Financial Planning Report for Mark and Susan Saunders

Question:

Discuss about the Financial Planning Report to Mark and Susan Saunders.

Answer:

Introduction

Mark and Susan are 45 years of age with 3 teenaged children. Currently, Mark is a business man and Susan is a salaried employee ( teacher in a secondary school ). They have parked their surplus cash in assets worth $ 1.72 mn like their family home, car, Australian shares and risk free investments like term deposit and savings. This also includes the business assets of Mark i.e. van, office, plant and machinery of $ 410 k. They also individually have a super annuation corpus where in the case of Susan the employer contributes 9.5 % of salary. The super annuation corpus combined is $ 170k which includes $ 60 k of Mark in two funds namely S & M SMSF and AMP Super Fund which invested across shares, cash and is invested in cash, property, fixed managed fund and shares. Susan’ super fund across the S & M SMSF and Australian Catholic Super fund of $ 110, 000 is invested across Australian shares, inter shares, property, fixed interest and cash. The liabilities of the couple aggregate $ 400 k and include loans on mortgage and car. Mark and Susan will retire in the next 15 years and they are seeking our advice to analyse their current and future financial situation based on the information we have gathered and provide some suggestions for improving their long term wealth. We have been appraised that both Susan and Mark will continue their current engagement of teaching and business respectively until they retire at the age of 60 i.e. after 15 years. There is an assumption that the couple would like to retire their liabilities as soon as possible and just keep a cash balance of $ 10, 000 in their bank account until the loans are prepaid. Hence the analyses is done on the basis of

Assuming loans are prepaid out of surplus cash generation subject to a minimum of $ 10, 000 every year AND
Assuming the loans are paid out in the normal course of 15 years. ( the backup that the loan is for 15 years is given below during the analyses )

Analyses

Assuming no Prepayment of Loan

Initially, let us understand the liabilities and the annual payout commitments of Susan and Mark. The couple has a mortgage loan of $ 390 k and a car loan of $ 10 k aggregating $ 400 k. The rate of interest is 5.5 % flexi and the tenure is 15 years. Hence the annual equivalent installment of $ 39, 500 to 39, 850. The payment schedule of the loan is attached below.

Home Loan & Car Loan			15	years
Year	EAI	Principal	Interest	Principal paid
2, 015	39, 500	400, 000
2, 016		382, 150	22, 000	17, 850
2, 017		363, 318	21, 018	18, 832
2, 018		343, 450	19, 982	19, 868
2, 019		322, 490	18, 890	20, 960
2, 020		300, 376	17, 737	22, 113
2, 021		278, 263	16, 521	22, 113
2, 022		256, 150	15, 304	22, 113
2, 023		230, 388	14, 088	25, 762
2, 024		203, 209	12, 671	27, 179
2, 025		174, 535	11, 176	28, 674
2, 026		144, 284	9, 599	30, 251
2, 027		112, 369	7, 936	31, 915
2, 028		78, 699	6, 180	33, 670
2, 029		43, 178	4, 328	35, 522
2, 030		5, 702	2, 375	37, 475

As it can be seen from the table, the loan will be paid over 15 years at current EAI of $ 39, 500

The cash flow statement in that case assumes an accumulation of surplus money in the bank account in savings account which does not pay any interest. This will be a foolish strategy since there is a negative arbitrage of 5.5 %. The cash flow for the next 5 years ended June 2015, June 2016, June 2017, June 2018 and June 2019 are appended below ( works, H. ( 2016 ) ). ( Wikipedia. ( 2016 ) )

