QUESTION
1. What excess cash do you think they have available each month? (3 marks)
2. Using the ASFA Retirement Standards, what after-tax income per annum will
they need in retirement? (1 mark)
3. Assuming Robert does retire at age 65, how long could one expect Robert and
Mary to live in retirement (using current Life Expectancy Tables)? (2 marks)
4. If they rely only on a superannuation pension, what super account balance might
generate such a cash flow stream? (3 marks)
5. Taking into account Robert’s present super account balance, what annual sum
should be placed into this account to ensure his target balance for retirement? (5
marks)
6. Comment on their current super savings arrangements and the likelihood of
achieving their target. (4 marks)
7. What strategies could assist in helping them to save more? Where should they put
these funds? Why? (22 marks)
Robert and Mary Chan have two children, Brian aged 13 and Juliet aged 7. Their only
property is the family home, valued at $650,000. They currently owe $240,000, at 9%
over the remaining 20 years, through Westpac, and the mortgage payment per month is
presently $1,432.
Robert is a 43 year old marine biologist with Vanderlay Industries, where he is a highly
regarded and valuable employee. His company has provided him with a fully paid
company car, and he earns $90,000 per annum. His company also pays 9%
superannuation guarantee contributions to his account in the Vanderlay Industries
Employees Superannuation Fund, which goes into the default balanced fund (current
balance $43,500). He has a savings account with Westpac, the current balance of which is
$15,000, earning standard bank rates.
Mary, who is 39, has no separate income, and she looks after the children (she has not
worked for 10 years). She has a superannuation account with HESTA, but has not
contributed to it since leaving work (balance $7,500). She thinks it is a balanced account.
She has a car, a 7 year old Ford (valued at $3,000), and wants to replace it with a new
smaller, more efficient car this year (she expects to pay around $18,000).
They have a credit card through Westpac, but they manage to clear the balance owing
each month. Living expenses, including school fees, are around $2,800 per month. The
home mortgage (through Westpac) is $1,632 per month. They have shares valued at
$25,000; these are held jointly and are invested in companies which pay fully franked
dividends (4% this year). Robert is slightly more aggressive than Mary when it comes to
investing, but even so they tend to take few risks with their money. Insurance (including
health insurance) has been organised completely, as has their estate planning, using the
resources of very experienced relatives.
Brian attends a private school, and is in Year 8. The annual fee is $1,800. Juliet goes to
the local primary school, and the fees amount to $280 per annum. She is in Year 2, and
will eventually attend the same school as Brian when she is old enough. Both are
expected to attend university, and their parents want the HECS system to cover most of
the higher education expenses.
Robert’s and Mary’s parents are elderly, having had children late in life. Robert received
an inheritance 5 years ago, and he and Mary used it to pay off some of their mortgage.
Mary expects to receive money via her mother’s estate when she passes away (around
$50,000).
They have some concerns and issues, which is the reason they have gone to a financial
adviser:
1. Are we saving enough in superannuation, in order to have a comfortable lifestyle in
retirement (in around 22 years), being debt free?
2. Could we save more? Where should it be invested? Superannuation, or through our
share portfolio?
3. We have good equity in our home, but should we pay off the mortgage completely
as fast as we can?
4. What should we do with Mary‘s inheritance, assuming it is received in 5 years
time?
5. We think we should set up some funds for emergencies.
6. We don’t really have the time to manage our own share investments at present, so
what should we do in the future?
7. Mary would like Robert to retire as soon as he is able. Is this a possibility?
8. We pay a lot of tax and this is fair, but can we pay less?
9. We have had some luck with money and our investments in the past, but as we do
not know much about financial matters, we would like to have a plan we can follow
and understand.
Earnings rates, inflation, growth rates in incomes and expenses, etc., are expected to be
around 3% per annum for the foreseeable future.
