Andy and Bev Brown
Andy and Bev are “empty nesters” as both children have left home. Andy and Bev both work. Andy is a teacher, like his father. Bev is a legal executive, for a local law firm.
They have assisted their children with gaining university qualifications, so haven’t saved much for retirement, which is worrying them. They have a house valued at $600,000 but with a mortgage of $400,000.
They have term life insurance of $450,000 on Fred’s life, which was a condition of getting the mortgage. There is a small term life insurance policy on Bev, but only for $50,000. They do have medical insurance, though both have been healthy.
Andy and Bev have up-to-date wills, having revised them a few months ago. They were recommended to take Enduring Powers of Attorney at the time, but didn’t finish this as they would have had to make another appointment with someone independent, since this was a requirement of a law change. They intended to do this, but haven’t got around to it.
Unlike Fred, Andy does not have work-based superannuation, as it was regarded as too expensive when they were in their 20s and struggling to bring up a young family. They regret that decision now and are concerned about saving for retirement.
With the cold winter they have just experienced, Andy and Bev are hankering for a Pacific Islands holiday, but wonder if this is the right thing to do.
Issues for the family
The following section sets out some of the main issues for each of the families that would need to be discussed with a financial adviser and some of the possible solutions or options to be considered. Specific solutions would require much more detailed knowledge of each family’s finances as well as discussions about their goals and priorities. Even so, this shows just how many issues there are to be considered and where the advice of experts may be helpful.In contrast to Fred and Edith, Andy did not stay in the teacher’s superannuation scheme. This means that Andy and Bev do not have a base for their retirement savings, so need to work hard over the next 15 years to make up for this.
They are in a fairly typical situation of the mortgaged majority, with a home but not much else. So what goals might be appropriate for them?
- To reduce/repay our debt.
- To build a retirement nest egg from our combined incomes sufficient to provide us with financial independence over our retirement years.
- To protect our assets for the use and enjoyment of both ourselves and our family as a whole.
They also have a short term goal of a Pacific Island holiday, but this needs to be considered as competing with their long term goals, which may require less spending.
To be able to repay their mortgage and begin saving for retirement, they need to have a surplus over their day-to-day living costs. So, an annual budget is the start point. This should include provision for holidays, so the Pacific Islands dream might fit within the budget – but might also mean there has to be savings elsewhere.
So what are some of the options that Andy and Bev might consider?
- Setting a budget that generates a surplus has to be the top priority.
- Create an emergency fund of liquid investments, in case there is a short term problem.
- Consider their house and whether as “empty-nesters” they could sell and purchase a smaller home at lower cost. This might reduce their mortgage.
- Another alternative might be to take in a border – though this might not suit their lifestyle – but would help pay the mortgage off.
- Increase the rate of repayment of their mortgage.
- Work out what they would expect to need for retirement living costs and use this to develop a long term savings plan.
- Commence retirement savings.
- Andy could consider joining the teacher’s superannuation scheme to get the employer subsidy.
- Both could join Kiwisaver to gain the benefits of employer and government subsidy. (Note: Andy can get only one subsidy.)
In terms of the mortgage, Andy and Bev will need to consider the best approach to lowering interest costs and making early repayments. If they feel comfortable that they could stick to a spending budget, revolving credit might be good. If they prefer an external discipline, then they would need to look at fixed or floating interest rates. A mixture might be a good approach, with the ability to make early repayments without penalty against the floating portion.
In terms of the “what ifs”, like many Kiwis, Andy and Bev need to give more attention to this. Some of the tings to consider include:
- Income protection insurance since their income is their greatest asset.
- More life insurance as a protection against early death of one of them, so that the survivor has adequate capital for their retirement.
- Life insurance, including the existing policy covering the mortgage, should be trauma insurance policies, rather than term life, since these pay out if someone has a major illness, allowing them to make choices while alive.
- Ownership of the life insurance policies needs to be considered, as each one might be best to own the insurance on the other, so that it bypasses any estate.
- Though they have medical insurance, there are many choices for cover so a review might be worthwhile.
- General insurance will also be worth reviewing to make sure that their policies are adequate, e.g. covering replacement of the home.
- In terms of estate planning, they need to get organised with completing their Enduring Power of Attorneys.
The greatest challenge for Andy and Bev will be balancing spending now against a future comfortable retirement.
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