Case Studies

The following case studies shows how we use Optimo Pathfinder to demonstrate real life situations and model the best options.

How long term projections can help clients prioritise their goals

When your clients have competing goals and not much cash to spare, the idea that “We cannot do everything at once, but we can do something at once” comes to mind. So, then the question is, how do we choose what to do at once, and what can wait until later? In this case study, we will show how comprehensive, long-term modelling can help clients prioritize their goals.

The clients

This case study has Andrew and Melissa, who are in their thirties, and their daughter, Charlotte, who is turning two. They have two high priority goals:

  • Save for Charlotte’s high school fees before she starts high school
  • Pay off their mortgage as soon as possible

Their current situation is:

  • Andrew has a salary of $110,000/year and Melissa has a salary of $40,000/year (before tax, not including super guarantee).
  • Their annual living expenses are $70,000/year (not including mortgage repayments)
  • Their assets are:
    • A family home with a $600,000 mortgage with a minimum annual repayment of $40,000/year
    • $10,000 in cash
    • Superannuation funds with $50,000 each

The modelling and results

Using Optimo Pathfinder’s holistic modelling, we did 20-year projections to work out an initial strategy for meeting their two high priority goals. The results did not have any cash flow shortfalls, which indicates that Andrew and Melissa can afford to follow this strategy.

The assumptions used in the following strategy were:

  • Their salaries increase by an AWOTE of 3%pa
  • All expenses are indexed by CPI 2.5%pa
  • Their home mortgage has an interest rate of 5%pa
  • They keep their $10,000 cash aside for emergencies
  • Andrew and Melissa do not want to consider other investments or making voluntary super contributions
  • The analysis starts from the start of the 2017/18 financial year
  • Earnings within the Insurance bonds are taxed at 30% and will not be added to their personal tax. Since Andrew’s marginal tax rate is 37% (plus Medicare levy) and Melissa’s is 32%, they will pay less tax with the insurance bond than in a cash account.
  • Andrew and Melissa will hold the bond for more than 10 years, and therefore can withdraw their investment tax-free.
  • It is consistent with their risk profile.
  • It will provide some discipline to their savings, since they want to have the amount fully saved before their daughter starts high school.

Goal One: Saving for their daughter’s high school fees

Since Charlotte, will be starting high school in twelve years’ time, we will assumed that an insurance bond would be a suitable product because:

We also assumed that:

  • The insurance bond has an after-tax return of 4%pa.
  • The high school fees are $15,000/year in today’s dollars and indexed by CPI (2.5%) from the first year of analysis. The schedule of school fees is in Table 1.

Table 1: Charlotte's school fees

Pathfinder was given the following modelling instructions:

  • Withdrawals from the insurance bond must be the same as the school fees, above.
  • Deposits are allowed from the first year of analysis until the year before Charlotte starts school.
  • Within the above restrictions, Pathfinder can calculate the schedule of deposits. By default, it will keep within the rule that a deposit cannot be more than 125% of the previous year’s deposit.

Based on these inputs, Pathfinder projected the following results:

  • • Initial deposit of $2,491 made in 2017/18
  • • In the 11th year of the analysis (2027/28), before Charlotte starts high school:
      • A final deposit of $17,075 is made
      • The highest projected balance of $111,462 is reached
  • • In the 17th year of the analysis (2033/34), in Charlotte’s last year of school
      • The largest withdrawal of $22,268 is made
      • The account is closed

The complete schedule of deposits is as follows:

Table 2: Schedule of deposits to the insurance bond

The above schedule gives Andrew and Melissa an idea of what is feasible within the assumptions.If they are not sure about the deposits – for example, they may think that the deposits are too skewed towards the later years – then they can consider changing their initial deposit or allowing deposits within a different year range. However, having an initial schedule will give them an anchor for exploring feasible options.

Goal two: Pay off home mortgage

Andrew and Melissa also said that they wanted to pay off their home mortgage as soon as possible.

In the modelling, we let Pathfinder work out the schedule of mortgage repayments.This means Pathfinder paid the required minimum repayment and then each year, decided whether or not they could afford to make extra repayments and if so, whether it would increase their overall wealth. (Note that to simplify the case study, we did not include an offset account, but it is possible to model this in Pathfinder).

