Analysis of Personal Finance - Case Study Example

Analysis of Personal Finance Table of Contents 1. Current Situation 2 2.Objectives and Goals 8 3.Analysis and Problem Identification 9 4.Strategies and Recommendations 10 Overall Recommendations 12 Overall Improvements 13 1. Current Situation An integral part of knowing what an individual would like to attain is identifying his/her current position. This segment of the paper would detail the key facts upon which the strategies for the financial planning for Ms Joan Waterson are based. The Statement of Advice is based on the information that was obtained from Ms Joan Waterson about her. The identification of the current situation of Ms Waterson is crucial because that would determine whether the recommended strategies are appropriate, in the light of her personal situation, needs or objectives. 1.1. Personal Details Name of Client: Joan Waterson, DOB: 01/01/1961, Age 51, Status: Single. 1.2. Value of Shares The Share Portfolio of Ms. Joan Watterson comprises of 2500 Telstra & 1000 AMP shares which she has been holding for more than a year. However, it may be noted that Ms. Watterson is not a very keen equity investor and theses investments were accidental. The Capital gain that Ms. Watterson can earn (if these shares were sold now) is equivalent to $3000. Company Numbers of Shares Share Price (as on April 27, 2012) Value of Shares Telstra 2500 3.511 8775 AMP 1000 4.252 4250 All shares were bought and have been held for over one year. The total value of shares: $13025. Telstra paid dividend worth 0.14 (both 100% franked)3 twice during last one year, which is the period Ms. Watterson was holding its 2500 shares. During the same period, AMP paid dividend worth 0.15 (30% franked) and 0.14 (50% franked)4. We can compute the franking credits for Joan Watterson as follows: Franking Credits = Dividend * (3 / 7) * Franking Percentage5 Franking credits for Telstra = $300 and Franking credits for AMP =30 + 19.28 = $49.28 Total Franking Credits = $349.28. 1.3. Disposable Income Annual salary = $62,000 (taxable) and Fringe Benefit = $17,000. Therefore, the amount that Ms. Waterson can actually spend (without FBT applying) is the net amount, calculated at the top marginal tax rate: 17,000 * (1 – 0.465) = $9,050) (Marginal tax rate 46.5%).Hence, Actual fringe benefit = $9,050. Disposable Income Value Notes Taxable Annual Salary $62000 Dividends received $990 2500 * 2 * 0.14 = $700 1000*0.14 + 1000*0.15=$290 Franking credits $349.28 Interest on cash 4% of $4444 4.25% of $4500 Balance in Holiday account- $4444 (puts in $200 per month at 4%). Balance in Common Wealth Bank (CBA) account- $4500 (interest rate 4.25%)6 Taxable Income $63025.19 Tax Payment $4650 + 0.3*(63025.19-37000) = 12457.55 For taxable income $37,001 - $80,000, the applicable tax is $4,650 plus 30c for each $1 over $37,0007 Disposable Income $50567.63 1.4. Total Expenses per annum Expenses Value per Year Notes Mortgage payment $9050 $7200 (actual fringe benefit per annum + additional $600 per month) Laundry $300 Food & grocery $8400 $700 per month Clothing & shoes $1000 Electricity & gas $660 $110 per two months Phone & Internet $1800 $150 per month Municipal Rates $1000 Water $600 Car Expense Licensing $500 Comprehensive insurance $500 Running cost & repair $2500 Car Loan 0 Medical expense $1200 $100 per month Holiday expense $ 5000 Entertainment $4800 $100 per week Gifts $1920 (of which $633.6 is tax deductable) $40 per week (33% of which is in donations to community aid and tax deductable) Other expenses $2400 $200 per month Superannuation Expense $1380 Additional contribution made into West State per month (from taxed income) Total Expenses $50,210 1.5. Total Assets of Ms J. Watterson Assets Value Notes Cash $4500 $4444 Balance in CBA account Balance in Holiday account House $350000 to $400000 Currently valued by real estate agent Content $80000 Car $21300-$23600 2007 Holden Vectra (Car value is according to the red book for private sale) Shares $ 13,000 2500 Telstra & 1000 AMP shares (held for more than a year) Total Assets $525544 Considering the upper range for both the house and the car 1.6. Superannuation Funds West state super Govt. scheme Gasard Aviva, UK Supertrace Account Type Balance $172744 $43000 $790 $303 Investment Choice balanced (40% in cash and income assets and 60% in growth assets)8 25 % in each of Colonial First State Imputation fund, Perpetual Industrial Share Fund, Macquarie Mastercash Fund, and Advance Imputation Fund Contributions: Employer & Persona SG 9% 9% of salary + $115 entirely from contributions from after-tax income Tax Status 85% untaxed and 15% tax free The cumulative total balance of the four funds is equivalent to $216837. 