets that are going to be assessed by Centrelink, so there’s an opportunity to move non-super assets into super first.”

Buchan suggests that by putting in the $100,000 in cash, and a further $200,000 through Danny’s shares, dependent upon the capital gains ramifications, they could put in $300,000 to super before starting TTR. He suggests splitting these contributions into two – $150,000 pre-June 30, then the same amount on July 1 – and starting the TTR immediately thereafter. With a total of $810,000 thus accumulated, that should pay out a minimum pension of $32,400 per annum.

Danny is worried about starting a TTR before his shares have recovered to pre-crisis levels. “But the timing of starting a TTR is not as dependent on prevailing share market prices as you may think,” says Darren Johns. “If you are swapping a basket of shares under one banner – say, ANZ personal super – to a substantially similar basket of shares under another banner – such as REST – then you are not really selling out when prices are low. You are just moving from one holding structure to another.” There may be some transactional costs, he says, and expert advice should be sought, “but it’s not something you have to do at the top of the market in order for it to be worthwhile.”

Paul Moran makes the same point. “The portfolio would recover as easily in a TTR as in an accumulation account and this shouldn’t influence his decision.”

One other thing planners agree on is that there’s no time like the present. “Given that he needs to stage money in so he doesn’t pay capital gains tax, he needs to get started now to make sure he doesn’t miss opportunities,” says Berry.

2. A self-managed super fund.

This is clearly an option for Danny. “I always consider there to be three basic investor types,” says Buchan. “Self-directed – ‘I know what I am doing, you are merely a sourcing board’. Passive – ‘you are the expert, go and do it’. And involved – ‘educate and guide me, I want to understand my choices and be part of the selection’. Danny is on the cusp of being involved and self-directed.” He has experience in banking, finance and administration and a clear interest in the share market.

Since the planners suggest he should consolidate his various super accounts into one, it makes sense for him to consider a self-managed super fund as an option. “He has the skill and the know-how to consider it,” Buchan says. Self-managed funds only make sense at a certain scale, though. So would it work for Danny? Buchan says that if he consolidated his money into, say, Quantum REST, he would be paying about $6,400 a year in fees. Running a self-managed super fund, he would have to budget about $7,600 a year in costs. “Yes, it’s more expensive than REST, but is far more flexible and I think would suit Danny’s demeanour,” says Buchan.

Berry says he should consider the capital gains issues around transferring shares, but says they can be put into super without selling them, a process known as in specie. “You have to phase them in so you don’t get walloped with a capital gains bill,” she says. “Doing a self-managed fund does change the trustee, so it triggers capital gains, even if you’re not selling them.”

“You need a fairly high balance to consider a self-managed fund,” says Berry. “There’s no point doing it with a low balance, because the ongoing costs and auditing fees are quite high. Secondly, it’s good if you want to be hands-on with investments and buying and selling. It seems he is. It adds a level of complexity but it gives you more control.”

Sergio Arcaini also likes the idea of a self-managed fund. “In Danny and Nerida, when you look at the funds they have available, and the fact that obviously they are fairly methodical and disciplined people and should have the knowledge to run a super fund, it can really be a money saving exercise,” he says. “And I always like the idea that the client takes control of his own affairs.”

Whether Danny goes the self-managed route or not, all agree he should consolidate.

3. Salary sacrifice

This is part of the same theme of getting as much money into super as possible before commencing the transition to retirement. “In his late 50s, he should consolidate his super and salary sacrifice as much as he possibly can, bearing in mind that within the next 18 months, the maximum amount he will be able to contribute is going to be limited to $25,000,” says Sergio Arcaini, referring to the fact that the current $50,000 cap for salary sacrifice contributions for over-50s will drop to $25,000 in June 2012. “Therefore he needs to do something now.”

Arcaini has costed out a specific set of recommendations, starting with Danny consolidating all his super and rolling it into a TTR pension, with withdrawals starting at $12,400 in 2011 and gradually increasing to $30,900 in 2016. At the same time, Danny would salary sacrifice $20,000 a year in each of the next two years, and $15,000 a year for the next four; and make a series of non-concessional contributions too, including in-specie transfers of his share portfolio over the first three years. [NICOLE YOU MIGHT CONSIDER USING ONE OF SERGIO’s TABLES HERE]

Julie Berry explains another method worth considering in combination with the transition to retirement approach. If you roll your current superannuation fund into a transition to retirement pension, this pays a regular income, and is very tax effective, but means you can’t access the lump sum. You can then salary sacrifice into a new superannuation fund up to the allowable limit ($50,000, including superannuation guarantee contributions, for over-50s). “This money, instead of being taxed at your marginal tax rate, would be taxed at 15% on entry to the fund. This allows you to save tax and build up another lump sum.” She stresses, though, “it is essential that you seek advice on this strategy to ensure it is suitable.”

