Problem: Bryan and Marianne Brown have decided it is time to seek financial advice. They have just bought a new family home and feel they need to review their financial situation. They have two children, Bronte aged 10 and Adam aged 12. They have no plans for more children.
They have previously invested into shares and are comfortable with investing a portion of their investment funds into growth assets.
Their property, 7 Birmingham Rd, North Richmond 2754, was bought for $800,000 and, using the money from the sale of their previous home, they will have a mortgage of $300,000 after all settlement costs have been paid. Their repayments are $1520.06 per month over a 30 year term at 4.5% pa interest.
Bryan is 40 years old and has worked with his current employer for 15 years in a permanent full-time capacity. He is a high school teacher and teaches locally earning $95,000 per year. He currently salary sacrifices $5,000 per annum to his employer super fund on top of his 9.5% compulsory super contribution. Bryan has $2,500 in out of pocket work deductions for this financial year. This includes $200 in traveling expenses, which comprises of costs incurred in travel between home and work. Bryan's date of birth is 4th April 1977.
Marianne is also a teacher and is employed at the same school as Bryan in a permanent full-time capacity. Her salary is $110,000, as she is a lead teacher. Some time ago Marianne took 5 years off work to have their two children so when she returned to work she started contributing $10,000 pa under a salary sacrifice arrangement (in addition to her SG). She now feels she is on track and would like advice as to whether she should continue with this or use these monies for investment. Marianne's date of birth is 18th May 1979 and she is 38 years old.
They have $50,000 in a savings account in joint names, which is the proceeds of savings they have made over the years. They receive 1.5% pa in interest on the balance of this account. They have an additional $100,000 in a term deposit, which was the proceeds of an inheritance from Marianne's mother's estate. This receives 2.5% pa in interest, and is in joint names also. This will mature in 1 week. Additionally, they have a $15,000 cheque account in Marianne's name, which earns 1% pa, providing they keep $5,000 or more in the account at all times.
Two years previously they saw an advertisement in the local paper regarding BL Managed Funds, which touted great returns, so they decided to invest $20,000 on the 1st July 2015 into a balanced fund and $300 per month. The returns have averaged 4.5% pa and this is in Marianne's name.
They bought an investment property at Bateman's Bay 10 years ago in joint names. They like to use it for 6 weeks over the summer holidays, but during the rest of the year it remains unused. Hence, they have considered listing it as a holiday rental for 45 weeks of the year. They have been advised by a local real estate they can net $500 per week in the current market. They bought the property 5 years ago (1/9/2012) for $400,000, with a 10% deposit and a 30 year term. Their monthly repayments are $1,824.07 (P & I), calculated on an interest rate of 4.5%, the interest portion of the payment for the 2016 - 2017 FY was $15,015.78. The current value of the property is $700,000.
They have cumulative credit card debts of around $5,000 and only pay the minimum due each month ($200). Bryan has one card which has annual fees of $150. Marianne also has her own card, which has an annual fee of $75. All cards charge an interest rate of 22%. Assume: the credit cards always hover around $5,000.
As mentioned previously, they have two children, Bronte and Adam. As Marianne and Bryan have both attended university and have been fortunate enough to enjoy excellent careers, they wish to ensure they have sufficient funds to send their children to university. They saw a recent advertisement regarding savings for education and feel they should start saving to ensure there are sufficient funds to pay for these costs. They estimate they will need $25,000 per year for three years, for each of their children.
On a yearly basis, the following additional costs are estimated for the family:
Expenses Estimated Costs
Utilities/Rates $7,000
Car usage/maintenance $4,000
Food and groceries $13,000
Entertainment $8500
Miscellaneous $4,000
Neither Bryan nor Marianne have personal insurance outside of super. They do have general insurance on cars and have taken out a policy on the new house.
They both believe they should save and be self-sufficient during retirement although they have yet to establish a retirement plan. To date, Marianne has accumulated $257,000 in her superannuation account, while Bryan has $350,000 in his account. Neither have named a beneficiary.
Additional information: The long term return for equity investment is projected to be around 12% pa, whereas bond funds are expected to offer yield of 5% pa. Investment in term deposits will generate average return of 2.5% pa over the long term. Return from a Balanced Fund is approximately 8% pa (market rate). Use 2% pa on savings or bank accounts (use this rate for any new bank accounts recommended. Use 4.5% for all mortgages.
- The life expectancy for Bryan is 80 years and Marianne is 85 years.
- Children are expected to be dependent until 25 years of age.
- Tertiary education will commence when the children turn 18 years of age.
- Bryan and Marianne are Australian residents.
- For calculation of taxable income, use the relevant tax rates provided by the Australian Tax office (ATO), for the 2016/17 tax year.
- For tax calculations in the current 2017/18 FY, use the same rates as 2016/17 FY.
- Superannuation dividend payments are approximately 7% indefinitely. In general, an increment of 3% in salary is expected every year.
- When calculating income returns on the managed fund, calculate balance as at 30 June 2017 and balance at 30 June 2016, then calculate interest payable for full FY and average. Just consider the return as income with no capital gains. Additionally all income is reinvested.
Assessment Questions:
Question 1: Help Bryan and Marianne identify long and short-term goals.
Question 2: (i) Bryan and Marianne have indicated they wish to pay off their mortgage in 15 years. Calculate the monthly mortgage repayments on their new property and provide amortisation tables.
(ii) Calculate the current value of the mortgage on the Bateman's Bay property.
Question 3: (i) Calculate the value of the BL Managed Fund - Balanced fund.
(ii) Provide a brief analysis as to the impact of not seeking the advice of a licensed financial planner.
Question 4: (i) Construct a cashflow statement for the Browns for the 2017 tax year. Include mortgage repayments.
(ii) Create a household balance sheet for Bryan and Marianne, comment on whether they have a negative or positive net worth.
(iii) Using information given, calculate the following ratios and provide comment upon your answers:
a. savings ratio
b. liquidity ratio
c. solvency ratio
d. Monthly debt service ratio
Please provide formulas and calculations AND make a brief analysis regarding these answers. These formulas are found in Taylor and Juchau, ensure these are referenced clearly in the body of your assessment.
Question 5: (i) Calculate the amount they will need to save at the beginning of each year to accumulate the full amount of Adam's tertiary education costs. Assume a discount rate of 12%.
(ii) Compare this calculation to them saving at the end of each year instead.
Question 6: Marianne is doubtful about his tax calculation. Using the information provided, calculate the taxable income and tax payable for him. What tax planning advice can you offer the couple?
Question 7: Discuss the need for the following covers for both Bryan and Marianne.
i. Total Permanent Disability.
ii. Trauma
iii. Income Protection.
Additionally, provide a brief analysis of whether it is beneficial to have any of these personal insurances in superannuation.
Question 8: Based on your discussion in parts 1-7, provide specific recommendations to allow the couple to achieve their desired goals. Advise them of any potential problems or issues they need to know and suggest alternative plans to overcome them. Support your recommendations with additional calculations.