Pathfinder projected the following results:

  • Loan repayments above the minimum required amount are made
  • Loan projected to be fully repaid in 2035/36. Projected final loan repayment is $63,745.

In these results, extra repayments to the mortgage are only made after meeting all other expenses, including deposits to the insurance bond. It is only after they have saved the school fees that they can start making significantly larger mortgage repayments. These results give Andrew and Melissa an idea of when they could feasibly pay off their loan, and will show that if they wanted to pay it off sooner than projected, and they didn’t make other adjustments to their income or expenses, then it would impact on their goal to save for Charlotte’s school fees.


Andrew and Melissa wanted to pay off their home mortgage as soon as possible and save for Charlotte’s school fees before she started high school, but the projections have shown that they cannot afford to do both at once and it is best to focus on saving for Charlotte first. By showing them this, Andrew and Melissa can consider whether they are happy with this approach or whether they would like to adjust their goals, income or expenses.

It should also be noted that since these are very long-term projections, Andrew and Melissa would need to review their situation every year, and adjust their strategy, if necessary. However, by seeing the outcome of some comprehensive, long-term cash flows projections, Andrew and Melissa can more confidently prioritise their competing goals into short-term and medium-term actions they are happy to follow.

If you would like to look at this case study in more detail, we have added this case as a demo/sample case to our platform. How to run this case yourself? login (or create and account), add a new case and select the Case-Study from the list.

Other Case Studies:

Planning for Education Expenses

Insurance Bonds - Planning for Education Expenses

Insurance bonds can be a useful way of saving for large education or other expenses. They are taxed within the bond at 30% so do not impact on the investor’s personal tax. If held for a minimum of ten years, withdrawals are tax free to the investor. If withdrawn before 10 years, withdrawals are taxed at the marginal tax rate less a rebate of 30% for tax already paid within the bond (concessional rules apply between 8 and 10 years). After the initial deposit is made, the investor can deposit each year up to 125% of the previous year’s deposit without nullifying the tax timing status.

1.1 Case Study

Ray and Kathy have two young children and want to plan to have enough funds set aside for their expected large education expenses once the children move to secondary school and thence university. The expected profile for the expenses is shown in Figure 1, both in constant (today’s dollars) and in nominal dollars after applying inflation. Obviously, these values include a fair amount of uncertainty so ideally the plan may need adjusting as times goes on. Note that an Insurance bond allows for deposit flexibility within the 125% rule. They also have the option of meeting any funding shortfall from current income.

1.2 Pathfinder Learnings

  • Insurance bonds can be a useful way of saving for future large investments, particularly if the persons involved have a marginal tax rate greater than 30%.
  • Pathfinder enables you to map out a savings plan over time.
  • Pathfinder automatically provides guidance on concessional and non-concessional super contributions.
  • Pathfinder also alerts you to schemes such as spouse super contribution, co-contribution and use of unused concessional super caps.

Ray and Kathy have decided to save for these expenses using an Insurance bond so that the money is at “arms length”. They want to know how to structure their deposits over time so that they can meet their goal and also fit in with their other expenditure and savings.

The education expenses are fairly modest while the children are in primary school and Ray and Kathy feel comfortable about meeting those expenses out of current income. As seen in Figure 1, expenses start to become more onerous in 2025/26 when the first child starts secondary school. Ideally, they would like to draw from the Insurance bond at that point but recognise the withdrawals only become tax free in 2027/28. Nonetheless, by holding the Insurance bond in Kathy’s name they could plan to meet expenses from the Insurance bond from 2025/26. Kathy is expected to be on a marginal tax rate of 21% at that time but she receives a rebate of 30% for tax already paid in the bond. However, in this analysis we will assume that Ray and Kathy don’t draw on the bond before 10 years.

1.3 Assumptions

We have assumed in the analysis:

  • Insurance bond returns 4.9% pa (after tax);
  • CPI 2.5% pa;
  • AWOTE 3% pa;
  • Ray has a salary of $110,000 pa indexed at AWOTE;
  • Kathy is currently working part-time on a salary of $23,000 pa indexed at AWOTE, but may consider resuming full-time work at a later date;
  • Base annual living expense $65,000 indexed at CPI.

1.4 The Strategy

Pathfinder is an excellent tool for helping Ray and Kathy plan. We have setup the problem in Pathfinder and specified that savings must start in 2017/18 and be complete by 2026/27. Withdrawals from the Insurance bond must meet all anticipated education expenses from 2027/28 onwards.

