Restructuring inefficient debt to tax effective debt
Growing a suitable long-term investment portfolio can be difficult when you have a home mortgage and a young family. Planning is required to optimise surplus cashflow in a way that is suitable for your personal needs and investment risk profile. For some people, it may be appropriate to use surplus cashflow to repay inefficient debt, whereas other people benefit from a combination of repaying inefficient debt and gradually investing further funds into an investment portfolio via the use of an efficient investment loan. Bob (36) and Jane (36) needed advice for the best use for their surplus cashflow. They also wanted to know how to maximise their wealth accumulation for their future retirement and address the risks that could affect the achievement of their wealth accumulation goals.
About Bob and Jane
Bob and Jane have one young child, with Jane pregnant with their second. Their goals included funding the cost of private secondary schooling for their children, as well as their home renovation costs and travel expenditure. Bob and Jane are ‘aggressive’ investors with a long-term investment timeframe and the ability to tolerate investment volatility. They are already experienced with the concept of gearing, with investment properties that were partly funded by investment loans.
Our Advice
We recommended that Bob and Jane direct all income into an Offset Account against their home to reduce the interest costs on their home loan and to build a cash reserve to meet the costs associated with the care of their second child. We discussed the concept of debt recycling with Bob and Jane who agreed to proceed with this strategy including regular monthly investments into a highly diversified managed funds share portfolio.
It was also important to continue to build their wealth in the tax effective structure of superannuation, so we maximised their pre tax or Concessional Contributions to superannuation within their annual limits. While Bob and Jane continue to work, they will generate sufficient income to fund their living expenses and accumulate wealth to the extent that they require for their planned retirement. However, all this could change in the event of a potential illness, injury or death. As such, sufficient levels of Life, Total and Permanent Disability (TPD), Trauma and Income Protection insurance cover were recommended to protect them against these financial risks. We also considered the optimal structures to hold these policies from a tax and other perspective.
Finally, a comprehensive review of their estate planning situation was suggested to provide funds at appropriate times to their children, should Bob and Jane pass away. We coordinated a discussion with a specialist estate planner to help them implement these considerations.
Their Roadmap
By engaging Strategic Wealth to conduct a comprehensive review of their situation and provide suitable financial advice, Bob and Jane benefited from a clearly documented and informed roadmap to use their surplus cashflow in the structures appropriate for their needs. They have a clearly defined debt repayment program and wealth accumulation programs via gearing and superannuation. Importantly, they also have peace of mind that they can afford to take a year off work following the birth of their second child.
Bob and Jane are confident that they are on track to meet their planned expenses and future retirement goals and that they can offset the financial risks associated with illness, injury or death that could otherwise harm their ability to meet these goals. We continue to work with Bob and Jane on a regular basis to determine the impacts of their wealth accumulation and protection strategies on their changing family circumstances.
