Financial planning

In today’ s world, financial planning is important especially for families. Proper planning enables one to effectively manage their income, ensure the family’s financial security, have adequate investments, and have some savings in place (Berd and Fokin, 2019). The following is financial planning advice given to Anne on how she will utilize her assets to meet her financial needs.

CASE DESCRIPTION

This case is about a family which consists of three members. Anne, who is 40 years old, has two children, Daisy and Michael, who are 10 year old twins. Her husband, Alan ,died four weeks ago of a heart attack. Anne’s desire is to update her estate planning documents and get advice on life insurance as she currently has none. She would also like to access the funds in her late husband’s Superannuation account, and review her own Superannuation. She also wants a new plan on repaying her car and home loans. Anne also wants to ensure that she has adequate insurance. She also wishes to start up on a savings plan while maintaining a $20,000 emergency fund.

CASE DATA

S.NO

NAME

RELATIONSHIP

AGE

1

ANNE

Self

40

2

MICHAEL

Son

10

3

DAISY

Daughter

10

4

JENNY

Sister

38

5

DON

Father

62

6

IRENE

Mother

62

The cash flows and net worth are as follows:

MONTHLY ($)

YEARLY ($)

Inflows

$10,000

$120,000

General life expenses

($350*4)= $1400

$16,800

Medical and dental

–

$2,000

Mortgage repayment

$2,500

$30,000

Building and contents insurance

–

$3,000

Telephone and internet

$100

$1, 200

Mobile phone

$40

$480

Car payment

$300

$3,600

Water

–

$600

Council rates

–

$1200

Gas

–

$800

Electricity

–

$2,200

Home maintenance

–

$2,000

Motor vehicle costs

($1,050+$600+$2,000)= $3,650

Children’s school expenses

$10,000

$76930 (total outflows).

OTHER ASSETS:

v Home valued at $800,000 ($400,000 mortgage at 3.5% p.a)

v Alan’s super balance of $150,000 and Anne’s which is $100,000

v Alan’s life insurance of $300,000 in his Unisuper account

v Savings of $10,000

v Term deposit of $20,000 (matures 30 November 2020)

ADDITIONAL IMMEDIATE EXPENSES:

v Funeral home: $20,000

v Charges to Happy Financial Planners Pty Ltd. : $5,000

v Car loan repayment $600 (Plus one month in arrears)

v Family expenses for the month

ASSUMPTIONS:

• Assumptions on investment returns are:

Income Growth

Cash 1.5% 0%

Australian fixed interest 4.0% 0%

International fixed interest 6.0% 4.0%

Listed Property 4.5% 3.0%

Residential property 4.0% 4.5%

Australian Shares 4.0% 6.0%

International Shares 3.5% 6.5%

• Both Anne, her husband and family are Australian residents.
• The house in Sidney is the family’s residential home.
• Assumptions regarding other data are allowed provided proper reference or a proper justification is given for the assumption.
• The values stated in each case are based on an assumption relevant to the real life needs of the family and the strategy developed is in line to those values assumed.

LOAN REPAYMENT

House Mortgage

The family has a house mortgage amounting to $400,000 with a floating interest rate of 3.5%. This loan is paid at an Equated Monthly Installments (EMI) of $2,500 a month. This implies that the family will pay the loan for 18 years with a total cost of $ 539,707 and a total interest payable of $139,707. The time and interest are calculated using Loan Calculator in excel sheet which is given in Appendix A (Naioi et al. 2019).

The strategy is to repay part of the loan amount in Lumpsum and refinance the remaining amount with a bank that charges an interest rate of 2.9% and a processing fee of 1% sanctioned.

The following table shows the existing outstanding amount of loan which is $400,000 and is to be paid in 18 years tenure at the interest rate of 3.5%. EMI for this loan is $2,500.

Existing Loan

Time

Rate of Interest

Total interest Charged

Present EMI

$400,000

18 years

3.5%

$139,707

$2,500

Anne wishes to renegotiate the loan. The strategy is for the bank to help her refinance the existing mortgage with a cheaper one at an interest rate of 2.9% p.a.

If Anne pays a lumpsum of $130,000 on the mortgage the balance would be financed as shown in the table below.

If she retained repaying the loan with the same bank for the same period of time she would pay an EMI of $1,687 as calculated by excel sheet in Appendix C.

Existing Loan

Time

Rate of Interest

Total interest Charged

Revised EMI

$270,000

18 years

3.5%

$94,303

$1,687

This means that she would safe a total of $45,404 using the lumpsum payment option:

• Total interest charged on the full loan-Total interest charged on the remaining amount
• $139,707-$94,303 = $45,404

Paying a mortgage of $400,000 for 18 years at 2.9% would have had an EMI of $2,379 as calculated using Loan Calculator in excel sheet which is given in Appendix B2. The table below shows how the refinanced loan would have been paid without a lumpsum.