SOLUTION
| Chan Case Study | note:All the value in calculatiuon is in Dallar Denomination | |||||||||||||||||||||||||||||||
| Answer 1 | ||||||||||||||||||||||||||||||||
| Monthly Income | 7500 | |||||||||||||||||||||||||||||||
| Mortgage(monthly) | 1432 | |||||||||||||||||||||||||||||||
| Home mortgage(monthly) | 1632 | |||||||||||||||||||||||||||||||
| Cost of living(monthly) | 2800 |
|
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| Monthly Saving | 1636 | |||||||||||||||||||||||||||||||
| Answer 2 | 
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| As per the ASFA Retirement Standards | ||||||||||||||||||||||||||||||||
| Budget for living standards(JUNE quarter 2011) | ||||||||||||||||||||||||||||||||
| Categery | Amount |
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| comfertable couple | 54954 p.a. | |||||||||||||||||||||||||||||||
| They will need 54954 after tax income in the retirement. | ||||||||||||||||||||||||||||||||
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| Answer 3 |
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| Life expectancy(Additional Years of Life) |
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| Retirement Age | Life Expectancy |
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| Robert | 65 | 61 |
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| Mary | 18.7 years | 21.8 years |
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||||||||||||||||||||||||||||||||
| Source: ABS Australian Historical Population Statistics 2008 (cat. no. 3105.0.65.001); ABS Deaths, Australia, 2009 (cat. no. 3302.0) | ||||||||||||||||||||||||||||||||
| Answer 4 | ||||||||||||||||||||||||||||||||
| Assumption: | Rate of investment | 7% | ||||||||||||||||||||||||||||||
| Annual contributation by company | 8100 | |||||||||||||||||||||||||||||||
| Total contributation(with interest) | 89596.05 | |||||||||||||||||||||||||||||||
| Current balance at the time of retirement with interest | 192722.5 | |||||||||||||||||||||||||||||||
| Total contribution by company | 282318.5 | |||||||||||||||||||||||||||||||
| Answer 5 | ||||||||||||||||||||||||||||||||
| Annual Budget for cost of living per year after retirement | 54954 | |||||||||||||||||||||||||||||||
| Life expectancy | 19 years | |||||||||||||||||||||||||||||||
| Total amount to be needed at the time of retirement | 1044126 | |||||||||||||||||||||||||||||||
| Total contributation with interest by the company | 282318 | |||||||||||||||||||||||||||||||
| reserve in Mary superannuation account | 7500 | |||||||||||||||||||||||||||||||
| Mary reserve at the of Robert retirement | 65364.53 | |||||||||||||||||||||||||||||||
| Balanced required at the time of retirement | 696443.5 | |||||||||||||||||||||||||||||||
| If the rete of investment is 7 % | ||||||||||||||||||||||||||||||||
| Future value interest foctor annuity | 49.00574 | |||||||||||||||||||||||||||||||
| Annual sum should be placed into the account | 14211.47 | |||||||||||||||||||||||||||||||
| Answer 6 | ||||||||||||||||||||||||||||||||
| Annual saving | 19632 | |||||||||||||||||||||||||||||||
| Annual sum should be placed into the account | 14211 | |||||||||||||||||||||||||||||||
| Balace | 5421 | |||||||||||||||||||||||||||||||
| There is taget of | 1) Buying a car | |||||||||||||||||||||||||||||||
| 2) Higher education | ||||||||||||||||||||||||||||||||
| 3) emergency and other | ||||||||||||||||||||||||||||||||
| Robert has sufficint cerrent saving and he will be able to achive the target. | ||||||||||||||||||||||||||||||||
| Answer 7 | ||||||||||||||||||||||||||||||||
| Strategy to save more | 1. to decrease the expenditure as far as possible | |||||||||||||||||||||||||||||||
| 2. To increase the income | ||||||||||||||||||||||||||||||||
| Venue of the fund to be invested | 1.In Share | |||||||||||||||||||||||||||||||
| 2.in bond or T-bill | ||||||||||||||||||||||||||||||||
| According to the minus age method, Robert should invest (100-43) 57 % of fund in euity shares | ||||||||||||||||||||||||||||||||
| and he should invest 43% of fund in bond or T-bill | ||||||||||||||||||||||||||||||||
