Case study- single professional woman, finalising her divorce
From time to time I see people during a really difficult time in their lives. It’s just a part of life. Relationships sometimes end and it is often a catalyst for some people to seek financial advice as it can be a really different financial landscape than what they are used to.Just under a year ago I met with Bianca who is a 35 year old engineer. She had just finalised a divorce and subsequently split assets (including super assets) and had no idea what she needed to do.
After the divorce, the couple had sold their family home, paid off any loans and Bianca was left with $65,000 in cash. She had her own superannuation fund, but as she took a couple of years off work during her career to have a child, she was expecting a payment from her husband’s superannuation fund. She had no idea what that even meant, and whether she could just have that money directly instead of putting it in her super fund.
Bianca had custody of her daughter Bella during the week and her ex-husband spent time with her every second weekend. As part of the divorce settlement, Bianca was entitled to some child support from her ex-husband. She had recently moved into a rental unit but really wanted to buy a townhouse for her and her daughter to live in.
During our initial discussions I had to uncover all of the financial information and assess what she had, outline the areas of risk and define her overall goals. As part of this we agreed that I would assess her superannuation fund, any insurance gaps she had for herself and her daughter, the best way to manage her cash now that she is a single income earner, and put in place some plans for the $65,000 she had in cash. We also needed to address estate planning as part of this to ensure that if anything should happen to her, her wishes were carried out.
- The first thing I did was assess her superannuation fund including the investment, fees and set up and outlined the rules around the transfer she was getting from her husband. Her super fund was a good fund, however the investments hadn’t been assessed or changed it quite some time and I had concerns over whether they actually suited Bianca as an investor. We retained her super fund but changed the investments within the fund to suit her time frame and situation. As part of this, we also needed to change her binding death nomination as that was set up to go directly to her ex-husband. We wanted this to form part of her Will which we facilitated with a lawyer for her, so we established the nomination to go directly to her estate.
- We discussed the super payment Bianca was set to receive from her ex-husband. There are certain rules around these kind of things and unfortunately Bianca could not have the money directly, it must be transferred into her super account. The benefit of this, is that she gets an extra lump sum to go towards her retirement investments. We made sure that the lump sum transfer was also invested as per our research and recommendations, and let her know once the transfer had occurred and settled.
- We also did some future planning to see how she was tracking for retirement. Based on her expenses and how much money she wanted to have, we needed to aim for a super balance at retirement of about $890,000. In order to get that (and taking into account her insurance recommendations discussed below) we recommended that she salary sacrificed 4% of her income into her super fund. This will ensure that her insurance premiums are covered, her super balance is increasing steadily and we reduce the tax that she pays. Win/win/win
- We had a look at her insurances, which are even more important now that she is the sole carer for Bella. Bianca had a very low level of life insurance only as they always just had life insurance on her husband in the past. Given that she relies on her income and supports her daughter, it was very important to put in place some insurance asap. We applied for income protection to provide income for her if she can’t work due to illness or injury.. We also applied for Life and Total and Permanent Disability Insurance. The life insurance is enough to support her daughter Bella to be cared for until she turns 21. It was really important to her to make sure her daughter would be financially OK. Her disability insurance factored in looking after her daughter as well as some extra to cover medical expenses that may occur. As part of the insurance recommendations, we also put in place child’s trauma for Bella for $100,000. This is a policy that can be attached to the side of Bianca’s policy and covers Bella for a list of different critical illnesses like Leukemia. It was really important to Bianca to ensure that if something happens to Bella, she could take time off work to look after her and pay for medical treatment. We set up some of this insurance to be paid for from her superannuation fund and the rest to be funded from her pay so that it didn’t effect her take home pay too much.
- Now that we knew her insurance and super were taken care of, we discussed ways for her to manage her cashflow going forward, taking into account all of the new and different expenses. We worked through this to ensure that she could comfortably manage her current expenses, and project into the future to determine the best time for her to purchase her townhouse. Because Bianca has $65k in cash, she has a pretty good head start on a deposit for her townhouse. In order to make sure she can comfortably meet all of her expenses and a new home, we projected that if she saves her excess income for the next 12 months which should give her an extra $15,000, she should be able to comfortably purchase a townhouse for $400,000 as per her wishes and meet all of her expenses. We set up her budget to automatically save for her house and save for her day to day expenses, so that we when met up for her review in 12 months-time, we knew she would have the money available to buy a house.
- Because we know that we needed the money in 12 months, we didn’t invest the funds in shares or managed funds. We set up a high interest bank account that wasn’t attached to her eftpos card to keep the money aside for when she needed it. Investing for such a short period just doesn’t make sense as the chance of fluctuations is quite high, so it’s best to keep this in cash for the moment.
- Estate planning is really important for Bianca especially when taking into account her daughter and ex-husband. We referred her onto an estate planning solicitor that we work with to ensure that her Will and Power of Attorney were solid. We worked with the solicitor to ensure that it reflected her wishes on the financial side of things and included the insurances and superannuation that we had set up.
This was a really tough time for Bianca, so she was pretty happy that we were there to make all of the above happen for her, so that she knew she would be financially ok. Now that everything is set up, I manage and monitor her overall strategy and superannuation investments ongoing. Bianca keeps me up to date with her income which does fluctuate when taking into account the child support benefits and we ensure that she is tracking to buy a townhouse in 12 months.
When her annual review is due, we will meet up, complete a full review, and help her through the process of buying a townhouse. We will work with our preferred partners to secure her a home loan and get her set up. Then we will rework her budget and money management system to take into account the new house and expenses to ensure she can manage effectively going forward.
As always, Bianca can call me throughout the year if she ever needs help or guidance with her finances, I am always there to help. She pays me a monthly fee to manage her finances, most of which is paid for out of her superannuation fund so that it doesn’t affect her cashflow.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.
All names and details have been changed for privacy reasons