Question

(c) You have commenced work as a Certified Financial Planner. Your supervisor has provided the following financial data for a new client Brant Jerome. The client turned 34 years old today and plans to retire when she turns 67. The client owns a diversified share portfolio which is valued today at $47,000. It is expected that this portfolio will earn (on average) 7% per annum indefinitely. Brant also has a superannuation account with a balance of $78,000 to which he currently contributes $1,000 per month. The superannuation account is expected to continue to earn 8% per annum. At his retirement, your client plans to consolidate his financial holdings and purchase a monthly annuity as a pension to fund his planned lifestyle. Brant believes he will need to self-fund his retirement until he reaches the age of 85 at which time he would like to have $120,000 remaining to fund any costs not covered by the age pension. During the pension phase of his retirement, Brant will adopt a Balanced investment strategy which will return 5% pa (compounded monthly) on his annuity investment. (i) What will be the value of Brant’s financial assets when he retires at age 67? Present all calculations to support your answer. (ii) What will be the monthly pension amount that Brant will receive on his retirement? Present all calculations to support your answer.

Answer 1

Future value of Cash Flow:

(Cash Flow)*((1+i)^N)

i=return rate, N=Number of years to future

Value of diversified portfolio=

$47,000

N

Number of years to retirement

33

(67-34)

i

Rate of return on the portfolio= 7%

0.07

X

Value of portfolio at retirement

$438,291

(47000*(1.07^33)

SUPERANNUATION ACCOUNT :

Pv

Amount balance in Fund

$78,000

Rate

Monthly Return =(1.08^(1/12))-1=

0.6434%

Nper

Number of months toretirement

396

(33*12)

Pmt

Monthly deposit

$1,000

FV

Balance in fund at retirement

$2,803,465

(Using FV function of excelwith Rate=0.6434%, Nper=396,Pv=-78000, Pmt=-1000)

Y

Value of Superannuation fund at retirement

$2,803,465

(i)

Z=X+Y

Value of Brant's Financia lasset at retirement

$3,241,756

(ii)

Monthly Pension till age of 85

Pv

Amount available at retirement

$3,241,756

Rate

Monthly return =(5/12)%

0.41667%

Nper

Number of months of pension

216

(85-67)*12

Fv

Remaining amount at age of 85

$120,000

PMT

Monthly Pension till age of 85

$22,447

(Using PMT function of excelwith Rate =0.41667%, Nper=216, Pv=-3241756,Fv=120000)