The strategy as developed by Pathfinder has Ray and Kathy purchasing an Insurance bond with an initial deposit of $13,500 in 2017/18. For the following 9 years they contribute additional amounts of between $17,000 and $22,000 each year with the bond reaching an expected value of $233,000 in 2027/28. This plan is illustrated in Figures 2 and 3.

Ray and Kathy commence paying school fees of $2,100 pa in 2019/20 from current income. The fees are below $5,000 pa until 2025/26 so are manageable from current income. They increase to $14,600 in 2025/26. The fees in 2025/26 and 2026/27 are also paid from current income although other approaches could be adopted such as:

  • Have additional savings outside the Insurance bond;
  • Withdraw relevant amounts from the Insurance bond with some tax being payable.

From 2027/28 onwards, withdrawals are made from the Insurance bond to match the education expenses. No tax is payable on these withdrawals as the bond has been held for 10 years.

1.5 Conclusions

In this example, an Insurance bond has been used to meet expected large education expenses for future years. Such bonds are particularly effective if the marginal tax rates of the parents are above 30%. But in any case, by setting aside a special pot of money the parents can have comfort that the children’s education won’t suffer if the parents are unable to meet the large annual amounts required from current income.

A similar strategy might be used for other large expenses, for example planning for the children’s wedding.
Optimo Pathfinder can be a useful tool for helping plan such strategies in conjunction with other goals people might have.

Finally, although we do not report here but Pathfinder will automatically provide guidance on such things as:

  • Maximising concessional and non-concessional super contributions;
  • Making a spouse super contribution to obtain a tax rebate;
  • Making a non-concessional super contribution to get the Government co-contribution;
  • Using the unused concessional cap provision to accelerate super once other large expenses are behind.

For more information and how Optimo Financial can assist you, contact us.

The Retirement Trap

The Retirement Trap

Two recurring themes that frequently arise when discussing retirement policy are whether people have sufficient incentive to save for their own retirement and even if they do, will retirees subsequently splurge all their savings on holidays, home, a new car etc and then live off the age pension. Indeed, the latter seems to be almost taken as a given by some commentators although at around $35,000pa for a couple, the age pension only provides for a Modest lifestyle according to ASFA’s definition (see later).

Writing in The Australian, 30 June 2017, Glenda Korporaal reports on a paper by Jack Hammond and Terrence O’Brien* which argues that the combination of the changes to super and age pension eligibility coming into effect in 2017 produces a “retirement and income savings trap”. Trish Power of the SuperGuide website has labelled this “Retirementgate”.

As summarised in The Australian:

“The Hammond-O’Brien paper shows that a home-owning couple with $400,000 in super, when combined with the age pension, can earn more than a couple with $800,000 to $1 million in super whose assets mean they don’t qualify for the pension. The retirement savings “sweet spot” is now $400,000 for a home-owning couple who would be eligible to receive 94% of the age pension, delivering them a total income of $52,395 a year (assuming they draw down the minimum 5% of their super).”

The paper further argues that “you cannot secure more (in income) than what you secure with $400,000, until you have at least $1,050,000 in super.”

Note that the analysis is based on essentially maintaining the initial super capital although it recognises that this may not be possible if returns are less than the minimum required drawdown.

Perhaps predictably, most of the comments on the article express anger and outrage at the superannuation changes in particular and Government tax grabs in general, but some are more circumspect such as John who writes:

“The purpose of the system is not so we can pass on a bigger estate to the kids. The exact point of the system is to draw down on your super retirement savings, for at least a few years, and therefore reduce the nation’s total spend on the aged pension.”

Continuing with the theme, Allen and Corporaal writing in The Australian (4/7/2017) under the headline “Cruise ships rise on retiree tide” found “Luxury cruise bookings have doubled for the local arm of one American operator in just over 12 months, fed by cashed-up retirees looking to reduce their assets to qualify for the pension. The stricter assets tests are encouraging retirees to reduce their cash to make sure they still qualify for the pension. The combination is encouraging more retirees to spend up on holidays rather than put their surplus cash into savings or superannuation”. In the same article, Tourism Australia managing director, John O’Sullivan, was not so sure; he said “it was no surprise Australians had embraced cruising. You only have to look at how strong it is in other markets; it has grown aggressively. I don’t know if Australians are using their super”.