Another superannuation option Berry recommends is to use most of the $100,000 cash balance – perhaps $80,000 – to put into a new super fund for his wife. Some of the shareholdings could also be transferred into it. “Since she’s not working, she can turn a pension on from that at any time,” Berry says.

4. Wills, estate planning and insurance

All the planners consulted would want to review Danny’s arrangements around wills, powers of attorney, life insurance and income protection. “Have they looked at estate planning? Who is the beneficiary on his super?” asks Berry. “If your super goes to non-dependents, they are taxed. If it goes to a dependent like your spouse, you’re not taxed. When divvying up your estate, the most sensible thing is to send the super to your spouse.” If Nerida sets up a super fund as Berry suggested above, she should nominate Danny as the binding death beneficiary. Arcaini, too, thinks setting up a super fund for Nerida makes sense, starting with a $90,000 in specie transfer of shares, and adding $90,000 of the cash balance. He’d also like her to sell her stake in the property and put that into super too, and finally, add spouse contributions of $3,000 a year into her super account until Danny turns 65.

Buchan suggests retaining the endowment policy for the future. And Johns suggests using Nerida’s accounts more: “Put the bank savings in your wife’s name to reduce your income tax payable,” says Johns. Buchan suggests a similar approach: he calculates they have the ability to save $454 per week, and should put half of it into a high yielding cash account in Nerida’s name, with the other half as contributions to super.

5. Retire sooner? But sort out the house

Johns says that, with net retirement capital of over $1 million including Nerida’s stake in the house in Gymea, “it is likely that you are able to stop working full time at the age of 62, as per your original hope, and receive an income of $50,000 per year with a high degree of probability that your money will not run out for 25 years.” He adds: “Working past this age may add to your financial strength, but it may not be necessary with prudent investing.”

Getting to this point, though, will require clarity on the Gymea house. “At the moment the house, with the brother living in it, is a loss-making exercise,” says Arcaini. “She’s not getting any rental from it but she is responsible for repair and maintenance of the place. That is a bad arrangement.

 THE RETIREE

Bob Young is 72 years old and largely retired in Roseville, Sydney. He spent much of his working life as an electronics technician, mainly in private industry, before joining the New South Wales government in 1975. He retired in 1985, on full super, following sickness, although he does continue to receive a modest amount from an electronics business.

The extraordinary part about Bob’s story is the rigour he has applied to investment, with some success, since retirement. Starting out with a $250,000 portfolios of shares he inherited in late 1996, he set about developing a system for them with the help of an Excel spreadsheet. For the first five years they went through the roof. At one stage – clearly supplemented by other contributions, but also because of excellent performance – his portfolio was worth $4.5 million. “That was simply by being a very fussy fundamentalist,” he says. “Since then, I haven’t had the time to watch it so much, and naturally I copped it on the chin in the downturn a couple of years ago.” But even after that, he still has about $3 million in shares.

It’s a result of a very specific and committed strategy, which he describes like this: any share that is paying a fully franked dividend of 5% or better fully franked, trading on a price/earnings ratio of less than 20, with an NTA (net tangible assets) of less than one third, and trading in the bottom 25% of its yearly range, he will consider buying, provided the stock has a market capitalization of more than $100 million. His policy, where possible, has been to buy 0.00001% of the total number of shares on issue. “As soon as any stock failed to meet several of those parameters, it got sold,” he says. It’s a classic fundamental strategy. “It just came naturally,” he says.

These days his portfolio includes big holdings in Telstra, Wesfarmers and CSR, among other things.

This success has had a couple of consequences: one, a major concentration of assets, with far more in shares than in super (about $500,000 in state super), although he does own his own home, worth about $2 million; and two, something of a suspicion of the value of advice and professional management. “I’ve always steered clear of managed funds on the basis that: why should I pay someone else to do not quite as well as I’m doing,” he says. That said, as he gets older, and spends more time helping senior relatives into retirement villages, “I’m finding I don’t have so much time,” so the time may be coming to embrace more advice.

He describes his super fund as “the sort of state government super that one can’t touch: one of the old plans, geared to CPI.” However it pays a pension of around $600 per week. A far bigger source of income is the dividends from his share portfolio – in fact, the combination of pension, dividends and the electronics business give him a total income of $200,000 a year. To keep the tax bill under control, he maintains a margin loan. He’s also carrying forward capital losses of around $400,000 from the financial crisis, and would like to use them somehow.

Bob is married, to a retired teacher, and his daughters are grown up and elsewhere in Sydney.

DETAILS:

Age: 72.

Assets: Owns home, worth about $2 million; $500,000 in state super; $3 million in shares; $20,000 in cash.

Liabilities: A $400,000 margin loan.

