Statement of Advice (SOA) - Example

Statement of Advice (SOA) Student Name Institution Introduction A retirement plan is a very important tool to prepare for retirement. There are several people who have being working for years and having good pay but after their retirement, they live miserably. One of the reasons of this is a lack of retirement plan. Studies have indicated that for someone to live well after retirement, one does not need to depend solely on the pension plan. One has to be very skillful and invest. The first step involves deciding the amount of money one requires for retirement. One important factor to consider when making a decision on the amount of money for retirement plan should be 70% of the annual income before the retirement period to live comfortably. Besides, it is important to know that the health care expenses will hire during the retirement period especially if the person was not insured by a Medicare before retirement (Scotiabank.com. 2016). The next step involves knowing how to meet the expenses. The source of income for the retirement is from social security, pensions, and savings. Calculations will help to determine the estimated Social Security benefits. There are various important aspects of planning for a retirement which includes increasing life expectancy, have a good time for relaxing and resting, the desire to remain a contributor and lack of social security plan (Life Blog. 2013). Will is a married man of 64 years old while his wife Jennifer is 63 years old. Will is planning to retire at the age of 66 years, and the couple is planning to have $42,000 retirement income per annum. The discussion that follows the advice the couple some processes to meet the goals to live a comfortable life after retirement. Material that are required for the plan The main purpose of an adviser is to provide recommendations that help the participants make a decision about their plans. The adviser should be prudent and known biased, and therefore, the participant should have trust on the adviser. When the participant trusts the adviser, then the process of the planning becomes very smooth and efficient. The participant should provide materials that are necessary to assist in the planning. First of all, Mr. Will should state the goals that he wants to achieve in the retirement plan. This way, the adviser will calculate the amount of savings will needs to have at the end of every month or year. Secondly, the time for retirement is very crucial because it will determine the amount of money to be saved yearly to achieve the set goal (Life Blog. 2013). The current financial status is also important because it forms the current status that one can make the retirement plan work. For instance, some liabilities and assets will help the couple to know how much they can save yearly. The responsibilities of the couple are another vital material that I will require as an adviser. The lesser the responsibilities, the more advantages the couple has because they will have the opportunity to save as well as investing. It is also advised that the couple be very genuine about their ages because this will help he adviser establish the amount the couple requires to save before their retirement age approaches. The more the years the participant has, the more advantage they have because they will have the time to make savings and investments. On the other hand, if the participants are close to their retirement period, the adviser will have to come up with measures that ensure that participants reach their goals in the limited time (CNNMoney. 2016). It is also important to find whether the participant is covered by any retirement schemes. The schemes will play a greater role in contributing to the income of the participant during the retirement period. However, the retirement plan may not assist the participant to reach their goals especially if their intended amount is higher or equal to the yearly income of the participant for the retirement period. Also, the medical cover will play a major role in ensuring that the participant does not spend much of their income during the retirement on medical issues. It is important for participants to understand that medical costs may rise at the later ages of their retirement. After the provision of all this information to the adviser, the adviser will have a smooth time helping the participant make their plan that is parallel to their needs (CNNMoney. 2016). How to maximize social security entitlements There are four main categories of social security benefits and all fall under the Old Age. Retirement Benefits cover all employees, and they are eligible to befit when they retire at the age of 62. The client may choose to begin getting befit at any time after the age of 62. However, other incentives wait until the person gets to the age of 65 or 67 years. One may opt to continue working up to the age of 70 years which in turn increases the amount of retirement for those years. The participant must also consider that the amount that is added when he/she delays collecting the benefit is only a small amount (Sahadi, J. 2016). So, one way that I would advise Mr. Will is to wait before starting collecting the retirement benefits. It has been proven that waiting for pays. The time stipulated for collecting the retirement benefits is 62 years. However, one has an option of waiting longer than that. If Mr. Will waits for a time when he will start collecting his retirement benefits up to 70 years, he will increase his amount by 76%. This is because he will earn from delayed retirement credits which are equal to 8% every year plus the inflation rate for every year. However, Mr. Will should not wait any longer after 70 years because; the amount will stop accumulating after exactly 70 years. This way Mr. Will will have increased his amount to a good amount. If Mr. Will agrees to collect his retirement benefits at the age of 