Financial Planning for Tom and Uli Baxter - Assignment Example

Name: University: Course: Tutor: Date: Statement of Advice Statement of Advice Prepared for Tom and Uli Baxter By ________________ On your financial situation as at 30th June 2010 You had requested for my advice on building wealth between now and your retirement age, which is 63 years for Uli and 59 years for Tom. Tom, you had indicated that you are uncomfortable with a single superannuation strategy. I have taken that into consideration. Among the issues that you had wanted us to discuss is the Landlord Insurance as well as refinancing of the loan. I have included a balance sheet as at 30th June 2010 and 30th June 2011 and another one at each of your retirement ages. The Statement Of Advice (SOA) will include cash flow statement as at 30th June 2010 and a projected cash flow for the periods ending 30th June of 2011, 2016 and 2023. Summary of my advice Important Information about you This part of the SOA contains the information that I gathered from you which I have used in order to come into a conclusion on the best advice on your retirement financial planning. It is divided into three subsections; one on your goals and objectives; secondly, the personal and financial information that I received from you and lastly, a section on the risks and the risk profile. My advice is based on your goals and objectives which are as follows. That Tom’s superannuation not to be in a single superannuation strategy To create wealth by both inside and outside superannuation Minimize the taxes as well as get some advise on TTR (time to recover) Advise on the offset account that they have and to be advised if you need to change the banks. You needed advise on the investment loan which is currently on principle and interest basis and advise if they need for a better arrangement on this loan Your savings goals include a car worth of $55,000 at year six, to save for a holiday worth 20,000 at year 2, to save for weddings 5 years from today plus to ensure that your loans are repaid by the time of retirement. Your retirement requirements financial needs to be $60,000 You indicated that your highest personal priority is to save for short term i.e. for a home or a holiday followed. This was followed by medium term saving for early mortgage repayment as well as for protecting against sickness and accident tallied and came in as second. Limitations to the SOA This advice is however limited to an extent that you had indicated that you are comfortable with the arrangements of the existing estate planning and on the information you have on the social security entitlements. You had also decided that it was too early for a discussion on the type of retirement income streams that suits you during retirement. Your personal information Tom Uli 49 years old 46 years of age No smoking No smoking No Standard of health Excellent standard of health Full cover HBA Full cover HBA History of longevity History of early death from heart disease To retire at 59 years (10 more years) To retire at 63 years (to retire in 17 more years One of the parents is alive at 80 years of age Both parents are dead in their middle 60s Tom works part time at the Australian post while Uli works at the St. John’s ambulance.You have been married for 25 years. Together you have two children, Kathryn and Julia who are aged 24 years and 21 years respectively. The two are non-dependants and do not live at home with you. The children are financially independent and you do not anticipate a need to assist them as you have informed me. Both of you have potential for additional part time work. You have a will that was last reviewed in 1985. I advise that this will to be changed as there are quite a number of changes that have happened. Among them is your children becoming of adult age and even one of them having been married since then. Your investments have also grown substantially. It is therefore advisable that you both change your will soonest possible. There is a history of long live for Tom but historically, Uli’s family die young. I will put this into consideration. Financial Information Your annual earnings and expenditure Cash flow statement as at 30th June 2010 $ Tom’s 75% part time income 125,000 Uli’s 60% part time income 68,000 Tom’s share dividends 9,500 Negatively geared prop. (11,353) Total income before tax 221,147 Total income after tax 146,318 Home loan repayments (45,828) Investment loan (29,364) Expenses (84,172) Deficit (13,046) This indicates that by the end of the year nothing has been saved and you have to borrow an amount of $13,046 to cover your extra expenses. This corresponds with your lifestyle which means living on a tight budget. The home loan of $560,000 started on 1st July 1995 and is on Principle and interest basis at an interest rate of 7.25%. The balance on this mortgage is estimated at $417,580. The interpretation is that the mortgage has been running for 15 years. At a rate of $45,828 per annum, the mortgage repayment as at 30th June 2010 is $687,420 (which includes the principal and interest repayments). The investment loan of $350,000 was taken on 1st January 2005 is also on P+I