Young Family's Target: Millions

Personal Investment

Sunday December 1, 1996

by Maureen Murrill

If you did a quick survey of couples in their mid-20s to find out what they were doing with their money, you could almost bet the bank on the fact that setting up a retirement plan would not be top of the pops.

A lot of young marrieds would be struggling to save a deposit for a house or to meet the monthly mortgage payments. The young professionals with dual incomes would probably be spending most of their disposable income on entertainment, travel and conspicuous trappings to consolidate their status, content knowing they have plenty of time to be prudent.

But, as our story this month shows, not everyone can be pigeonholed so simply. Peter Randall, 26, and his wife Leigh-Anne 30, have two children, three and eight months. Ostensibly they have one income; $35,000 Peter earns as an army corporal in the administration branch, based in Townsville. Leigh-Anne does a few hours' part-time work each week but her income is not taken into account in the family finances.

Lots of young couples fit this mould. They would laugh at the thought of investment opportunities - there just wouldn't be anything left to invest! But the Randalls estimate they can save $650 a month.

There's a little more to the Randalls' circumstances than first meets the eye. About 18 months ago Leigh-Ann inherited a property in New Zealand currently worth about $NZ100,000. The house belonged to her parents. For that reason she is loath to sell it. It is rented, earning the couple $A450 a month.

The other advantage the couple has is that, while they don't own their own home, they live in an army house that costs just $85 a week. That's a pretty good deal. But there's a drawback: most young couples want their own home, and the Randalls are no different. But if they bought one in the Townsville area, they would have to live in it now and lose their army accommodation. They are not allowed to own a property in the vicinity and rent it. Just about any local property would cost them double, if not triple, the rent they pay.

The Randalls have savings of about $14,000. Leigh-Anne has blue chip shares worth about $7000 and they own their own car worth about $8000. They are not huge credit cards users and have no debt to speak of. They have no huge expenses on the horizon, but would like to think that when their daughters are ready to begin secondary education they could afford to pay for it.

Peter sees his long-term career in the army although, he is unlikely to stay at one location for the whole of his service.

The Randalls' long-term plan contains a couple of priorities; they want to be able to buy a home for their retirement and they want to have a reasonably comfortable lifestyle when they stop work.

They are not overwhelmed by the hype that surrounds superannuation these days. This is understandable: a couple of their age are conditioned to the fact that super is taken from their pay each week as a matter of course, and Peter probably started contributing from his first pay packet, unlike the generation before him.

Their first investment preference was property. They felt sure someone would loan them money to buy a property in Australia against the security of their New Zealand house. However, trans-Tasman residential investment loans are not easy to arrange, as they have found out.

They have already been to see a couple of investment advisers and, while they haven't yet touched on a plan they feel really comfortable with, the overwhelming advice seems to be that they should stay in the army housing, forget property at this stage and concentrate more on a savings plan underpinned by share market investments.

They have also been teased by the prospect of negatively gearing a share portfolio and arranging their tax to get the gearing component benefit as a cut in weekly tax payments, effectively increasing their cash flow.

Personal Investment took the Randalls' situation to Bernie Walshe, principal of the Melbourne financial planning group, Cameron Walshe. We intentionally stayed away from advisers in and around Townsville because the situation probably needed an injection of advice based strictly on the fundamentals, without any local factors intruding.

Walshe is not steering the Randalls in the direction of property. He prefers a regular savings plan and the use of endowment warrants (see 'Endowment warrants' above right). At this stage he doesn't think the couple is in a sound enough position to think about negatively gearing shares.

Walshe says the NZ property is a prime asset that will rise in value, although low inflation means growth will be slower than many have been used to. But he says the rent Leigh-Ann receives is a resource that can be used for further investment in Australia. Should she decide to sell the NZ property, the family situation would have to be reviewed.

Walshe says that because the family has no liabilities, they obviously have a disciplined approach to money. On this basis he says it is possible to invest in a negative gearing scheme - buying shares with borrowed money and claiming the interest as a tax deduction - to accelerate the rate of growth and provide some tax relief.

But Walshe says that, to be realistic, the capital for such a scheme is lacking and it could put unnecessary pressure on family finances at this stage.

Walshe says the important asset is the amount of saving available. Because Peter and Leigh-Anne are only young, they can take a long-term view of investment.

He agrees with the Randalls that compulsory superannuation should provide for their basic needs in retirement but that they will need significant extra capital to achieve their goals.

Walshe favors a savings plan for the couple, beginning with $2000, then $300 a month, indexed for inflation, with dividends reinvested each year. The investment should be in joint names, partly for tax reasons. As a guide, Walshe says that if such a plan earned 8 per cent a year, assuming a 3 per cent entry cost, a 1.5 per cent fee and inflation at 4 per cent, the investment in five years would be worth $30,960 - $25,450 in today's dollars. At the end of 30 years, a reasonable scenario in the Randalls' case, the savings plan would have a capital value of $2.3 million. To put a realistic face on the investment, Walshe says the multi-million next egg is about the equivalent of $709,000 in today's dollars. Still a tidy sum.

To help build a fund for the children's education, Walshe recommends the couple put $5000 into endowment warrants that will be converted into fully paid shares in 10 years.

One advantage of the warrants is that no tax is paid during the repayment years and no deductions can be made. However, the investment will be liable for capital gains tax when the shares are sold.

After these outlays, Walshe says about $7000 is available for investment, plus $350 a month income. He would keep the $7000 in an easy-access account for emergencies and unplanned expenditure.

He recommends the Randalls accumulate the lazy $350 a month until they have a big enough sum to consider buying more investment warrants.

Endowment warrants

Endowment warrants is a method of buying shares, similar to a lay-by arrangement, Australians use to buy goods. Investors put up between 30 to 65 per cent of the value of the shares they want to buy and the balance is paid off using dividends paid by the companies.

The investor in the meantime pays interest on the difference between the share price and the warrant price. If the dividends received over the life of the warrant are not enough to make up the difference, the investors can make up the shortfall or sell the warrant in the market.

Personal Investment chooses one family, or individual, each month, for personal consultation with an adviser. We require a letter, with a business-hours telephone number, that outlines your circumstances, your aspirations and basic financial plan. Exact financial details do not need to be published, but hurry, as all requests cannot be met. Send your letters to:

'One family's finances's,

c/- Personal Investment,

GPO Box 55A, Melbourne, 3001.

© 1996 Personal Investment

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