Craig and Susan Brown had just returned from their honeymoon trip in the Caribbean. They celebrated their wedding and the successful completion of Susan's MBA degree. Craig is 30 and Susan is 28 years old. Since the day they tied the knot, Craig's parents have been encouraging the couple to establish some personal financial goals for their future. The couple is eager to own their own home and have children in the next 3 years. They intend to seek professional financial advice from a registered financial planner.
Craig works as a senior electrical engineer for a local manufacturing company and earns a pre-tax salary of $160,000 per year. Susan is currently employed on a part-time basis as a computer technician and earns a yearly gross salary of $40,000. In the near future, she intends to pursue a full-time career as a business manager for a computing firm until their first child arrives. They plan to have two children with two years apart between them. If she takes up the new career, her gross salary would increase to $85,000 per year. During your first meeting with them, Craig was quick to point out that he dislikes financial surprises while Susan indicates that she is willing to take some risk if the investment returns are worthwhile. Both of them do not spend a great deal of time tracking and understanding their finances.
Currently, they live in a rented apartment in the eastern suburb of Sydney. They pay a monthly rental of $4,000 for the 3 bedroom apartment. They are hoping to own their own property in three years before their first baby arrives. Craig has set aside a small fund for their new home. The money is invested in a portfolio of blue-chip shares which provide consistent dividends for the last 5 years. The current market value of the fund is approximately $60,000.
Craig has a savings account balance of $25,000 that earns an annual interest of 5 per cent. He has received a $1,500 dividend cheque with associated imputation credits of $400. Last week, he received a lottery winning of $15,000. Susan has a cheque account at a local bank. The account has a balance of $4,000 and the bank requires all customers to keep a minimum amount of $2,000 to earn an annual interest of 1.5 per cent. Craig and Susan are concerned about the amount of personal income tax and medical levy withheld from them. They are not entirely convinced that the tax calculations are correct. In their regular weekend shopping, credit cards are often used. Their combined monthly balance always seems to hover around $3,500 at all times. They use their card to draw cash from the ATMs to cover their daily household expenses even though they carry about $300 in cash between them.
Although the first child is not expected until three years later, the Browns are anxious about their children's tertiary education cost. Susan thinks that they should start thinking about education funding today. To encourage their children to take up tertiary education in the future, Craig and Susan are happy to provide for their education. The tertiary program will take 3 years to complete and the estimated individual tuition fee is $40,000 per year when the children start to attend university. For each child, other related expenses would cost another $20,000 per year.
The Browns believe they should save and be self-sufficient during retirement but they have yet to establish a retirement plan. Susan has accumulated $35,000 in her superannuation account while Craig has $145,000 in his account and has not named the beneficiary. The estimated combined yearly expenses are as follow:
Other expenses (per annum):
Utilities $7,000
Car usage and maintenance $30,000
Food and groceries $10,000
Entertainment $8,500
Miscellaneous $8,000
The following information is also available:
- Superannuation dividend payments are approximately 5% indefinitely. In general, an increment of 3% in salary is expected every year.
- The long-term return for equity investment is projected to be around 14% per year, whereas bond funds are expected to offer yield of 6% per annum. Investment in term deposits will generate average return of 5% per annum over the next 30 years. Return from low risk managed fund is approximately 7% per year.
- The life expectancy for Craig and Susan are 77 and 85 years old respectively. The children are expected to be dependent on their parents until they turn 24 years old.
- Craig and Susan are Australian residents.
- For calculation of taxable income, use the relevant tax rates provided by the Australian Taxation Office (ATO).
- The Medicare levy is 1.5%. Craig has tallied his work-related expenses for the year to be $9,500, which includes $1,600 for return bus fare from home to work during the year. He has also donated $400 to CARE Australia. Susan has work-related expenses of $2,500, tax deductible gifts totalling $1000 and paid $200 for tax return preparation.
- They do not receive fringe benefit from their employers.
- Both Craig and Susan provide approximately 9% superannuation contributions via salary sacrifice and their respective employers provide another 9.5% contribution into their superannuation funds.
- For the use of credit cards, interest charged for unpaid balance is approximately 17% per annum.
- All debts will be amortised over the period of the loan. Mortgage repayments are made at the end of each month.
Required
Question 1 -
Identify specific short-term and long term financial goals for the couple.
Question 2 -
Assuming 3 years from now, the couple decides to purchase their own property. The estimated purchase price is $1,200,000. They are able to obtain a 30 year home loan with 95% financing from the bank. The home loan has a fixed rate of 7% p.a. for the entire period of the loan.
i. How much do they have to pay the bank every year?
ii. How much do they still owe the bank when the first child goes to university?
Question 3 -
i. Calculate the amount to be saved by the Browns at the beginning of each year in order to accumulate the desired amount for one child to attend university if they can earn 12% on their savings starting today (total cost of $60,000 per year for a child is expected).
ii. If instead, they save money at the end of each year, how much do they have to put away to provide for the education cost?
Question 4 -
Craig is doubtful about his tax calculation. Using the information provided, calculate the taxable income and tax payable for him. What tax planning advice can you offer to the couple?
Question 5 -
The Browns do not have a will. Advise the couple on the issues they should consider in drawing up a valid will (be specific and make sure you include the children in the will).
Question 6 -
Discuss the need for the following covers for the couple (be specific to the case).
i. Total permanent disability
ii. Income protection