basis at a rate of 7.50% for a duration of 30 years. The monthly payment is $2,447 per month which is equivalent to $29,364 per annum. The rental property was bought in 1st January 2005. This is at the same time that you received a loan of investment of $350, 000. Tom is likely to inherit $500,000 from his mother in 10 years. Tom’s SMSF is invested in a balanced portfolio while, Uli’s is in 40%cash and 60% on fixed interest investments. The rate of return after tax for the SMSF is 6.25% for Toms and 4.30% for Uli You do not anticipate purchasing any major capital purchases. Your assets and liabilities Balance sheet (extract) for the year ending 30.06.2010 Assets Liabilities $ $ Home J 775,000 Mortgage 417,580 SMSF J 745,000 Investment loan 334, 455 Rental Prop. J 450,000 Contents J 75,000 M/Vehicles J 45,000 Jewelry J 50,000 Shares T 145,000 NAB offset acc.J 72,000 Insurance for both on death 200,000 Insurance for both on disability 90,000 Total assets 2,582,200 Total liabilities 752,035 This gives net assets of 1,830,165 Your risk profile There is a risk involved in all investments. Some investments have a higher risk than others. In most cases the higher the risk, the higher the return on the investment. Some assets may have risky low returns in the short term but with high possible returns in the long term. Tom’s preference seems to be on the high risk, low returns in the short term but with possible future long-term growth. Uli on the other side prefers the low risk with an almost a guarantee returns on the investments. You both have very little experience as far as investing decisions are concerned. The investment time frame for both of you is 1 year each. Other risks Toms risk on investment seems to be higher than your partner Uli. Tom’s investment objective is growth in capital value of his investments in 5 years. Tom, your expectation on income from investments is growth in capital value of your investments. You also require no income from the investments but expect the capital growth to be at a rate that represents good capital growth and significant real returns. You have also indicated that you are willing to risk short term growth for the sake of the future capital growth and that you can take risks on some funds. You understand that long term investments will at times fluctuate considerably. For long term investments, you are mostly comfortable where the likelihood of a negative return and is between one year and 5 and a half years. As for you Uli, you would rather invest in areas where an investment will generate a combination of income and capital growth in 3years. You also prefer a stable income that would meet expenses but can however be supplemented from drawings from capital reserves. Your expectations on capital growth should be in such a way that capital should grow at least to always be in line with inflation and cannot expect any fall, whereby you indicated that a fall at a higher rate than this would mean withdrawing from the fund. You aren’t willing to invest in areas where there are high chances of a loss. You are also specific on low risk investments. Your opportunity to obtain higher returns as compared to fluctuations and potential falls in the capital does not exist while it is very high for Tom. Jointly, you indicated you would not prefer to invest in agricultural products and unethical investments. Our advice is well known for following the ethical expectations for our clients. My advice to you Based on the information I got from you and which you need to confirm that it is correct, the rental building has been contributing to the deficit after the end of the year. The rental building was bought at the same time with the loan investment. This therefore means that the property has appreciated by over $100, 000 in the fifteen years. This is a good investment which has grown in value. The rent paid does not portray this high value in property. I therefore recommend an increase in rent by 20% to $18,720. The will reduce and offset the interest charged on this property. Thus the negatively geared prop will be reduced by this increase from $11,353 to $ 8,233. You both indicated that you have potential to additional work. I recommend that both of you work on the same part time 100%. This will create additional income which can be used to save for the holiday and for insurance against sickness and accident as you had indicated as your highest priority requirements. This will give an additional gross income of $31, 250 on Tom’s salary and $27,200 on Uli’s salary. If we consider the increment tax effect we get a net increase of $18,954. Tom prefers long term capital returns. I recommend that the shares be turned into a balanced managed fund. To reduce on taxes I recommend that both of you take up an income protection insurance and prepay premium. These premiums are tax deductible. I recommend that the premiums to be 10% of gross salary for each one of you. To diversify on Tom’s superannuation, we diversify into 25% fixed interest, 25% fully franked Australian shares and 25%on international and off shore investments, and 25% on balanced funds. He will again opt not to receive any cash