Superannuation & Retirement Planning- Assignment
Read these instructions carefully:
1. Assignments which do not comply with the submission requirements WILL NOT be assessed.
2. The assignment can be completed either individually or groups of two or three.
3. Due date is 5pm on Monday 11 May 2015 via CloudDeakin.
4. Only one hardcopy per group also needs to be submitted. The hard copy will be the copy used for marking. The hardcopy should not rely on the marker accessing the electronic copy in order to make sense of the hardcopy.
5. This assignment consists of two separate components. In component one your answer should be directed to the clients Mark and Antonia in the first person. The answer needs to be friendly and client ready.
6. Only ONE copy per group will accepted for submission.
7. All members of a group must submit the assignment electronically via CloudDeakin.
8. Each page must be clearly numbered and includes your name(s) and student ID number(s) in the footer.
9. All text based/Word information in the assignment should be double spaced using a 12 point font. The assignment should have standard left, right and top and bottom margins.
10. All financial modelling should be done in REAL TERMS and the impact of modelling in real terms needs to be made clear to Mark and Antonia.
11. If you are a group, you will be expected to interact together on a regular basis (You may utilise social media (CloudDeakin) to facilitate this. It is important that all parties interact and contribute regularly to ensure that equal work loads are being carried. If you are part of a group, any member of the group may be called upon by MAF708 to answer any questions on any aspect of the assignment. As a member of a group you therefore owe a responsibility to the other members to fully contribute to the group success. The final assessment is therefore dependent upon attention to detail as you plan your responses. Don't let your team down.
Students should be in a position to commence the assignment after they have completed topic 2 of the study materials. Topics 3, 4 & 5 will also assist.
Component One
Mark and Antonia Chau have come to you for some advice about their superannuation. Antonia is 42 years old. She is a graphic designer working for an online publishing house. Antonia is in an accumulation scheme and her employer contributes the standard 9.5% superannuation guarantee into her account. Antonia's superannuation balance has been highly volatile - commencing seven years ago Antonia had three years of terrible returns however over the last four years the returns have improved considerably - six months ago hersuperannuation balance was almost back to where it was 7 years ago so Antonia decided to shift out of her high growth investment selection into the cash investment selection. She currently remains in the cash investment selection. In 2014 Antonia earned $82,000. She has a balance in her superannuation account as at 31 December 2014 of $168,750. She does not currently salary sacrifice. Mark has suggested that a long term nominal rate of return of 4.15% on a cash investment selection is realistic and Antonia is happy for you to commence your modelling on this basis. Antonia also intends at this stage to work for another eighteen years before retiring at age 60. Mark is also 42 years old and works as a high school teacher. He is a member of his employers defined benefit superannuation scheme. His final superannuation payout on retirement is a function of three factors which are ultimately multiplied together to produce the payout amount.
The factors are:
• Final average salary (FAS) which is an average of the last three years of salary. In 2012 Mark's salary was $84,200, in 2013 it was $86,950 and in 2014 it was $91,720.
• The number of full time years worked (n). Mark has worked for his employer for the equivalent of 19 years full time. It is Mark's current intention to work for another eighteen yearsfull time by which time he will be 60 years of age.
• The employee contribution percentage which is generally denoted on the statements that Mark gets as the FAS%. Employees have the choice of how much they salary sacrifice into their defined benefit scheme, the choices are:
• 0% salary sacrifice = FAS% of 8.5%;
• 5% salary sacrifice = FAS% of 17.5%
• 7% salary sacrifice = FAS% of 21%
For the past 19 years Mark has salary sacrificed 5% of his salary into his defined benefit fund and he is happy to continue to contribute at least this amount into the future.
Mark'slastsuperannuation statement dated 31 December 2014 stated that he had a notional $291,348 in superannuation however he would like you to check the accuracy of this figure before you go too much further with your superannuation modelling.
Mark has done a bit of research and he is keen for you to incorporate some of his ideas into your modelling. Mark believes that if he were to open a separate superannuation accumulation account and use a balanced investment strategy that he could generate nominal returns of 6.48%.
Antonia and Mark have $300,000 in liquid assets outside the superannuation environment. They also have a mortgage on their home of $175,000. They have no children and have no plansto have children. They estimate that based on current expenditure they would generate a cash surplus of about $20,000 per year. They also estimate that they would spend approximately $30,000 per year on travel.
Retirement seems a long way off however they have decided to set themselves a target. A friend has suggested that if you can generate a retirement income of 65% of your preretirement income then you should have a fairly comfortable retirement. Antonia and Mark have no idea whether this is an achievable target or not - that is why they have come to you for advice.
Other assumptions:
• The rate of inflation is 3%;
• A nominal increase in income of 4.72% per annum for both Antonia and Mark;
• The interview with Antonia and Mark has been conducted at the end of 2014 so that all modelling would be done in calendar years commencing 01/01/2015;
• Funds invested in retirement are expected to generate a nominal return of 5.80%;
• All superannuation contributions are made in December of each year and therefore do not attract earnings in the year in which they are made;
• The Abbott Government currently has pending legislation which will delay the increase to the SGC. For the sake of simplicity assume that the SGC is 10% for each year of the financial projections - this will lead to a slightly conservative estimate.
Required
Mark and Antonia would like a report which models and displays the following information:
A. How much they can expect to accumulate in superannuation by the time they retire at age based on their current superannuation settings. You will need to model Mark and Antonia's superannuation separately.
Part A for Mark should display on a single A4 spreadsheet page. Part A for Antonia should display on a single A4 spreadsheet page. (Hint: Use a landscape approach combined with the Hide rows function) Therefore Part A = maximum of two spreadsheet pages.
B. The retirement income stream, expressed as a percentage of their combined pre-retirement income, that they can expect in retirement based on the accumulated amount you determined in part A above. This should be based on Antonia's life expectancy. [Please note
that this can be calculated using the Payment PMT function in Excel - we are not asking you what type of income stream they should choose - this is discussed in topic 8 which we will consider after the assignment has been completed and handed in.]
C. Briefly explain to Antonia and Mark the impact of modelling in real terms.
D. What five strategies can you suggest for boosting the couple's retirement income? Antonia and Mark thought they could kick-start this process by suggesting two strategies:
• Antonia is worried that she was too hasty in moving to the cash investment selection and wonders what would be the impact of changing her investmentselection again.
• Mark wonders whether he should increase his contribution to his defined benefit plan to 7% or whether he would be better off by setting up a separate accumulation account and salary sacrificing the extra 2% into that account instead.
[You are required to explain and discuss yourstrategies and provide some financial modelling results.]
A separate spreadsheet should not be included for each strategy you might consider in this part. If you have a preferred scenario (a single strategy or combination ofstrategies) and you want to demonstrate to Antonia and Mark the thinking behind your strategies, you can include one spreadsheet in this part - it must however print on one A4 page. If you wish to show Antonia and Mark the results of other scenarios then this must be done through the use of tables, graphs, charts etc. Effective communication isthe key.
Your written commentary to parts C and D combined should not exceed 1,800 words (please include a word count).