Cash Flow Statement
Year ended June 30		2015	2016	2017	2018	2019
Cash Inflow
Interest on savings account	$	-	-	-	-	-
Interest on Term deposit	$	1, 000	1, 250	1, 500	1, 750	2, 000
Dividend from Bank shares	$	4, 000	6, 000	6, 360	6, 742	7, 146
Salary and Business Income	$	157, 000	161, 710	166, 561	171, 558	176, 705
Mark	$	125, 000	128, 750	132, 613	136, 591	140, 689
Susan	$	32, 000	32, 960	33, 949	34, 967	36, 016
Total Cash Inflow	$	162, 000	168, 960	174, 421	180, 050	185, 851
Cash Outflow
Mortgage and car loan	$	39, 500	39, 500	39, 500	39, 500	39, 500
Work expenses	$	700	721	743	765	788
Mark	$	-	-	-	-	-
Susan	$	700	721	743	765	788
Investment in Term deposit	$	10, 000	10, 000	10, 000	10, 000	10, 000
Pre Payment of Loan	$
Living expenses	$	60, 000	61, 800	63, 654	65, 564	67, 531
Tax	$	41, 790	44, 477	46, 437	48, 464	50, 563
Total Cash Outflow	$	141, 990	146, 498	150, 333	154, 293	158, 381
Cash accrual	$	20, 010	22, 462	24, 088	25, 757	27, 470
Opening savings Bank	$	35, 000	55, 010	77, 472	101, 560	127, 317
Closing Savings Bank	$	55, 010	77, 472	101, 560	127, 317	154, 787

The closing savings bank balance will be $ 155 k.

Assuming Prepayment of Loan

Assuming that all surplus cash greater than $ 10, 000 will be used to prepay the loan, the loan schedule looks like this

Home Loan & Car Loan			15	years
Year	EAI	Principal	Interest	Principal paid
2, 015	39, 500	400, 000
2, 016		337, 140	22, 000	62, 860
2, 017		294, 505	18, 543	42, 635
2, 018		248, 334	16, 198	46, 171
2, 019		198, 524	13, 658	49, 810
2, 020		144, 788	10, 919	53, 735
2, 021		91, 053	7, 963	53, 735
2, 022		37, 318	5, 008	53, 735
2, 023		( 480 )	2, 052	37, 798

The loan is completely repaid in the next 7 years i.e. by 2023. This strategy is prudent since the payout of the money is not towards interest for 15 years. Interest is saved since the principal payment is accelerated in 7 years instead of paying the loan over 15 years. The minimum savings balance of $ 10, 000 is also maintained. In future, this strategy and the calculations based on this will be used to arrive at the retirement corpus

The cash flow statement for the 5 years ended June 2015, June 2016, June 2017, June 2018 and June 2019 are appended below

Cash Flow Statement
Year ended June 30		2015	2016	2017	2018	2019
Cash Inflow
Interest on savings account	$	-	-	-	-	-
Interest on Term deposit	$	1, 000	1, 250	1, 500	1, 750	2, 000
Dividend from Bank shares	$	4, 000	6, 000	6, 360	6, 742	7, 146
Salary and Business Income	$	157, 000	161, 710	166, 561	171, 558	176, 705
Mark	$	125, 000	128, 750	132, 613	136, 591	140, 689
Susan	$	32, 000	32, 960	33, 949	34, 967	36, 016
Total Cash Inflow	$	162, 000	168, 960	174, 421	180, 050	185, 851
Cash Outflow
Mortgage and car loan	$	39, 500	39, 500	39, 500	39, 500	39, 500
Work expenses	$	700	721	743	765	788
Mark	$	-	-	-	-	-
Susan	$	700	721	743	765	788
Investment in Term deposit	$	10, 000	10, 000	10, 000	10, 000	10, 000
Pre Payment of Loan	$	45, 010	21, 327	22, 519	23, 618	24, 804
Living expenses	$	60, 000	61, 800	63, 654	65, 564	67, 531
Tax	$	41, 790	45, 612	48, 006	50, 510	53, 130
Total Cash Outflow	$	187, 000	168, 960	174, 421	179, 956	185, 752
Cash accrual	$	( 25, 000 )	-	-	94	99
Opening savings Bank	$	35, 000	10, 000	10, 000	10, 000	10, 094
Closing Savings Bank	$	10, 000	10, 000	10, 000	10, 094	10, 193

As can be seen in the table, the bank balance is kept at the minimum of $ 10, 000 and the remaining amount is used to prepay the loan obligations.

