Question

Jan is aged 45 and wants to know about funding for her superannuation when she plans to retire at age 60. At the moment, Jan is single but has some prospects. She currently earns about $120,000 per annum and her employer will let her salary sacrifice to superannuation.

As Jan's financial adviser, the first thing you need to do is calculate the amount she will need at retirement. Pat's current tax rate is 37% excluding the Medicare Levy (2%) and you expect that she could earn 6.5% gross in the long term on any investments, whether they are in superannuation or invested in her name.

a) List 6 questions you will should ask Jan in relation to her request

b) List 6 factors that should be discussed with Jan regarding your advice

c) Calculate the estimated amount Jan will require for retirement

Answer 1

a)

1. What is the total amount of saving accumulated so far

2. What rae your annual expenses and savings

3. What is your risk profile? (To find out if her saving could potentially be ninvested in equities)

4. What is the expected amount of funds she would be needing annually post her retirement

5. Does she have any liabilities which needs to be paid off in the future years.

Does she have a house which could be reverse mortgaged.

b.

1. The fund would that would be used t fund for her retirement would be superannuation fund.

2. She would be receiving an amount annually for her upkeep

3. She should be very clear regarding her annual expenses. Her annual expenses should include any contingencies also.

4. The rates of inflation could effect her earnings. For instance, if the inflation goes down, then the central bank may reduce the rates, which could in-turn effect her income.

5. The house, if owned by her could be reverse mortgaged also, which would give her the right to earn a fixed amount from her propoerty without parting with the property. However, on her demise the property would be taken over by the lender.

6. The tax rates could affect her pay-outs.

c.

Considering her annual expenses to be $1,00,000, inflation of 5%, the annual amount required at the time of retirement is:

1,00,000*(1.05^15)

= 2,07,892

Pre tax amount required = 207892/0.63 = 329988

Amount required= 329988/(.065) = 5076748

Present Value = 5076748/(1.05^15) = $24,42,002