Since the analysis, at least as presented, is static in nature, we have used Optimo Financial’s PathFinder model to investigate the issue in a more dynamic setting over 20 years; and especially to see how the financial situation evolves over that time. We look at the hypothetical case of David and Alice who are retired and who are both eligible for the age pension. They have a family home but no other assets apart from their super (to be consistent with the Hammond/O’Brien analysis we have not included personal assets). They have no debt.

The Association of Superannuation Funds of Australia (ASFA) has calculated that in the March quarter 2017, a couple around 65 would require $35,000pa for a Modest lifestyle and $60,000pa for a Comfortable lifestyle. The corresponding amounts for a couple aged around 85 are $35,000pa and $55,000pa respectively.

According to the ASFA Retirement Standard, a comfortable lifestyle enables “an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

We will initially assume that David and Alice require $52,395pa (indexed at CPI) for annual expenses consistent with the “sweet spot” as identified by Hammond and O’Brien. But note that this is $8,000pa less than what is required for ASFA’s Comfortable lifestyle.

We consider three levels of initial super balances:

  • $400,000;
  • $700,000;
  • $1,050,000.

1.1 Assumptions

We have assumed in the analysis:

  • Pension fund returns 4.4%pa;
  • CPI 2.5%p.a;

Base annual living expenses $52,395 indexed at CPI.

1.2 Question 1: How much will remain?

Since the assumed return on the super fund is less than the minimum required drawdown (5% initially) and therefore the pension fund will be depleted over time, we investigate the projected balance remaining after 20 years for the three cases.

The results are shown in Figure 1. A starting balance of $400,000 is projected to be reduced to around $307,000 while for $700,000 and $1,050,000, the final balances are projected to be $620,000 and $830,000 respectively. Note that these amounts are in current dollar terms. In constant today’s dollars, the amounts are $191,000, $386,000 and $519,000 respectively.

1.3 Question 2: How much extra income?

We have noted that the assumed annual expenditure would be less than ASFA’s Comfortable retirement standard, so the second question investigated is suppose that in each case, David and Alice run down their super over 20 years by increasing their annual expenditure by an equal amount in real terms each year, what is the maximum increase?

Figure 2 shows that with a $400,000 initial super balance, David and Alice could increase their annual expenditure by $8,000 while for $700,000 and $1,050,000 the increases would be $20,500 and $33,000 respectively.

1.4 Question 3: How much if retain some capital?

In the third scenario, we investigate a slight variant of Scenario 2. We saw in Scenario 1, that with an initial super fund balance of $400,000 and an annual expenditure of $52,395 that David and Alice would be left with $307,000 ($191,000 in today’s money) in their account after 20 years. So in this third scenario, we ask how much extra could they spend each year and be left with that amount.

The results are shown in Figure 3. With an initial balance of $700,000, David and Alice could increase their annual expenditure by $11,500 while for a balance of $1,050,000 the corresponding amount is $23,000. Both these amounts would put David and Alice above the Comfortable standard while relying on a balance of $400,000 would not allow them to attain that level.

For this final scenario, we also show in Figure 4 the age pension payments over the 20 years. By around 2029, the annual age pension payments differ by less than $2,000pa for the 400k and 700k cases, while all three cases converge to within that amount by 2032.

1.5 Conclusions

Are people likely to forgo saving for retirement or alternatively live-it-up for a few years on their super savings and then rely on the age pension? Maybe, if they are prepared to be satisfied with a Modest lifestyle that won’t afford them many cruises as found desirable by Allen and Corporaal. Nonetheless, Hammond and O’Brien have identified a “sweet spot” of savings around $400,000 and suggest there is little incentive to accumulate retirement funds above that level unless you can get above $1,050,000. Pathfinder is an ideal tool for investigating how the age pension interacts with other savings and to put numerical values to scenarios so that you can properly assess various strategies.