The balance sheet of the couple for the 3 years ended below

Balance Sheet
Year ended June 30		2015	2016	2017
Assets
Family Home	$	850, 000	850, 000	850, 000
Plant in Business	$	80, 000	82, 400	84, 872
Car	$	25, 000	25, 000	25, 000
Office in Business	$	320, 000	320, 000	320, 000
House Contents	$	100, 000	103, 000	106, 090
Australian shares	$	100, 000	106, 000	112, 360
Van in Business	$	10, 000	10, 000	9, 999
Term deposit	$	40, 000	50, 000	60, 000
Combined Super Fund	$	194, 555	207, 965	222, 188
Total Assets	$	1, 719, 555	1, 754, 364	1, 790, 509
Liabilities
Loans	$	400, 000	337, 140	294, 505
Capital	$	1, 319, 555	1, 417, 224	1, 496, 004
Total Liabilities		1, 719, 555	1, 754, 364	1, 790, 509

The term deposit is increasing by $ 10 k per annum. The loan reflects the amount outstanding at the end of every year.

The tax calculation matrix for computing the tax for the next 5 years is as under

Income and Expenses		2015	2016	2017	2, 018	2, 019
Interest on savings account	$	-	-	-	-	-
Interest on Term deposit	$	1, 000	1, 250	1, 500	1, 750	2, 000
Interest on Mortgage	$	( 22, 000 )	( 16, 198 )	( 13, 658 )	( 10, 919 )	( 7, 963 )
Dividend from Bank shares	$	4, 000	6, 000	6, 360	6, 742	7, 146
Salary and Business Income	$	157, 000	161, 710	166, 561	171, 558	176, 705
-	$	-	-	-
Work expenses	$	( 700 )	( 721 )	( 743 )	( 765 )	( 788 )
Taxable Income	-	139, 300	152, 041	160, 020	168, 366	177, 100
Tax	$	41, 790	45, 612	48, 006	50, 510	53, 130

Ato.gov.au. ( 2016 ).

This is taken into the cash flow workings presented earlier. All expenses are increasing by CPI and income is increasing as per the rates mentioned in the question set

The cash outflow mix indicates that 36 - 40 %of their spend is on fulfilling loan obligation while 32 - 37 % is on living expenses. Tax accounts for the rest. ( Taxpayer.com.au. ( 2016 ) ).

Analysis of Cash outflows	2, 015	2, 016	2, 017
Mortgage and car loan	21 %	23 %	23 %
Living expenses	32 %	37 %	36 %
Prepayment of Loan	24 %	13 %	13 %
Tax	22 %	27 %	28 %
Total	100 %	100 %	100 %

The super annuation analysis is tabulated below

Super Fund of Mark

Mark has invested money In S &M SMSH and AMP Super Fund. Based on the return %, his weighted average return in super fund is 6.53 %. The closing balance also includes the proceeds from sale of his business assets. The table below gives the running balance of his super till retirement in the next 15 years

Super Fund - Mark						6.53 %
Year ( June 30 )	Age	Income	Opening Super Bal	Emp cont	15 % Cont Tax	Net earnings	Closing Super Bal
2, 015	45	125, 000	60, 000	-	-	3, 920	63, 920
2, 016	46	128, 750	63, 920	-	-	4, 176	68, 096
2, 017	47	132, 613	68, 096	-	-	4, 449	72, 545
2, 018	48	136, 591	72, 545	-	-	4, 740	77, 285
2, 019	49	140, 689	77, 285	-	-	5, 049	82, 334
2, 020	50	144, 909	82, 334	-	-	5, 379	87, 713
2, 021	51	149, 257	87, 713	-	-	5, 731	93, 444
2, 022	52	153, 734	93, 444	-	-	6, 105	99, 549
2, 023	53	158, 346	99, 549	-	-	6, 504	106, 052
2, 024	54	163, 097	106, 052	-	-	6, 929	112, 981
2, 025	55	167, 990	112, 981	-	-	7, 381	120, 363
2, 026	56	173, 029	120, 363	-	-	7, 864	128, 226
2, 027	57	178, 220	128, 226	-	-	8, 377	136, 604
2, 028	58	183, 567	136, 604	-	-	8, 925	145, 529
2, 029	59	189, 074	145, 529	-	-	9, 508	155, 037
2, 030	60	194, 746	155, 037	-	-	10, 129	825, 166

The balance at 2030 is $ 825 k.