70 instead of 62, the amount will increase to $6181.20 per annum instead of 3636 per annum. This multiplied by the number of years, which is eight years; Mr. Will will have made $49,449.6. Secondly, Mr. Will should find out whether he is eligible for benefits that are more than just him as a person. Because he is married, he may be able to claim retirement benefits for his wife even if he is still alive (Letzkus, W. 1987). This will depend on the work records of Jennifer. There are three assumptions that are made in this strategy of maximizing befits; that Mr. Will is married for a certain period; he does not intend to remarry very soon and that Mr. Will be strategic when to apply for spousal benefits. Because Mr. Will is married, he can claim spousal benefits that are half of the Wife’s retirement benefits. Thirdly, Mr. Will should not file for two benefits at the same time. If the Mr. Will is covered for retirement befits and say, spousal befit, if he applies for both at the same time he will end up losing one of the benefits. Records show that if Mr. Will files for both of the benefits he will lose the smaller befit and get the larger benefit. The best strategy is to file for the small befit first and then later claim the larger benefit. In this case, Mr. Will should apply for the spousal benefit if eligible and then later apply for his retirement benefits. From calculations, if he applies for spousal benefits at the age of 62 years, he will earn an income of $5454 per annum which is half the pension if his wife per year. Later at the age of 66 or seventy years when he could collect the retirement befits, Mr. Will should claim his own befits. This means that instead of getting $3939 per annum for his retirement benefits, he will increase the amount to $9393 per annum due to the spousal befits (Sahadi, J. 2016). To structure Will’s superannuation account to provide income upon retirement Will has accumulated a good amount of money in his superannuation account according to the superannuation rules in Australia. One way that Mr. Will could structure his account to provide more income is to make voluntary contributions to this account from his savings in the remaining few years. This arrangement is known as the salary sacrifice arrangements. Mr. Will can agree with his employer to cut a given amount of salary to go to the superannuation account. Such arrangement will go into the category of the salary sacrifice but superannuation guarantee (Taxreview.treasury.gov.au 2016). The advantage of this arrangement is that the amount cut out will not be part of the taxable income of Mr. Will giving him an advantage that that amount will not be taxed. The other way to increase the amount in superannuation account is to use the personal arrangement scheme. This is where Will needs to make a personal sacrifice from his salary to go to the superannuation account. However, he should be keen not to make a contribution that is more than what is required by the law (Taxreview.treasury.gov.au.2016). This may result in taxation of the extra amount of money. Therefore, the best strategy that I would advice Mr. Will is to ensure that he makes a weekly saving in the superannuation account so he will increase his retirement savings. Although it is stipulated by the Australian government that one should not withdraw from the superannuation accounts until his/her retirement age, other factors may call for a person to withdraw from the account for instance in the case of medical conditions that require some amounts more than what is covered by Medicare. However, I would urge Mr. Will to remain disciplined and not make any withdrawals until he is 66 years old. To target retirement income of at least $42,000 per annum There are various steps that are involved in determining the amount of money one will be earning after the retirement period. The first steps involve determining the year on is planning to retire. The time one decides to retire should offer benefits of the social securities. Will is planning to retire at the age of 66 which is a good year to access his social security. However, I would advice Mr. Will that even if he decides to retire at that age, he should wait a little longer for his benefits to accumulate to a good amount. The next step involves estimating the life expectancy. This is an unpleasant method, and many people don’t consider this step. However, it important when planning for the amount one requires for after retirement. According to the Social Security Administration, the average life expectancy for a man in America is 84 years while that of a woman is 87 years. For this reason, Will can plan so that the amount of money he is planning to have after the retirement period of 66 years to have saved enough that will cater for him and his wife. The next step is estimating the retirement expenses. Mathematically, it is the life expectancy estimated minus the expected retirement period. In this case of Will, it will be 84 minus 66 which as 18. This means that Mr. Will should plan for a retirement period of 18 years. One multiplies the annual income before retirement by 70 percent to get the estimated retirement expenses. Since Mr. needs an income of $42,000 per annum on his retirement, the estimated amount required for the period of retirement is $42,000*18 which is $756,000. Mr. Will has an advantage that he is covered by a medical cover, does not contribute to any upkeep of his children, leaves in his home, therefore, no need to pay rent and the couple is leaving a healthy life. This means that the expenses will not rise during the retirement period. Also, Mr. Will can look at the income and expense to determine whether there is a downfall or surplus. The couple leaving cost is $42,000 per annum. Their income combined is 110,595 plus 3636 which amounts to $114,231 per annum. Looking at the figures, the couple has a surplus of $72,231 per annum. This is a