Existing Loan

Time

Rate of Interest

Total interest Charged

Present EMI

$400,000

18 years

2.9%

$113,914

$2,379

The strategy as well includes repaying some of the outstanding loan amount as a lumpsum amount and refinancing the remaining $270,000 with a cheaper mortgage at 2.9 %of ($130,000) for 18 years. This is shown by the loan calculator in Appendix B. The table below shows how Anne would pay the balance of the refinanced mortgage.

Existing Loan

Time

Rate of Interest

Total interest Charged

Revised EMI

$270,000

18 years

2.9%

$76,892

$1,606

This strategy resets the EMI to $1,606 and a saving of $17,411 is realized:

• Total Interest charged at 3.5%-Total interest charged at 2.9%
• $94,303-$76,892 = $17,411

In this strategy the total savings are:

• Lumpsum payment saving + Refinancing option savings ­­­–­ Refinancing processing fee
• $45,404 + $17,411 – $2,700 = $60,115

Car Loan

Anne has a car loan of $20,000 with MG finance at a rate an interest rate of 7.0% with a monthly payment of $300. Assuming that the car loan has only lapsed for the 1 month she will pay the loan for 7 years. The total loan plus interest will be $25,200. Anne can pay this amount in lumpsum using the amount to be claimed from the husbands life cover to clear the car loan (Lu et al, 2020).

ANNE’S SUPERANNUATION

Anne would like her superannuation to be reviewed. Currently, it is paid at 9.5%, and her current balance is $100,000. This implies that Anne pays ($120,000* 9.5%) = $11,400. Now that she will be contributing to the Unisuper on her own, she needs to increase the amount of the contribution.

Anne and her husband are on concessional contributions and Anne is on compulsory contribution by the employer. This means that Anne has a limit of $25,000 contribution per year as defined by the super contribution cap for all the ages (Kingston and Thorp 2019).This means that if she will increase the savings then she will not exceed the superannuation limit to avoid additional penalties and taxes.

For Anne to review her contribution she needs to elect her employer to make contribution to the super account as a salary sacrifice concessional contribution. This is the best cost-effective method to avoid taxation as this contribution is before tax (Si 2018, p.3). The employer’s Super contribution is taxed at 15% which is lower than the marginal tax rate for the majority of people. This means that some money is saved on the tax (McKenzie 2018, p.73).

If Anne’s employer does not offer this option for salary sacrifice it is an option to make contributions directly into the super account using after tax salary then make a tax claim of the same while filing the tax returns. This is usually done by lodging a notice of intent to claim for personal contribution to the super fund before the end of the financial year for them to acknowledge in writing before claiming a tax deduction while filing returns.

It is also advisable to ensure that Anne’s parents have an investment through super which they can make if they haven’t started. If they have and have exceeded their yearly cap because they are below 65 years old they can make non-concessional contribution up to $100,000.

Anne can withdraw her husband’s super balance on compassionate grounds to pay the funeral costs ($20,000) and Mortgage repayment lumpsum ($130,000) to bring it down to $270,000. Anne can claim the super amount as a dependent under the superannuation law and receive the amount as a lumpsum tax free.

CLAIM OF THE HUSBAND’S LIFE COVER

Anne is named as the nominated non-binding beneficiary of Alan’s Super account $300,000. This means that she is the person who stands to be the beneficiary of the life cover together with the two kids. A non-binding beneficiary doesn’t guarantee that the person will receive the funds. This only happens if the preferred beneficiary is a financial dependent of the deceased (Backhaus and Butler, 2019). In this case, Anne is dependent financially on the husband since she is responsible for taking care of their children and the bills. She also has a shared financial commitment with Alan as they are joint tenants of their mortgaged home. In order for Anne to access the funds in a tax effective manner, she needs to get the payment as a lump sum. Tax is not payable when a dependent receives the funds as a lumpsum. She should not claim it as an income stream. Since Alan was under 60 years, marginal tax rates would be applicable to the income streams.

ANNE’S INSURANCE

As per the strategy it is important that Anne has an insurance in place for her family and assets in place. She has an option to pay her life insurance through Super account as it is convenient to pay premiums. However there are more drawbacks than advantages in this option.

There is no guarantee for beneficiaries unless expressly written to the super fund. This means that it will reduce the retirement benefit. It ends at 65 years for TPD and 70 years for the life cover (Black and Millington, 2019). The amount cover is not user specific as it is a group option as one might buy an option big than necessary or rather less than expected. In case of change of employment and the fund is switched the investment will be lost.

Anne should acquire a life insurance cover outside super through another provider. She should expressly choose the kids to benefit from the fund and in case they are not of age to be represented by her sister until they are of age.

