Risks associated with the advice provided Raj Naji (aged 47) is married to Sally (45). They live in a lovely suburb on the north shore of Sydney. The couple has two children, Leila and Alexander, 9 and six years respectively.
Raj is a partner at an accounting company and frequently travels both interstate and internationally. Sally is a marketing manager at an IT company and is on full time work after her second born Alexander started schooling. Both children attend a reputable private school.
Raj earns a monthly salary of $ 380,000 while Sally earns a monthly salary of $ 220,000
They have a joint tenancy of their principal residence of $ 2,500,000 and home contents of $ 180,000.
They have a joint call account of $ 22,000.
A joint car loan of $ 40,000 at 8.5% interest.
Raj has a term investment under his name of $ 62,000 at 3.54% and matures on 15th January 2018.
Raj and Sally have an employer superannuation contribution of $550,000 and $285,000 respectively.
Raj and Sally have a life and TPD super fund investment or $800K and $500K respectively.
Raj has a share portfolio of $120,000.
Sally has managed funds of $45,000.
Raj and Sally would like to continue supporting their children through their high school and university education. They believe in education as a vital investment to the future of their children.
Raj would like that one day, Sally and he would be able to slow down and retire.
Raj would like to retire at age 64 and Sally at age 62. They are however ready to work for a few more years to achieve a comfortable retirement. Raj is ready to work a few more years on a semi-retirement plan.
Both think they need an after tax income of $80,000 during their retirement.
They would like to know the effect of the latest superannuation changes of 1st July 2017 on their retirement and savings plan.
They would like to pay off their home loan within the shortest time possible.
Saving and investing is also part of their objectives.
They are ready to borrow and invest if the move can enable them to achieve their retirement goals.
They would like to make renovations on their house once they retire at an approximate cost of $142,000 current value.
They would like to take a family trip to Disney land in 2 years time at an approximate cost of $16,000 current value.
They would like to start their SMSF, hence want to know the benefits and risks of establishing one in line with their circumstances.
They would like to know the possibility of using the Limited Recourse Borrowing type of arrangement to buy and rent an apartment.
Raj would like to get advice on the share portfolio that he purchased recently.
Both of them would like to know of their possible eligibility of obtaining an age pension on retirement.
They would like to provide private school education to their children.
They would like to get advice on the various types of pensions in which to start their superannuation savings on retirement.
They would like to have enough personal and general insurance.
They would like to be provided with clear recommendations on their estate planning needs.
They would like to get advice on what they should do on maturity their term deposit.
A projection of Raj & Sallys life expectancy or more than eight years.
It is recommended that Raj should sell his current share portfolio and invest in a highly diversified managed fund to suit his risk profile and reduce the systematic risk.
It is recommended that both Raj and Sally should rollover their current superannuation accounts into an SMSF that includes a corporate structure in the event of retirement.
It is recommended that Raj should take a professional indemnity cover in he decides to continue working as a private consultant after his retire.
Raj and Sally should incorporate a power of attorney by considering a myriad of options that exist to pass on their estates to the intended beneficiaries.
The primary risk that arises when investments do not provide the returns as expected while bearing in mind that the risks cannot be terminated completely.
The risk of adjustments in taxation legislation resulting in a reduction in the net income estimated savings and an increase in the tax payable.
The advice applies various assumptions with regards to interest rates, investment returns and income taxes as well as the clients financial circumstances. As a result, the results of the advice may not be realized if these underlying assumptions are not met.
TOC \o "1-3" \h \z \u Executive summary of advice PAGEREF _Toc503860775 \h 1Basis for advice PAGEREF _Toc503860776 \h 3Personal Details PAGEREF _Toc503860777 \h 3Current Financial Position PAGEREF _Toc503860778 \h 4Risk profile PAGEREF _Toc503860779 \h 5Impact to Rajs asset allocation PAGEREF _Toc503860780 \h 5Impact on Sallys asset allocation. PAGEREF _Toc503860781 \h 5Objectives PAGEREF _Toc503860782 \h 5Assumptions PAGEREF _Toc503860783 \h 6Projected cash flows and net wealth PAGEREF _Toc503860784 \h 7Retirement needs analysis PAGEREF _Toc503860785 \h 8The needs analysis PAGEREF _Toc503860786 \h 8Superannuation changes PAGEREF _Toc503860787 \h 8Transition to retirement pension PAGEREF _Toc503860788 \h 8Concessional contribution cap. PAGEREF _Toc503860789 \h 8Non-concessional contribution cap. PAGEREF _Toc503860790 \h 9A $1.6 million transfer cap on pension accounts. PAGEREF _Toc503860791 \h 9Self managed superannuation fund facts. PAGEREF _Toc503860792 \h 9Establishing an SMSF PAGEREF _Toc503860793 \h 9Benefits and risks of establishing an SMSF. PAGEREF _Toc503860794 \h 9Benefits PAGEREF _Toc503860795 \h 9Risks PAGEREF _Toc503860796 \h 9Transfer of residential property into an SMSF. PAGEREF _Toc503860797 \h 9Limited resource borrowing arrangement PAGEREF _Toc503860798 \h 10Recommendations PAGEREF _Toc503860799 \h 10Salary sacrifice PAGEREF _Toc503860800 \h 10Self management superannuation fund (SMSF) PAGEREF _Toc503860801 \h 10Debt management PAGEREF _Toc503860802 \h 10Investment options PAGEREF _Toc503860803 \h 10Share portfolio PAGEREF _Toc503860804 \h 10Insurance products PAGEREF _Toc503860805 \h 10Estate planning PAGEREF _Toc503860806 \h 10Appendix PAGEREF _Toc503860807 \h 11
Basis for advice
Raj Naji (47 years)
Relationship Status: Married to Sally.