Super Fund of Susan

Super Fund - Susan						4.92 %
Year ( June 30 )	Age	Salary	Opening Super Bal	Emp cont	15 % Cont Tax	Net earnings	Closing Super Bal
2, 015	45	32, 000	110, 000	3, 040	456	5, 410	117, 994
2, 016	46	32, 960	117, 994	3, 131	470	5, 803	126, 459
2, 017	47	33, 949	126, 459	3, 225	484	6, 219	135, 420
2, 018	48	34, 967	135, 420	3, 322	498	6, 660	144, 903
2, 019	49	36, 016	144, 903	3, 422	513	7, 127	154, 938
2, 020	50	37, 097	154, 938	3, 524	529	7, 620	165, 554
2, 021	51	38, 210	165, 554	3, 630	544	8, 142	176, 782
2, 022	52	39, 356	176, 782	3, 739	561	8, 694	188, 654
2, 023	53	40, 537	188, 654	3, 851	578	9, 278	201, 206
2, 024	54	41, 753	201, 206	3, 967	595	9, 896	214, 473
2, 025	55	43, 005	214, 473	4, 086	613	10, 548	228, 494
2, 026	56	44, 295	228, 494	4, 208	631	11, 238	243, 308
2, 027	57	45, 624	243, 308	4, 334	650	11, 966	258, 959
2, 028	58	46, 993	258, 959	4, 464	670	12, 736	275, 490
2, 029	59	48, 403	275, 490	4, 598	690	13, 549	292, 947
2, 030	60	49, 855	292, 947	4, 736	710	14, 408	311, 381

The balance at 2030 is $ 311 k. This includes contribution from employer as well and a weighted average return of 4.92 % based on the amount invested in Australian Catholic and S &M SMSH fund

Combined Super Fund

The combined superannuation balance and real income calculations are tabulated below. Real income is calculated based on purchasing power of a $ using the CPI of 3 % growth yoy.

Year	Combined Super Bal	Purchasing Power %	Real Income
2, 016	194, 555	97.1	188, 888
2, 017	207, 965	94.3	196, 027
2, 018	222, 188	91.5	203, 333
2, 019	237, 272	88.8	210, 813
2, 020	253, 267	86.3	218, 470
2, 021	270, 225	83.7	226, 309
2, 022	288, 203	81.3	234, 335
2, 023	307, 258	78.9	242, 552
2, 024	327, 454	76.6	250, 966
2, 025	348, 856	74.4	259, 582
2, 026	371, 535	72.2	268, 405
2, 027	395, 563	70.1	277, 440
2, 028	421, 018	68.1	286, 693
2, 029	447, 984	66.1	296, 170
2, 030	1, 136, 546	64.2	729, 506

Based on the real income requirement of $ 60, 000 pa for the couple at the time of retirement and after, the retirement fund will last for 20 years as tabulated below