good figure because Mr. Will and Jennifer do not need to look for ways to make extra savings have an income of $42,000 per annum after the retirement. The best way forward is to save the surplus in either their joint saving accounts or either of the superannuation accounts. The next step, they will need to review and analyze the various retirement income strategies. The couple may be having such a large amount of surplus, but the earnings will be cut short immediately after retirement. This means that they will need various sources of income which will help then sustain their yearly expenses of $42,000.Since they are covered by various pension schemes, one of the sources of income will be the social security. The next will be their savings account. If Mr. Will starts saving the surplus at this time, the money will be enough for them during the retirement. Thirdly, they both have superannuation accounts meaning that they will have good savings that they can access immediately after retirement. The third step involves comparing and reviewing the various income options available. Since for Mr. Will has three main sources of income during the retirement period, he should review which will give him give the amount of income during the retirement. For him, she has chosen his superannuation account as his main source income; he should ensure that it is loaded with large amounts of savings. Currently, the account has savings of $450,000. Given their expenses of $42, 000 per year, the savings will take them for roughly 10 to 11 years. We have approximated that he has a life expectancy of 84 years and his wife 87 years. His retirement period is about 18 years while that of his wife is 20 years. Let us work with the retirement period of his wife which is 20 years. If there are going to depend solely on the superannuation account of Mr. Will, it means that they have a deficit of around nine years without income which is roughly a deficit of $378,000. My advice to him is that the surplus amounts they are making annually of $72,231 should be deposited in Mr. Will superannuation account. Since he has two years before his retirement, the surplus will be $144,462, which will cater for two years of their retirement. Since they all have bank savings and pension schemes, then the rest of the years will be catered for by the savings and social security. I think that the couple will enjoy the retirement period and be able to meet their expenses without worry. Charging options for the financial adviser There are several costs for the financial adviser but they vary from different advisers. The first meeting with the participant is mostly free. At this period, the adviser gives the participants what they should expect and the amount the whole process would cost. During the statement of advice the fee will be $2000 for simple advice and $4000 for comprehensive advice. For implementation of advice, the cost will need negotiation between the adviser and the participant if the participants agree on the recommendations. The ongoing fee for financial advice will probably cater for newsletters, reports on investment portfolio, the regular reviews and invitation to seminars. Lastly, there are fees for commissions and financial advice which may total to $8,000 (www.moneysmart.gov.au 2016). Conclusion A retirement plan is a financial and personal plan that helps individuals lives the lives they desire during the retirement period. There are scenarios where people have worked many years earning god amount of money but end up living miserable lives during the retirement period. One of the reasons for this is a lack of a retirement plan. The plan helps individuals to be aware of the year of retirement, their financial expenses during the period and the sources of income during that period. There are several sources of income during the retirement period which includes the pension schemes, savings and in some countries like Australia superannuation accounts. In the above statement of advice, Mr. Will is 62 years old and plans to retire at the age of 66. He has bank savings, retirement scheme, and a superannuation account. Since he wants to depend on his superannuation account to cater for the expenses of $42,000 per year, he needs to make a lot of savings in this account. One source of the saving should be the surplus they make together with his wife yearly. Lucky enough they have good savings, no liabilities and are living in good health not to forget that they are covered by medical schemes. From the look of things, the couple is going to enjoy their retirement period and according to their desires. References (2016). Retrieved 16 May 2016, from https://www.moneysmart.gov.au/investing/financial-advice/financial-advice-costs Importance of Planning for Retirement | Scotiabank. (2016). Scotiabank.com. Retrieved 16 May 2016, from http://www.scotiabank.com/ca/en/0,,3145,00.html Letzkus, W. (1987). Estimating Future Social Security Benefits. Compensation & Benefits Review, 19(1), 47-57. http://dx.doi.org/10.1177/088636878701900105 Retirement Income Strategic Issues Paper - Section 2: Australia's Three-Pillar System. (2016). Taxreview.treasury.gov.au. Retrieved 16 May 2016, from http://taxreview.treasury.gov.au/content/StrategicPaper.aspx?doc=html/Publications/Papers/Retirement_Income_Strategic_Issues_Paper/Chapter_2.htm RETIREMENT PLANNING: How much to save for retirement. (2016). CNNMoney. Retrieved 16 May 2016, from http://money.cnn.com/pf/money-essentials-retirement-how-much Sahadi, J. (2016). 7 ways to maximize your Social Security benefits. CNNMoney. Retrieved 16 May 2016, from http://money.cnn.com/2015/03/19/retirement/social-security-benefits/ Top 6 Reasons Explaining the Importance of Retirement Planning - HDFC Life Blog. (2013). HDFC Life Blog. Retrieved 16 May 2016, from http://blog.hdfclife.com/top-6-reasons-explaining-the-importance-of-retirement-planning-part-1-532190 Read More