Australia

Debt Recycling

Case Study

You are a financial planner who is required to present a Statement of Advice to the following clients, Franca and Carlos Pound who are 58 years and 60 years respectively.

About their family

Franca and Carlos have 3 children; Bianca, Peter and Tania who are 31, 29 and 27 respectively. Tania, the youngest child still lives at home with Carlos and Franca and doesn't pay any board. She has recently completed post graduate studies in psychology and has been saving up for a deposit on her first house with her parent's blessing. Tania plans to purchase her first home in the near future, as long as she can find the right house. She will move out of the family home once this has been achieved. Carlos and Franca's other two children are both financially independent and have left the "family nest".Bianca, the oldest child is married to Mathew and is also 5 months pregnant with their first child (and Franca and Carlos's first grandchild). Bianca is a secondary school teacher and Mathew (her husband) is in IT support. Peter, the middle child works as a manager of a restaurant, and is single.

Their financial situation

Franca works part-time earning $53,000 before tax as a speech pathologist and Carlos works as a construction project manager earning $98,000 before tax. They estimate at the moment they are able to save approximately $2,900 per month since their eldest two children left home. They believe once Tania leaves home this cashflow saving amount will increase to $3,700 per month. They anticipate this will occur within the next 12 months.

Franca and Carlos own their own home in joint names. They believe their home is worth conservatively $625,000. They still have a mortgage of $67,000 with NAB. The loan is a principal and interest loan, with a variable interest rate of 5%.

They own some direct shares in joint names which they purchased via various initial public offerings and de-mutualisations (e.g. AMP) over the past 20 years. The shares they own are CBA, Qantas, AMP, and Telstra. Combined, the shares are worth $75,000 based on current market values. The gross unrealised capital gain across all shareholdings (if the shares were to be sold) is approximately $46,000. The break-up of their direct shares is below:

Today's Market ValuePurchase Value

CBA$30,500$4,500

Qantas$7,500 $5,500

AMP$22,600 $5,500

Telstra$14,400 $13,500

Franca and Carlos want to retire when Carlos reaches age 65 - in 5 years' time. They currently have their superannuation monies in XYZ Superannuation and ABC Superannuation. Their balances are as follows:

Carlos - $421,500 (XYZ Superannuation Fund)

Franca - $348,400 (ABC Superannuation Funds)

Based on the risk profile they have completed in your pre-appointment pack you sent them prior to your first appointment, Carlos and Franca have indicated they are 'moderately conservative' investors with respect to their superannuation monies. The five different risk profiles are provided below for your convenience.

Indicative Investor Risk Prole Conservative Moderately Conservative Balanced Growth assets in portfolio 0% 25% 10% 30% 25% 50% 45% 65% 75% 100% Income assets Description in portfolio 35% 55% You are a conservative investor who does not wish to take any investment risk. Your priorities are the safeguarding of your investment capital. You are prepared to sacrifice higher returns for peace of mind. You are a moderately conservative investor who is prepared to accept a small amount of risk. Your priority remains the preservation of capital over the medium to long term. You may have some understanding of investment markets; Myou cannot afford to take any chances with your capital. You are a balanced investor with some understanding of investment market behaviour and can accept some shgjetm risk to your capital. You do not wish to see all of your capital eroded by tax and inflation and are prepared to take a small Mam risk in order to gain longer term capital growth. You are an assertive investor who understands the movement of investment markets. You are most interested in maximising Mcapital growth, although you do not wish to make unbalanced investment decisions. You are happy to sacrifice short term safety in order to maximise long term capital growth. You are an aggressive investor. You are prepared to sacrifice your investment capital in pursuit of the highest m capital growth investment. You are most interested in reducing your taxable income and have an understanding of the behaviour of investment markets