Year ( June 30 )	Age	Opening Super Bal	Pension withdrawal	Pension withdrawal ( real basis )	Net earnings	Closing Super Balance
2, 031	61	729, 506	60, 000	60, 000	40, 123	709, 629
2, 032	62	709, 629	60, 000	60, 000	39, 030	688, 658
2, 033	63	688, 658	60, 000	60, 000	37, 876	666, 534
2, 034	64	666, 534	60, 000	60, 000	36, 659	643, 194
2, 035	65	643, 194	60, 000	60, 000	35, 376	618, 569
2, 036	66	618, 569	60, 000	60, 000	34, 021	592, 591
2, 037	67	592, 591	60, 000	60, 000	32, 592	565, 183
2, 038	68	565, 183	60, 000	60, 000	31, 085	536, 268
2, 039	69	536, 268	60, 000	60, 000	29, 495	505, 763
2, 040	70	505, 763	60, 000	60, 000	27, 817	473, 580
2, 041	71	473, 580	60, 000	60, 000	26, 047	439, 627
2, 042	72	439, 627	60, 000	60, 000	24, 179	403, 806
2, 043	73	403, 806	60, 000	60, 000	22, 209	366, 016
2, 044	74	366, 016	60, 000	60, 000	20, 131	326, 147
2, 045	75	326, 147	60, 000	60, 000	17, 938	284, 085
2, 046	76	284, 085	60, 000	60, 000	15, 625	239, 709
2, 047	77	239, 709	60, 000	60, 000	13, 184	192, 893
2, 048	78	192, 893	60, 000	60, 000	10, 609	143, 503
2, 049	79	143, 503	60, 000	60, 000	7, 893	91, 395
2, 050	80	91, 395	60, 000	60, 000	5, 027	36, 422
2, 051	81	36, 422	60, 000	60, 000	2, 003	( 21, 575 )

In case the real income of $ 60, 000 also undergoes the CPI, the purchasing power drops and hence the number of years when the retirement lasts comes down to 15 years when their age is 75 years as tabulated below

Year ( June 30 )	Age	Opening Super Bal	Pension withdrawal	Pension withdrawal ( real basis )	Net earnings	Closing Super Balance
2, 031	61	729, 506	61, 800	60, 000	40, 123	707, 829
2, 032	62	707, 829	63, 654	60, 000	38, 931	683, 105
2, 033	63	683, 105	65, 564	60, 000	37, 571	655, 112
2, 034	64	655, 112	67, 531	60, 000	36, 031	623, 613
2, 035	65	623, 613	69, 556	60, 000	34, 299	588, 355
2, 036	66	588, 355	71, 643	60, 000	32, 360	549, 072
2, 037	67	549, 072	73, 792	60, 000	30, 199	505, 478
2, 038	68	505, 478	76, 006	60, 000	27, 801	457, 273
2, 039	69	457, 273	78, 286	60, 000	25, 150	404, 137
2, 040	70	404, 137	80, 635	60, 000	22, 228	345, 729
2, 041	71	345, 729	83, 054	60, 000	19, 015	281, 691
2, 042	72	281, 691	85, 546	60, 000	15, 493	211, 638
2, 043	73	211, 638	88, 112	60, 000	11, 640	135, 166
2, 044	74	135, 166	90, 755	60, 000	7, 434	51, 845
2, 045	75	51, 845	93, 478	60, 000	2, 851	( 38, 782 )

( Investopedia. ( 2003 ) )

As the couple indicated, inflation is an important factor which eats into the retirement real pension income. With the corpus of the super fund on real basis, the value of the Australian shares growing @ 6 % annually, the couple can sustain till the age of 101 i.e. for the next 41 years after retirement.

Retirement corpus at age 60
Super fund ( Real basis )	729, 506
Bank Shares	239, 656
Total	969, 162
Real Income required	60, 000
Years to last	41
Age of couple	101

Conclusion

Based on the analyses, it is evident that the couple are comfortable in their retirement situation. Two of their three children are also working. Hence the responsibilities of Mark and Susan for providing for them are complete. Moreover, the couple have already purchased residential property at opportune time and are availing the capital gain. The liability on the mortgage will also be paid of in the next 7 years from the cash flow generated by the couple. The couple has prudently invested in medical insurance and hence the cost of hospitalization during aging is also taken care of. With the proceeds from the super fund and the shares, the couple can comfortably live till age 101

References and Bibliography

Anon, ( 2016 ). [online] Available at: https://www.australia.gov.au/information - and - services/money.../superannuation [Accessed 27 Sep 2016].

Ato.gov.au. ( 2016 ). Individual income tax rates | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/rates/individual - income - tax - rates/ [Accessed 27 Sep 2016].

Investopedia. ( 2003 ). Purchasing Power Definition | Investopedia. [online] Available at: https://www.investopedia.com/terms/p/purchasingpower.asp [Accessed 27 Sep 2016].

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