Case Study 2 – The 57 Year Old Family Man

Dr Bill has worked hard over 25 years in practice, is a little weary and adamant that he will as least reduce his hours in the near future. Locum work may will eventuate once his practice is sold at age 60, although income from this source is uncertain. 

After a successful career Dr Bill has a good portfolio of assets: 

  • 1/3rd share of medical chambers     $300,000 
  • KiwiSaver account (self employed minimum contribution) $120,000 
  • NZ/Aust share based portfolio $400,000 
  • Estimated Practice sale $150,000
  • Rental Property (Levin) debt free $370,000
  • Bank account $50,000
  • Family Home Auckland (they will sell down to raise $500,000) $2,500,000 

Dr Bill is well aware his assets are significant although has no idea how to optimally structure these to cover his retirement. This, unsurprisingly, is a common issue for professionals with expertise in other sciences. 

Bill’s inkling is that he and his already retired wife Betty would like to pay their 2 children’s student loans of $70,000 each upon retirement, but again cannot assess whether this is possible or not in terms of affecting his retirement plans.

Bill and Betty agree that 70% of current income through 25 years of retirement income will suffice their needs.  So what are the tell tales that Bill and Betty must consider? 

The first and foremost is that with their principal income years behind them, they must consider the “risk” involved with their current investments. At any stage in the investment cycle, protecting against negative events is critical but no more so than the years leading to retirement. 

On this basis a red flag is raised surrounding the Australasian share portfolio. While it has been a fantastically successful asset in the last decade (return), given Australasia comprises less than 2% of the world economy, is it sufficiently diversified to maintain a core position in their next 25 years of requirements (risk)? All too often we see analysis completed on the basis of return with scant attention paid to the much more important effect of risk. 

Is the share portfolio also too growth focussed or does it hold more defensive bonds and fixed interest. How is KiwiSaver invested? 

Liquidity 

With approximately 50% of financial assets held in property, does this provide sufficient ease of availability to meet their retirement objectives? Are the rental yields attractive against other forms of more liquid investment? 

Longevity of investments 

Will these investments be sufficiently robust to last the 25 years of retirement expectations? 

Taxation 

Maximise taxation concessions should these be available. 

The Financial Planner’s Advice (again)! 

Risk  

Bill’s KiwiSaver account can be held through the retirement years but should reflect his age and stage and with retirement in 3 years, be held in a platform that will provide reasonable growth but not be overly aggressive. As a guide, we would suggest 27% in income assets with the balance in well balanced growth holding. We would look to review this on an annual basis with the inclination to reduce emphasis on growth with age. 

We would recommend rebalancing the (acknowledged well performing) Australasian portfolio to a true internationally diversified asset base accepting the future returns may be lower albeit risk greatly reduced. Over the long term reduced risk will see outperformance although this may not be evident in good market periods. 

It is well to remember that that the most important determinant of wealth sustainability is asset allocation and in fact manager performance is in distant second place. 

Income 

We would ensure that 5 years of Bill’s anticipated income needs are held in safe/defensive /liquid assets that are likely to be able to sustain through any investment storm. The rest of the portfolio could then be invested in a diversified manner according to Bill and Betty’s agreed risk profile. 

Liquidity 

Measure the rental yield and property growth estimates against projections from a diversified portfolio of investments. We often see neutral outcomes in this exercise which may suggest some or all of the property assets could be realised and applied to the portfolio to ease “management issues”, single property risk and ensure funds are readily available if required. 

Taxation Concessions 

Investments should be ideally structured as Portfolio Investment Entities (PIEs). PIEs are incredibly tax efficient with almost all expenses and in many cases periods of loss, offset by the portfolio manager against tax to pay. In addition the top marginal tax applied to a PIE is 28% as opposed to 33% if personally held. Over many years of a retirement timeframe, this may have a significantly positive effect on portfolio longevity. 

Calculations 

We would be able to deliver projections that show Dr Bill and Betty are in a position to retire at age 60 and maintain their anticipated drawdowns to age 86 (if they allow that NZ Superannuation will contribute to this income requirement).  If they choose to pay their children’s student loans it is possible that their portfolio may only last until age 81 and of course this is a decision that can then be made with clarity and if a pressing requirement, may mean that a lower income level is chosen. 

Last it should be possible to dig deep as you measure risk and for instance, the effect of an event such as the calamitous Global Financial Crisis of 2008. How would this effect Dr Bill and Betty if it was to manifest early in retirement. Is the investment risk therefore in need of adjustment or as a retired couple, would they be comfortable weathering the storm knowing 5 years of income are in safe houses? 

Monitor and Measure 

No one is able to tell what is ahead in terms of investment market cycles albeit may so called experts claim they have the answers with doom merchants and soothsayers littering the financial pages. With uncertainty always prevalent it is crucial to measure on a regular basis Bill and Betty’s actual outcomes against the projections which are the basis of their retirement plan. In this way, adjustments to a retirement strategy should be able to be made in a timely and disciplined manner.