1.7. Debt Type of loan Amount Payment Interest Notes Mortgage $75,000 $1,362.41 monthly 7% Personal $1200 $60 monthly 24 payments remain Credit card $2,000 Minimum $100 monthly 13.49% p.a. on purchases9 Note: Mortgage will be paid off in 15 years 1.8. Personal Insurance Insurance cover via West state comprises of death or permanent disability benefit of $203,000.Of that, $172,774 is the balance in the West state Fund, and the balance is the insured amount. The Client has no income protection cover guaranteeing specified level of income in case of accident or illness. Insured Owner Type of cover Level of cover Benefit payable Joan Waterson West state super scheme Death + Permanent Disability $203,000 Lump sum 1.9. Property House & contents: sums insured are $320000 for the building and $80000 for contents The car is comprehensively insured. According to current will, on the event of Ms. Joan Waterson death, her assets would be equally distributed amongst her 5 siblings. The super funds would pay the benefit in case of Joan Waterson death to her estate.   2. Objectives and Goals Joan Waterson wishes to retire by the age of 56. Nevertheless, if retirement at the age of 56 looked difficult she would consider cutting back to 4 days one year, then 3, and so on. The age pension would start from the time Ms. Waterson attains the age of 65. So it is imperative that Ms. Waterson makes proper arrangement for the financial needs arising during the big gap from the age of 56 to 65. Thus, her prime objective is to accumulate sufficient Retirement Income to fulfill all her responsibilities during that period in addition to fulfilling her interests. The interests of Joan Waterson after retirement comprise of traveling extensively, and attending summer school courses on aspects of ancient history particularly about Greece and Rome among others. She also wants to remain associated with Community Aid and one of her prime responsibilities is to look after her aged mother, and her nephew and nieces. The target retirement income that Ms. Waterson is looking forward to is equivalent to 60% of her pre-retirement income. The disposable income of Joan Waterson at present is $50567.63, 60% of which would be equivalent to $30340.56. Thus, the client would require an annual income of around $30340 following her retirement after about 5 years. She could continue to require an income of $30340 for at least the subsequent 9 years, until she attains the age of 65 and her age pension starts. On the basis of the information provided by Ms. Waterson and the following discussions, her lifestyle objectives and goals were reviewed. The recommendations provided in this SOA have been developed to help Ms. Waterson in accomplishing these. Living Expenditure: Joan Waterson would like to afford for her living expenses of around $30,500 per year. Holidays: Joan Waterson would like to expend $5,000 on a travel holiday every year. Family: Joan Waterson has a large extended family comprising of her mother and five siblings. She intends to take care of her mother and also assist her nephews and nieces financially. Retirement: Joan Waterson would like to withdraw from full time work in 5 years time when she attains 56 years of age. She is willing to draw down on her capital with the purpose of accomplishing her retirement objectives. 3. Analysis and Problem Identification From the assessment of the current scenario of Ms. Waterson, it can be comprehended that the total cumulative value of capital and assets owned by Joan Waterson is equivalent to $718,781. This value includes total balance of the four superannuation funds and all her assets (excluding her car). Ms. Joan Waterson would want to afford annual living expense of approximately $30,500 as well as an annual $5000 for her travelling interests. Assuming the life expectancy level of Ms. Waterson to be 80 years, he needs to arrange for the financial requirements of 25 years, provided she retires at 55. She would get some amount of assistance from the Age pension after she attains the age of 65. However, she needs to build a decent corpus of capital for her retirement plans. Ms. Waterson is single and does not have any direct responsibility of a family, but the downside is that she has to prepare for her old age finances on her own. Nevertheless, it can be expected that her siblings and their children would assist her in times of need. The existing investment strategy as well as level of savings will most likely not be adequate to build up the assets essential for Ms. Waterson to be able to preserve her preferred standard of living post retirement. Moreover, it was observed that the client does not have an income protection cover yet. Hence, if Joan Waterson were to endure a long term or everlasting disability, she might have to considerably trim down her standard of living and perhaps might even have to liquidate assets. This would sequentially hamper the retirement income objectives10. Another key observation made from the assessment of Ms. Waterson’s present position is that she lacks emergency cash reserve. It is wise to maintain an urgent situation reserve that would cover for the basic living expenses of around 5 to 6 months11. In case of Joan Waterson, this balance should be in between $25,000 to $30,000. On the other hand, Ms. Waterson has mere around $4500 in her savings account, so that should be taken care of with immediate concern. For this, the client needs to put up a reserve of at least $25,000, and maintain that value in the form of investments that can be transformed into cash at any moment without principal loss or a penalty payment. 