Car Insurance

Anne’s car is already insured, but not adequately. She pays Rego/Greenslip fees of $1,050 annually. The Greenslip insurance covers compensation for people who may be killed or obtain injuries during a car accident (Car, 2018. p 7).These maybe pedestrians and drivers of the other vehicle. However, this type of insurance does not fully cover the driver, with an exception of receiving benefits for a maximum of six months after, or if the driver sustains serious injuries. This type of insurance does not cover damage sustained by the subject vehicle, other parties’ vehicles and properties, and theft of the vehicle. Therefore, it us advisable for Anne to take up an additional cover against damage of the car. This type of insurance is known as a comprehensive cover which covers damages to the owner’s vehicle and to the other driver’s vehicle or property. It also covers damage that would be caused by other factors such as fire and natural calamities. If also provides protection against theft of the car (Bohnert et al. 2016).

The cost of the premium is calculated by the insurer after considering factors such as the driver’s age, their driving record, history of making claims, and the vehicle type. However, the average premium amount is about $778 annually. She can get this amount from her annual salary. I would recommend that she uses Budget Direct Insurance company which offers an affordable comprehensive cover.

Home Insurance

Currently, Anne has a building and contents insurance cover for which she pays $3,000. The building part covers the actual building fixtures such as roof, walls, floors, doors and windows. These are covered against the risk of fire, gas and natural calamities. Content insurance covers the belongings in the house. Therefore, Anne does not need any additional home insurance since all the aspects are covered (Booth and Hardwood, 2016).

SAVINGS PLAN

Anne wants to maintain a contingency plan of $20,000. This is already in the term deposit and she can review the date after maturity on 30th November 2020. The saving s in the family savings account of $10,000 can be retained.

In order to get a great savings plan, we need to analyze how Anne’s living expenses are like compared to her income. The leftover money will be used to set up a savings plan. Anne should then commit to saving this fixed amount every month. The most advisable type of savings account to open is a High interest savings account (Feng., et al 2019 p. 145). These are usually online savings accounts where one can make direct deposits without physically going to the bank. These will have a high interest rate of about 2.55%. They also offer extra benefits such as bonus saver and introductory rate savings.

Anne’s monthly expenses (with the new mortgage payment of $1606) are a total of about $5600. Her monthly income is $10,000. This means that she can open a savings account where she can deposit up to $4,400.

POST CASH FLOWS

Anne’s annual salary is $120,000, and therefore her monthly income is $10,000. Her monthly expenses are as follows:

• General life expenses (($350*4)= $1400
• Medical and Dental- 166.67$
• Mortgage repayment- $1,606
• Building and contents insurance-$250
• Telephone and internet- $100
• Mobile phone-$40
• Car payment- $300
• Water, gas and electricity- $300
• Car payment-$300
• Council rates- $100
• Home maintenance-$166.67
• Motor vehicle costs- ($1,050+$600+$2,000)= ($3,650/12)=$304.16
• Children school expenses-$833.33

These total to about $5600 per month. Since her monthly salary is $10,000, it will be able to sustain her monthly expenses and leave room for savings.

This month, she has additional expenses of $5,000 to pay the financial planner and $2,700 for the mortgage’s service fee. This can be sourced from Alan’s life insurance of $300,000, to bring it down to $292,300.

INVESTMENTS

Anne’s husbands life cover of $300,000 can be split two ways. $142,300 should be put into savings and the other $150,000 into investment (Morris, 2018). Anne should consider two different investment opportunities to avoid risking all her money on money channel. The first opportunity that she can invest in is a term deposit. She can deposit $50,000 in a bank for a period of one. Depending on the interest rate offered by the bank, she can withdraw this money with interest after the one year elapses. She can then keep doing this for the rest of the years. The other investment opportunity is in Real Estate Investment Trust (REITs). This is where an investor gives their funds to a fund manager who buys and sells assets in the property market. One such group is the Goodman Group, which has a market cap of approximately 16 billion and a dividend yield of 2.24%.

ESTATE PLANNING

Anne also wants to put her estate documents in order so that her children will be taken care of after her death. This process involves setting out a plan for what happens to ones assets and investments after their death. The first document that she should update is her will. This legal document will outline her wishes for how her assets will be distributed after she dies. Here, she can name Daisy and Michael. She should also specify who will be responsible of her children, for example her sister. She should also make Superannuation death nominations for who will get her benefits when she dies. Here, she can make a binding nomination to her children. She should also create powers of attorney where she will appoint another person to carry out her affairs if she is unable to. Anne should also create testamentary trusts to distribute her assets to the beneficiaries (Burgess 2020, p.372).

CONCLUSION

By following these recommendations it ensures that Anne leaves in the most cost effective tax environment and that she can manage her finances well. The reduction in the loan obligations will help her to cater for the family expenses easily now that she is alone.

Having an insurance will ensure that the risk of losing her assets Is low and the future of the family is secured. Planning her estate is a great move to ensure her kids are well taken care of if she happens to die.