Case Study 1 – The 35 Year old Doctor

For this young lady, her focus in an otherwise very busy life, is organising her finances to meet her objectives in as simple manner as possible.  

Karen as a GP employee, earns income of $170,000 and with the help of her parents she has purchased her home, although carries mortgage and family debt of $650,000 which she is paying at the rate of $2,000 per fortnight. At current interest rates Karen will have this debt repaid in 18 years. 

Karen is aware of the pitfall that many high income earners fall into of concentrating all resources on repaying home debt. This is effectively transferring all near term wealth accumulation into a lifestyle asset that she always will seek to retain ie own a freehold home. Furthermore Karen has seen many of her colleagues successfully clear their mortgages, only to be enticed into purchasing somewhere bigger and better and so start the debt cycle once again. She appreciates that balance between lifestyle and financial in building assets is important. 

Her KiwiSaver stands at $97,000 and Karen is matching her employer contribution of 3%. As an unsophisticated investor she is in a Conservative account and hasn’t taken advice on her options. 

First Step – Clarity 

To build clarity, Karen first needs to identify a goal to base her financial accumulations around. This is not always easy to do, although future retirement is often a meaningful “target”. Once the target is established, it is then possible to monetise. Karen wishes to be in a position to retire at age 62 should she choose and agrees with the Retirement Commissioners guideline that she wants 70% of her income to be available through (hopefully) 30 golden years. With the “target identified” we are able to assess that bottom line her objectives require amassing a daunting $3.6m of assets beyond the home she will live in! 

Dimishing the Panic 

Just as a medical diagnosis requires scientific application and reasoned consideration, a financial forecast needs discipline and process in identifying and of course, meeting.  

Karen’s KiwiSaver is projected to have a value of $770,000 at age 62. However were she to take a more balanced investment approach (higher weighting to growth), with 27 years of future saving in front of her this balance could rise to $1.4m. Equally by increasing her personal contribution to an affordable 6% as opposed to the current 3%, a further $400,000 is added. KiwiSaver at age 62 is now estimated at $1.8m! 

Karen’s mortgage and loans will be fully repaid at her age 53. If Karen makes a (voluntary) pledge to apply (say) 50% of her annual mortgage commitments to a retirement fund from age 53 until retirement at age 62, this would deliver approximately $270,000 to her available funding. 

With surplus daily income available at this time, Karen can commence savings to an appropriately diversified investment portfolio. Willing to commence at $1,000 per fortnight (and reassess as needs be), such savings are expected to build to an impressive $1.6m at age 62. While retirement focused the savings portfolio should be liquid and able to be accessed should necessity demand. Equally an in depth analysis of the risks of the investment should be undertaken and the downside, as well as (the more often discussed) upside numerically understood. The most likely successful investor is one that is able to stay the course with confidence in varying market conditions. 

Importantly, and a fact often overlooked by those with pre 65 retirement ambitions, is that the “mortgage” pledge and savings portfolio easily cover the gap between age 62 and age 65 when Karen’s principal asset of KiwiSaver is still locked and unavailable for retirement support. 

With salaried income of over $4.0m due between Karen’s age now and retirement, Karen agrees this income must be protected by appropriate insurance. Her financial future is dependent upon this and no right person would contemplate not holding insurance on a $4.0m asset…..would they? 

Has Karen Reached her Retirement target? 

A Financial Planners Sales Pitch

Life does not often progress smoothly or in a straight line. A financial plan needs constant monitoring, measuring that projected outcomes are on target and adjustments considered as events and circumstances unfold. If your investment strategy is not aligned to your goals and assessed accordingly, future outcomes at best revolve around luck.