How do I stay on track?

Background

Bonnie (46) is a single professional lady with no dependents and works as an accountant in a large PLC on a basic salary of €100,000. She is also in receipt of a performance related bonus which has averaged €30,000 over the last four years. She estimates the current market value of her home to be in the region of €300,000 and she has an outstanding tracker mortgage of €190,000 registered against same with 15 years remaining to expiry. Her income exceeds her expenditures and she freely admits that she could be more efficient with her surplus income.

Based on current legislation, she should qualify for the full state pension from age 68. Being single, she is concerned about her situation should she be unable to work through sickness or disability. She also would like to know if she will have enough to live on in her retirement.

Bonnie has been a fee based client for a number of years and pays for our services by way of a monthly direct debit.

From our initial financial review she acknowledged that her biggest asset was in fact herself which we often refer to as human capital. We clarified that she had the following existing benefits through her employment:

A death in service benefit of four times salary paid to her estate should she die whilst in employment.
An income continuance benefit whereby she will receive 6 months full basic salary from her employer should she be unable to work through sickness or disability. Thereafter reducing to 50% of basic salary funded from an income protection insurance policy.
A member of the company defined contribution pension scheme where both the employer and employee contribute 5% of basic salary.
A medical insurance benefit underwritten by VHI.

Financial Planning Strategies Implemented to date

Since working with Bonnie, we implemented the following strategies:

Effected a personal annual income protection policy for €37Kwith a 26 week deferral period. This was to bridge the gap between the 50% of basic salary and the maximum permitted being 75% of total taxable salary less the state disability.
Given that Bonnie has mortgage protection and four times salary life cover with no financial dependents, we advised that she does not require any additional life cover. However we recommended she restructure the mortgage protection to include specified illness cover whereby a lump sum will be paid to discharge the debt in the event of her being diagnosed with a qualifying specified illness.
Bonnie has built up an emergency fund through savings equating to 50% of her net annual expenditures. The emergency fund is placed on a demand deposit account so she has instant access to money should the need arise.

Having secured Bonnies immediate personal position we then recommended medium to long term strategies to enhance her asset based to provide her with sufficient income in retirement. This included:

Maximising her pension funding scope by making an additional voluntary contribution within the age related factors. After deducting her 5% employee contribution, this equated to a further 20% of her taxable salary subject to the salary cap of €115,000. She is using her annual bonus to part subsidise these contributions.
Effecting a personal savings plan investing a monthly premium in a portfolio that was appropriate for her risk strategy and lifestyle objectives.
Rebalancing all existing lump sum investments annually to ensure the investment strategies remains appropriate for her risk and lifestyle objectives

Ongoing Review Process

On an ongoing basis we review all of Bonnie’s financial holdings to achieve the optimum long-term outcomes in the context of her goals, objectives and risk profile which can change over time.

This process provides her with a clear overview of her financial world thereby allowing her to make smarter and informed financial decisions which can be adapted to reflect changing circumstances. Our job is to ensure this analysis is laid out in an easy-to-digest manner, to help declutter her mind and commit to a programme of good financial habits.

We have created key performance indicators (KPI) which we monitor periodically. As we analyse this data over time, it enables us maintain the effectiveness of the plan but also helps us to identify risks which could potentially affect the success of same which we can then respond especially as her longer term planning needs emerge and become more evident.

Our review meetings involve the following:

Discuss any changes in Bonnie’s circumstances since the last review and adjust accordingly.
Outline our key performance indicators and discuss the effectiveness of each strategy employed making adjustments if appropriate.
Review effectiveness of all investment/pension strategies and rebalance asset allocations if necessary.
Ensure tax efficiencies are maintained.
Ensure any deposit / investment maturities are re-invested appropriately.
Ensure life-long cash flows are reviewed applying various ‘what if’ scenarios to test the robustness of the plan.

The graph below provides illustrates some of the key performance indicators we compare and monitor.

BALANCE SHEET

Financial Planning Outcomes

Bonnie has now achieved the following outcomes:

She has sufficient income protection and specified illness to ensure her cash flows are not negatively impacted in the event of being unable to work through sickness or disability.
She has money on instant access and therefore does not need to liquidate her longer term investments in the event of an emergency thereby allowing her to remain committed to her longer term investment strategy.
She is investing an element of her surplus income into a personal savings scheme to help finance her future lifestyle costs by enhancing her asset base.
She is maximising her scope for pension funding using her bonus to subsidise the costs.

As a consequence of structuring her own financial plan, Bonnie tells us that she now feels in control of her own destiny and in turn this has provided her with a peace of mind around her future. She is confident that her cash flows are not just sufficient to meet her current lifestyle today but also in retirement and in the event of catastrophe.

Having embarked on this financial planning journey, it has enabled Bonnie to enhance her life experiences and convert her current and future financial resources into the most important currency of all. Choices.