GF68
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| Chan Case Study | note:All the value in calculatiuon is in Dallar Denomination | |||||||||||||||||||||||||||||||
| Answer 1 | ||||||||||||||||||||||||||||||||
| Monthly Income | 7500 | |||||||||||||||||||||||||||||||
| Mortgage(monthly) | 1432 | |||||||||||||||||||||||||||||||
| Home mortgage(monthly) | 1632 | |||||||||||||||||||||||||||||||
| Cost of living(monthly) | 2800 |
|
|
|||||||||||||||||||||||||||||
| Monthly Saving | 1636 | |||||||||||||||||||||||||||||||
| Answer 2 |
|
|
||||||||||||||||||||||||||||||
| As per the ASFA Retirement Standards | ||||||||||||||||||||||||||||||||
| Budget for living standards(JUNE quarter 2011) | ||||||||||||||||||||||||||||||||
| Categery | Amount |
|
||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
| comfertable couple | 54954 p.a. | |||||||||||||||||||||||||||||||
| They will need 54954 after tax income in the retirement. | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
| Answer 3 |
|
|||||||||||||||||||||||||||||||
| Life expectancy(Additional Years of Life) |
|
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| Retirement Age | Life Expectancy |
|
||||||||||||||||||||||||||||||
| Robert | 65 | 61 |
|
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| Mary | 18.7 years | 21.8 years |
|
|||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
| Source: ABS Australian Historical Population Statistics 2008 (cat. no. 3105.0.65.001); ABS Deaths, Australia, 2009 (cat. no. 3302.0) | ||||||||||||||||||||||||||||||||
| Answer 4 | ||||||||||||||||||||||||||||||||
| Assumption: | Rate of investment | 7% | ||||||||||||||||||||||||||||||
| Annual contributation by company | 8100 | |||||||||||||||||||||||||||||||
| Total contributation(with interest) | 89596.05 | |||||||||||||||||||||||||||||||
| Current balance at the time of retirement with interest | 192722.5 | |||||||||||||||||||||||||||||||
| Total contribution by company | 282318.5 | |||||||||||||||||||||||||||||||
| Answer 5 | ||||||||||||||||||||||||||||||||
| Annual Budget for cost of living per year after retirement | 54954 | |||||||||||||||||||||||||||||||
| Life expectancy | 19 years | |||||||||||||||||||||||||||||||
| Total amount to be needed at the time of retirement | 1044126 | |||||||||||||||||||||||||||||||
| Total contributation with interest by the company | 282318 | |||||||||||||||||||||||||||||||
| reserve in Mary superannuation account | 7500 | |||||||||||||||||||||||||||||||
| Mary reserve at the of Robert retirement | 65364.53 | |||||||||||||||||||||||||||||||
| Balanced required at the time of retirement | 696443.5 | |||||||||||||||||||||||||||||||
| If the rete of investment is 7 % | ||||||||||||||||||||||||||||||||
| Future value interest foctor annuity | 49.00574 | |||||||||||||||||||||||||||||||
| Annual sum should be placed into the account | 14211.47 | |||||||||||||||||||||||||||||||
| Answer 6 | ||||||||||||||||||||||||||||||||
| Annual saving | 19632 | |||||||||||||||||||||||||||||||
| Annual sum should be placed into the account | 14211 | |||||||||||||||||||||||||||||||
| Balace | 5421 | |||||||||||||||||||||||||||||||
| There is taget of | 1) Buying a car | |||||||||||||||||||||||||||||||
| 2) Higher education | ||||||||||||||||||||||||||||||||
| 3) emergency and other | ||||||||||||||||||||||||||||||||
| Robert has sufficint cerrent saving and he will be able to achive the target. | ||||||||||||||||||||||||||||||||
| Answer 7 | ||||||||||||||||||||||||||||||||
| Strategy to save more | 1. to decrease the expenditure as far as possible | |||||||||||||||||||||||||||||||
| 2. To increase the income | ||||||||||||||||||||||||||||||||
| Venue of the fund to be invested | 1.In Share | |||||||||||||||||||||||||||||||
| 2.in bond or T-bill | ||||||||||||||||||||||||||||||||
| According to the minus age method, Robert should invest (100-43) 57 % of fund in euity shares | ||||||||||||||||||||||||||||||||
| and he should invest 43% of fund in bond or T-bill | ||||||||||||||||||||||||||||||||