dividends but instead reinvest them by buying more shares. This will diversify his shares as well as reduce his taxes by reducing the taxable income on dividends. This will create wealth for Tom both within and outside the superannuation. An offset account means reduced interest on the mortgage. This means that you should open an account that would mean that you will only pay extra interest on the mortgage and the savings account. Interest is reduced and since interest is taxable, the tax charged on you is reduced. I advise you to set a meeting with your banker to renegotiate for an interest only arrangement. The advantage with the interest alone loans is that the increase in the value of property compensates for the inflationary rate of the principle sum plus the benefit of paying only for the interest only. This will improve your cash flow by $3,114 which will assist you in your short term investments. Savings Rent increment $3,120 Interest alone loan $3,114 Additional income from salaries and conversion of cash dividends $18,954 $ 25,184 This amount of $25,184 per annum can be subdivided for the short term savings plus a portion towards the retirement package that is required after retirement. $5,000 can be saved every year towards this package in the interest earning account that you are using to offset the mortgage. $5,000 can be saved to buy the vehicle at year 6 with an assumption that the old vehicle will have a residual value. You will save $6,000 of this amount to cover for the wedding expenses that is 5 years from now. The balance of $ 9,184 will be used to save for the holiday which happens after every two years. These savings will be saved in short term investments so they can be accessible for any emergency needs. Tax position as at 30/06/2010 Tom Uli $ $ $ Gross salary 156,250 95,200 I/credit 4,071 Negatively geared prop Rent 18,720 Less interest (25,253) C/rates (1,250) Insurance (325) R&M (8,108) Income protection premiums (15,625) (9,520) Taxable income 136,588 85,680 Gross tax payable 38,488 19,651 Less I/credits (4,071) M/L 1,908 1,020 Net Tax Payable 36,325 20,671 Net income after tax 100,263 65,009 Workings on tax 6000-37000 31000*.15 = 4,650 4,650 37000-80000 43000*.30 = 12,900 12,900 80000-136588 56588*.37=20938 5,680*.37 2,101.6 38,488 19,651 I also advice you to reduce on the monthly expenses, as some of the expenses like clothes can be reduced and the cash saved for medium term requirements. Balance sheet (extract) for the year ending 30.06.2011 Assets Liabilities $ $ Home J 775,000 Mortgage 371,752 SMSF J 890,000 Investment loan 305, 091 Rental Prop. J 450,000 Contents J 75,000 M/Vehicles J 38,000 Jewelry J 50,000 NAB offset acc.J 72,000 Insurance for both on death 200,000 Insurance for both on disability 90,000 Short term investments 25,184 Total assets 2,665,184 Total liabilities 676,843 This gives net assets of 1,988, 341 Assumptions That vehicles depreciate after six years with a residual value of $2,000 Balance sheet (extract) for the year ending 30.06.2020 (Tom’s retirement age) Assets Liabilities $ $ Home J 775,000 Mortgage 113,633 cash (withdrwal of SMSF) 890,000 Investment loan 152,545 Rental Prop. J 450,000 Contents J 75,000 M/Vehicles J 38,000 Jewelry J 50,000 NAB offset acc.J 72,000 Insurance for both on death 200,000 Insurance for both on disability 90,000 Short term investments (holiday) 20,000 Short term investments(retirement) 60,000 Total assets 2,720,000 Total liabilities 266,178 This gives net assets of 2,453, 822 Balance sheet (extract) for the year ending 30.06.2027 (Uli’s retirement age) Assets Liabilities $ $ Home J 775,000 Mortgage nil Rental Prop. J 450,000 Investment loan nil Contents J 75,000 M/Vehicles J 55,000 Jewelry J 50,000 Insurance for both on death 200,000 Insurance for both on disability 90,000 Short term investments (holiday) 20,000 Short term investments (retirement) 60,000 Total assets 1,775,000 Total liabilities 0 This gives net assets of 1,775, 000 Your annual earnings and expenditure Cash flow statement as at 30th June 2011 $ Tom’s 100% part time income 100,263 Uli’s 60% part time income 65,009 Negatively geared prop. (8,108) Short term investments 25,184 Total cash inflow 182,348 Home loan repayments (45,828) Investment loan (26,250) Expenses (84,172) Balance 26,098 Cash flow statement as at 30th June 2016 $ Tom’s 100% part time income 100,263 Uli’s 60% part time income 65,009 Negatively geared prop. (8,108) Short term investments 125,920 Total cash inflow 283,084 Home loan repayments (45,828) Investment loan (26,250) Expenses (84,172) Balance 126,834 Cash flow statement as at 30th June 2023 $ Uli’s 60% part time income 65,009 Negatively geared prop. (8,108) Short term investments 252,392 Total cash inflow 309,293 Home loan repayments (45,828) Investment loan (26,250) Expenses (84,172) Balance 153,043 What are my charges for the SOA? We will charge you $1,650 both for our advice and making these investments on your behalf. You can however do your own investment whereby in this case we charge you $200 per hour on the financial plan and advice. We charge an additional %1 of the amount invested for implementing the financial plan. Read More