Income: $600 per week from state super, $4,500 from the share portfolio, and $500 from the electronics business.

Expenses: Margin loan $2,000, and living expenses $1,000.

STRATEGIES

1. Use the capital losses

“Capital losses die when you do, so use them while you are still breathing as they are not transferable or assignable,” says Darren Johns. But how to do so? Some of the options below could help.

Some planners are not comfortable with the margin loan. “A margin loan becomes dangerous if he feels that he is getting a little too old to properly manage his portfolio,” says Paul Moran. “He should have instructions with someone to liquidate if he becomes ill or incapacitated. I’m not sure that having a margin loan is a really efficient means of managing tax. Gearing should primarily be for the benefit of capital growth.”

2. Use super

“To reduce income tax, you could use super as an investment vehicle,” says Johns. For someone like Bob, a self-managed super fund seems the natural approach: transferring his personally owned shares into the fund could be done with minimal, if any, capital gains tax payable, and could be a method of using up the capital loss he’s been carrying forward. “The benefits of doing so would be the dividend income received would be tax-free within the fund, assuming they start pensions, and withdrawls or pensions paid are not taxed in their name,” he says. Johns also says doing so could remove the need to have a margin loan at such a level – if at all – and that Bob would retain ownership and control of the shares. He suggests Bob and his wife transfer $150,000 each per financial year up to the age of 75, reaching $900,000 in total over three years. “The potential downside is an increase in accounting costs and complexity of financial affairs.”

3. Diversify.

“One problem is he has a badly skewed portfolio,” says Sergio Arcaini, who also wonders whether the stocks in his portfolio still fit the same rules that made him so successful in the first place. “He could monetize some of his shareholding and diversify through ETFs or other shares; because of the strength of the Australian dollar, he could look at some international shares; he could consider some listed property investments. You do require a mix of asset classes in your portfolios to be properly diversified. That, in the long term, is going to determine the results you are going to achieve.”

Andrew Buchan notes: “On first glance Bob looks to be sitting pretty. However, the share portfolio is very concentrated.” After looking at the portfolio, Buchan calculates that almost half Bob’s share exposure is in Telstra. “A direct share portfolio should have 12 to 16 stocks equally weighted across six to eight sectors, ideally with two stocks in each sector.” He recommends an exchange-traded fund at the core of the portfolio. And like other planners, he thinks using a margin loan for tax purposes is a mistake when superannuation is still an option for him up to age 75 provided he continues to meet the work test stipulations involved in super.

Apart from being heavy on shares, the portfolio is heavy on very few shares. “I understand his approach to share selection but I am staggered that there are not more shares in his portfolio if this is the way he manages,” says Moran. “He might consider an index fund as a core holding and then manage the satellite holdings.” Moran puzzles over some of Bob’s conclusions too. “Bob mentions a tax free income of $200,000, but this is only really possible if the shares are split with his wife. In effect, he has a tax paid income by using the imputation credits and the interest expense. In super, this imputation credit would be refunded, thus increasing his actual income.”

4. Decide what you want

“You have a successful career and you are financially secure,” says Johns. “What next? Have a think about what else you want to do with your time on Earth. Sing a song, write a book, climb Everest, build a hospital in Ethiopia? You need a ‘next’.”

Some planners struggled with knowing how to advise him for this reason: he has more money than he needs, but not an obvious goal. “Unless you know what it is he wants to achieve, and what his goals and aspirations are, how can you really advise him?” says Arcaini. “All allocations and advice are determined by the long term goals and expectations of the client.”

For Andrew  Buchan, what’s missing is detail about wills, inheritance plans and enduring powers of attorney. “In fact, I think Bob needs an estate plan rather than a financial plan.”

5. For retirees who aren’t like Bob…

Most retirees don’t have a $3 million share portfolio, and for them, the issues they bring to planners can be more mundane. Julie Berry says she often meets people for the first time when they are well into retirement. “If you get to retirement and you haven’t sought advice, the world hasn’t ended yet,” she says. “I often get people who have pulled their super out because they haven’t got advice. I strongly say: Get advice before you pull your super out, because once it’s out, if you’ve got a bit too old, you can’t put it back in. If you’re not happy with your situation don’t make any changes until you get advice and know what your options are. “

One of the first things she tends to discuss with retirees is the future of their wealth. “Estate planning is an issue I come across: people who’ve got a will but haven’t thought it through. Is there someone who might challenge a will?”

This doesn’t affect Bob, but Berry also highlights an issue that often arises when someone is moving into a retirement village and thinks they have to sell their home for tax reasons. They don’t. “Please don’t rush off and sell your home. You can rent it out and not be assessed by Centrelink, including the income. It’s such a stress for the family thinking they’ve got to rush around and sell their home, and they don’t have to.”