* Jack Hammond and Terence O’Brien “A retirement income and savings trap caused by the Coalition’s 2017 superannuation and Age Pension changes”,

Do Your Sums before Downsizing

Do Your Sums Before Downsizing

A popular subject often talked about at family barbecues is; "should mum and dad downsize when they get older?" Often it's assumed that downsizing is the best option moving forward. To test and possibly challenge this we decided to run a few scenarios through our Pathfinder Financial Optimisation Platform to find out. Read our findings below;

1.1 The Clients

In this example, we look at the case of David and Alice who have recently retired and who will soonboth be eligible for the age pension. David was born on 11 April 1953 while Alice was born on 15 November 1952. They have a modest $400,000 in super. Their other assets are the family home valued at $900,000 and personal assets valued at $40,000. They have no debt. They would like to have $50,000pa (increasing at CPI) for living expenses. They are worried that their super is not sufficient to maintain their desired income. Consequently, they have contemplated selling the family home and moving to a cheaper area where they could buy a new home for $500,000. Will downsizing leave them better off?

1.2 Assumptions

We have assumed in the analysis:

· Pension fund returns 5.7%pa;

· House selling costs 2.5%;

· House purchase costs 6% (including stamp duty);

· House prices in the long term increase at 3%pa;

· CPI 2.5%p.a.

1.3 Scenario 1: Retain Current Home

We first examine the scenario where David and Alice retain their current home. In this case, they will receive income from the government pension as well as drawing a pension from their own super. Figure 1 shows the sources of their income over a 20 year period.

David and Alice receive approximately 64% of their income from the age pension and associated benefits (see also Figure 6 below). The remainder is withdrawn from their pension account through withdrawing the minimum amount each year (plus some extra for the first few years until they become eligible for the age pension).

Their age pensions are limited approximately equally by the income and assets tests. After 20 years, David and Alice have a combined wealth of $1,960,000 most of which is from the family home.

1.4 Scenario 2: Downsizing Family Home in 2016/17

The next scenario sees David and Alice downsizing their family home from $900,000 to $500,000 in 2016/17. Their ages enable them to deposit the excess funds generated from the house sale into super as non-concessional contributions. However, a Pathfinder® analysis shows that increasing their superannuation balance reduces their age pension because, unlike the family home, super counts towards the age pension assets test and is deemed for the income test. Figure 2 shows the results of the age pension assets and income tests for David and Alice and we can see that their pension is now limited by the assets test. For a home owning couple, the age pension reduces at a rate of $3 per fortnight for each $1,000 of assets in excess of $575,000. This taper rate was doubled from 1 January 2017, so now has a much larger impact on the pension received.

So in 2019/20, for example, their age pension reduces from $36,337 to $9,004 and they must draw more from their pension account to make up the difference. Their wealth after 20 years is now projected at $1,581,000 or about $379,000 less than in the first scenario.

1.5 Scenario 3: Downsizing Family Home in 2027/28

In the third scenario, we examine the possibility that David and Alice defer the downsizing for ten years, say in 2027/28. Their age pension is initially unaffected until they downsize the family home, but after that time their age pension payments are severely curtailed. Their projected wealth after 20 years is now $1,714,000. This is a better outcome than in the second scenario but is still $246,000 less than if they keep their existing home.

1.6 Comparing the Scenarios

Figure 3 gives a comparison of the annual age pension received in the three scenarios. You can see that the scenario where they retain their current home, yields a higher pension and that their pension drops sharply after the sale of their house in the other two scenarios.

Figure 4 shows the total age pension payments over the 20 years. You can see that by keeping their original family home, their total pension entitlement is significantly higher than either of the downsizing options we analysed.

Figure 5 shows the total wealth over the 20 year period analysed.

The first point to note is the importance of the age pension towards retirement income, depending, of course, on the particular circumstances. Figure 6 shows the composition of retirement income over the 20 years analysed for Scenario 1.

1.7 Conclusions

In this example, the age pension plus estimated concession card benefits contribute about 64% to income while the account based pensions contribute about 36%. The second point is that downsizing the family home may not result in improving the overall situation as an increase in payments from a private pension may be more or less offset by a decrease in the age pension.

1.8 Pathfinder Learnings

In our Pathfinder® analysis, we find, perhaps surprisingly, that a couple could be considerably worse off by downsizing the family home. Any funds added to super by the income generated from downsizing could be dissipated by a reduction in the age pension. In addition, the costs of sale and repurchase of a family home are significant.

The age pension can provide a buffer between retirement savings and lifestyle expenses.

For persons eligible for the age pension, downsizing the family home may leave you worse off financially because of the impact of the age pension income and assets test.