4. Strategies and Recommendations All alternatives of investment involve a certain amount of risk in them. In general, however, investments that provide elevated rates of return are also associated with greater exposure of risk. In a similar manner, the investments that are comparatively less exposed to risk provide lower rate of returns. From the discussions with Ms. Joan Waterson, it can be inferred that she is a balanced investor. She seems to be a careful investor who wishes to have a balanced portfolio that can assist her in meeting her medium as well as long-term financial objectives. The client thus needs an investment strategy that will deal with the impacts of tax and inflation. Ms. Joan Waterson would have to take up certain amount of planned risks so as to attain good returns of investments. Therefore, a suitable asset mix proportion for Ms. Joan Waterson would be: 1. 40% investment in aggressive assets, for instance, real estate, Australian as well as intercontinental equities, and 2. 60% investment in defensive assets, for instance: cash, fixed interest, bonds12. For the short term, it is advisable that Joan Waterson pays off her personal debts in the form of credit card and personal loan. It was observed that Ms. Joan Waterson does not have enough of cash in her accounts. Hence, she should also open a savings account providing high yields and put around $10,000 within it for emergency purposes. Another significant factor that Ms. Joan Waterson should address immediately is the investment for income protection cover guaranteeing specified level of income in case of accident or illness. This is crucial in the event of inability to generate your usual income as a result of accident or illness. Such insurance cover schemes pay a specified amount of income instead of giving out a lump sum value. Additionally, the client should continue with her current superannuation arrangement with West State. In the medium time period, i.e. in between one to five years, it would be recommended that Ms. Joan Waterson pays off her mortgage loan. She has already started contributing $600 per month over and above the minimum amount due every month. However, Ms. Waterson should be aware that the paying off of the mortgage loan beforehand might involve certain discharge or official charges13. It was observed that Ms. Joan Waterson is averse to the fluctuations of shares and hence unwilling to invest in them. Hence, in order to gain from the rising markets without being directly exposed to the risk of owing company shares, Joan Waterson can take up a diversified approach. She can invest $80,000 in the growth option of a managed fund for a minimum period of 5 years so as to build up her retirement wealth. This is important because Joan Waterson is already 51 year old and intends to retire by 56, so she does not have much time to accumulate her retirement assets. The balance of this growth option fund would help Joan Waterson during the time period from her retirement at the age of 56 to the time her age pension starts at the age of 65. In the long term, i.e. after five years, Ms. Joan Waterson should plan to invest about $70,000 in a growth investment bond for a time frame of about 10 years. Joan Waterson could use the asset that would accumulate at the end of ten years for assisting the studies and other career requirements of her nephews and nieces. If Ms. Joan Waterson makes a decision to pursue with the mentioned recommendations of this Statement of Advice, it can be estimated that the client’s funds should grow over time and meet the financial needs to pay for the period till her age pension initiates. The personal debts of Joan Waterson being paid off in addition to setting up a high yielding savings account would create supplementary savings. This will permit Ms. Joan Waterson to enjoy the lifestyle she wishes to carry on with minimum concern. The value of the fresh investments in the growth managed funds as well as the Client’s present share portfolio will accumulate further over time. Moreover, these investments would assist Ms. Joan Waterson the most because these would grow while still being accessible to the Client. As a result, this will assist Ms. Joan Waterson to accomplish her retirement goals. Furthermore, the taking up of an income insurance cover will enable Ms. Joan Waterson to have effectual income insurance and health cover in the unlikely events of sickness or injury. Joan Waterson should postpone her retirement to the age of 60. This strategy has been recommended for the reason that that will improve the financial situation of the client substantially on the whole. Postponing her retirement would ensure that she has more savings in her superannuating account and the amount of money needed for her retirement will decline considerably. The reasons for the recommended strategies are as follows: Personal Investment The assessment of the disposable income as well as the cumulative expenses of Ms. J Joan Waterson revealed that the client is at present deficit of funds. This is owing to the mortgage