Children: Leila (9) and Alexander (6).
Employment: Partner in an Accounting Firm and earning a current salary of $380,000 exclusive of Superannuation
$1,350,000 in retail superannuation fund as a balanced investment (growth 75%, defensive 25%)
Insurance is inclusive of superannuation fund. $800,000 life and TPD
Current Personal Investments:
Term Deposit of $62,000 maturing on 15th January 2018 earning an interest rate of 8.5%p.a.
Share Portfolio of $120,000 invested equally in BHP shares and ANZ Bank.
Sally (45 years)
Relationship Status: Married to Raj Naji.
Children: Leila (9) and Alexander (6).
Employment: Marketing manager of an IT company earning a current salary of $220,000 exclusive of superannuation.
$785,000 in nominated superannuation fund as a moderate investment (50% Growth, 50% Defensive)
Insurance is included in the Superannuation Fund at an amount of $500,000 life and TPD
Current Personal Investments:
Managed funds of $45,000 invested in Australian shares.
Principle residence valued at $2,500,000.
A call bank account at $22,000.
Current Financial Position
Balance Sheet as of 30th April 2017
Raj and Sally Naji $ $
Current Assets Current Liabilities
Bank Account 80,000 Credit card balance 15,000
Term Deposit 62,000
Non-Current Assets Non- Current Liabilities
Residential Property 2,500,000 Residential Property Loan 900,000
Share Portfolio 120,000 Car loan 40,000
Total Assets 4,897,000 Total Liabilities 955,000
Total Net Wealth 3,942,000
Joint Income Statement
Raj and Sally Naji 2017
Salary Income $600,000.00
TTR Pension Income $30,000.00
Term deposit $62,000.00
Dividend Earnings $41,250.00
Total Income $733,250.00
Income Requirement $80,000.00
Home Loan Repayments $48,000.00
Car loan repayments $40,000.00
Total Expenses $168,000.00
Net Income Before Tax $565,250.00
Tax Expense $231,618.99
Net Income After Tax $333,631.00
The financial statements have been designed based on the current joint income, the income required and the loan information provided by Raj and Sally during the consultation. Moreover, the calculations were based on the current taxation rates and policies put forward by the government and the rates of interest given out during the consultation.
Concerning the above statements of financial reporting, Raj and Sally can meet their financial current financial requirements comfortably. They have an overall net wealth of $ 3,942,000 and are left with a net income of $333,631 after tax and expense deductions.
The risk profiles of the parties recorded below are based on the information obtained from Raj and Sally during the process of consultation. The data on current assets held by all the parties were also put into consideration in the process of developing their risk profiles and questionnaires.
Rajs risk profile assessment results describe him as a moderate investor. Concerning his financial background, he is interested in owning shares. He has a proper understanding of the Australian shares as well as shares in general and knows that they are more volatile than other forms of asset classes. Moreover, the higher the risk, the higher return should they perform according to the market expectations. In this case, raj understands that shares perform well in the long term. He is comfortable with taking it if he will be able to understand and see the possible rewards that would come along with the investment.
Impact to Rajs asset allocation
Being a moderate investor, Raj is recommended to hold 35% of his investment in assets that provide a fixed income, and the investment should be made appropriately in large scale domestic companies as the same level. He is also recommended to invest 15% in international equities and 10% in existing small domestic companies. The remaining 40% of his assets should be channeled towards investments that require cash allocations.
Sallys risk profile assessment describes her as a moderately conservative investor. This can be attributed to her family background where she was brought up in a conservative family which has most of their money invested in either term deposits with existing major banks at the time or government bonds. The family always talked of their dislike for investments made to shares as they felt that they couldnt sleep due to the stochastic market events. Moreover, they always advised Sally that property investment is less risky and had no chances of going wrong. In this context, they kept encouraging her and Raj to buy a house once they got married. Therefore, in risky investments, Sally is more conservative than Raj. However, after taking some finance subjects at the University, she can see some merit when taking calculated risk movements to achieve better financial returns.
Impact on Sallys asset allocation.
It is recommended that sally, as a moderate investor, should hold 50% of her investment in the form of fixed income investments, i.e., treasury and corporate bonds. This kind of investments would offer a fixed stream of income with minimal risks. 25% of her investment should be made on large companies that hold a larger percentage of the market. The remaining 25% should be allocated between shares held in cash investments and smal...
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