payment she has to make. The more rapidly, she pays it off, the quicker she would have access to larger amounts of funds at her disposal. She could use these funds to fulfill her wish to study further about ancient Greece or Rome. Furthermore, she could even use these funds to plan for a Europe trip, which would fulfill her desire to travel. Moreover, Joan Waterson had mentioned that she intends to look after her mother. The investments made in the high yielding saving accounts would facilitate her and act as an emergency fund intended to serve her mother’s age related problems. Since, Ms. Joan Waterson dislikes taking up too much of risk, it would be best for her to invest in managed funds. This is because the managed funds would provide her with diverse investment opportunities, which would in turn limit her direct risk exposure unlike investing in different kinds of assets. Moreover, the fund manager would be more expertise and would have more access to internal information, helping Ms. Waterson in choosing the right mix of assets in her fund. The investment in the management fund as well as the growth investment bond is for the purpose of asset accumulation for Ms. Waterson’s retirement. The growth investment bond will keep its annual earnings and also forfeit its 30% tax involved on its own. Thus, Ms. Joan Waterson would not have to pay any further tax unless she withdraws before the completion of the 10 year period. If she does so, then the withdrawn amount would be shown as earnings in her accessible income14. This is a much acknowledged investment method used for accumulating fund fir the future, while controlling risk and gaining from tax benefits. Personal Insurance At the moment Joan Waterson has only one insurance scheme, which is death + disability protection provided by West state. She should take up an income protection cover, so as to ensure continued flow of a definite income in cases of illness or inability to work15. In the case that Joan Waterson retires at the age of 55, the income protection insurance would not necessary anymore because she would not be employed anymore. However considering the financial position of Ms. Waterson, it is unlikely that she would be able to retire so soon; instead she might have to work part time, cutting back to 4 days one year, then 3, and so on. Overall Recommendations Short Term: pay off personal debts in the form of credit card and personal loan open a savings account providing high yields and put around $10,000 within it for emergency purposes invest in an income protection cover Medium Term: pay off mortgage loan completely invest $80,000 in the growth option of a managed fund for a minimum period of 5 years Long Term: invest about $70,000 in a growth investment bond for a time frame of about 10 years Overall Improvements The compliance to the recommended strategies would improve Ms. Waterson’s retirement income significantly. Moreover, the investments in income protection cover as well as in diversified managed funds would lower the overall risk exposure of the client and improve her asset accumulation for retirement. References AMP Ltd, “AMP Share Prices”, AMP, April 27, 2012, http://shareholdercentre.amp.com.au/phoenix.zhtml?c=142072&p=irol-irhome Altfest, Lewis J. Personal Financial Planning. USA: McGraw-Hill Higher Education, 2007. Australian Securities Exchange, “Telstra Corporation Ltd”, ASX, April 27, 2012, http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=TLS Australian Securities Exchange, “AMP Limited”, ASX, April 27, 2012, http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=AMP Common Wealth Bank, “Interest Rates”, Common Wealth Bank, April 27, 2012, http://www.commbank.com.au/personal/apply-online/download-printed-forms/TSI_interest_rates.pdf Common Wealth Bank, “Rates and Fees”, Common Wealth Bank, April 27, 2012, http://www.commbank.com.au/personal/credit-cards/low-rate/rates-and-fees.aspx Crumbley, D. Larry, and Smith, L. Murphy. Keys to Personal Financial Planning. USA: Barron's Educational Series, 2002. GESB, “West State Super”, GESB, April 28, 2012, http://www.gesb.com.au/index_weststatesuper.html Gitman, Lawrence J., Joehnk, Michael D., and Billingsley, Randall S. Personal Financial Planning. USA: Cengage Learning, 2010. Harrison, Debbie. Personal Financial Planning. UK: Financial Times Prentice Hall, 2005. Hallman, G. Victor and. Rosenbloom, Jerry S, Personal Financial Planning. USA: McGraw-Hill Professional, 2003. My Money Calculator, “Dividends & Franking Credits”, My Money Calculator. April 27, 2012, http://www.mymoneycalculator.com.au/dividends-franking-credits-explained-including-formula/ My Money Calculator, “Australian Income Tax Rate”, My Money Calculator. April 27, 2012, http://www.mymoneycalculator.com.au/australian-income-tax-rates-tax-tables-for-2009-2010-2010-2011-2011-2012/ Nissenbaum, Martin., Raasch, Barbara J., and Ratner, Charles L. Ernst & Young's Personal Financial Planning Guide. USA: John Wiley & Sons, 2004. Telstra, “Share Price Details”, Telstra, April 27, 2012, http://www.telstra.com.au/abouttelstra/investor/my-shareholding/share-price-details/ Read More