Writing a statement of advice

WRITING STATEMENT OF ADVICE
The Name of the Class (Course)
Professor (Tutor)
The Name of the School (University)
The City and State where it is located
The Date
Executive Summary
Current Situation
According to the information you have provided, you are married, and you have two children. Both of you are employed on a full-time basis. However, you have not disclosed to us about your will, or if there is any. Your annual income combined sums up to $600,000.Your expenditure, including home loans, mortgage repayment among others adds up to $ 1,283,000.Your assets, which include home, home content, motor vehicles among others add up to $ 2,925,000.
Name Raj Naji Sally Naji
Age 47 45
Marital Status Married Married
Employment status Full time Full time
Employer Accounting firm IT company
Occupation Partner Marketing manager
Health Good Good
Current will No No
Type of power attorney Undisclosed Undisclosed
Dependent Name Age Relation Financial Dependant
Leila 9 Children Yes
Alexander 6 children Yes
Income and expenditure
Income Raj Sally Income per annum
Salary & Wages $380,000 $220,000 $600,000
Total income $600,000
Expenditure Raj & Sally Amount per annum
Mortgage Repayment $96,000
Term deposit @ 3.54% $62,000
Car loan @8.5% $40,000
Home loan @ 5.25% variable $900,000
Living Expense# $120,000
Children private school fees $50,000
Credit card(balance outstanding) $15,000
Total $1,283,000
Assets
Asset Raj $ Sally Value
Home (principal residence) $2,500,000
Home Content $180,000
Motor Vehicle $80,000
Share portfolio Raj $120,000
Managed funds Sally $45,000
Total 2,925,000
There are various needs, objectives, and concerns which Raj and Sally want to be addressed.

These necessities include earning an after-tax income of $80,000 in today’s dollars upon retirement. Also, they want to be advised on the best strategy to pay off their loans as soon as possible. The other advice is on how to save and invest, as well as borrowing to finance. You also need to renovate your house upon retirement which would cost approximately $142,000 in today’s dollars. Other concerns and objectives include:
Taking family trip to Disney land, next two years, cost in today’s dollar would be $16,000
Ability to start their SMSF
Borrowing from SMF to purchase a property
Using salary sacrifice to superannuation to maximize retirement income
Advice on share portfolio
Eligibility to get age pension upon retirement: The two would want to know if they are liable for retirement benefits and any other benefits for that matter.
Setting up the sinking fund for children’s education
You want to plan for school fees for the children, both secondary and university. You want to be advised on the use of sinking fund to cater for the children’s school fees.
Different types of pensions they can start their superannuation savings
Adequate general and personal insurance. You want to be advised on various pension schemes that you can apply to cater for your individual needs upon retirement.
They would like you to consider their estate planning needs. You want and advise on their estate planning for that matter.
What to do with term deposit upon maturing. You want to understand how to handle the term deposit when it grows.
Projections should be made up to Raj & Sally’s life expectancy + 8 years.
These are the current needs that you want us to advise you. Another issue we will consider while recommending both of you is your attitude towards risks. I have noted that Raj is interested in owning shares owing to his financial background. He already understands Australian shares and how volatile they are. He also is well versed with how well the stocks can perform primarily on a long-term basis. Therefore, he is ready to take risks anticipating for future rewards. On the other hand, I can note that is quite conservative. She is used to seeing their money being invested in government bonds or long-term deposits with banks. Their family usually has a negative attitude towards investment because of unpredictable market trends. Sally is, however, comfortable with investing in property investment. However, both agree on taking calculated risks and make some investments. I will, therefore, use the above information regarding both Raj and Sally and issue recommendations that will benefit the family.
Retirement: Raj would like to retire at 64 years. Sally, on the other hand, would want to retire once she reaches 62 years. They can, however, postpone retirement for a few more years. In case they do not have achieved their set objectives; they are ready to work for some years after which they could retire from work.
Raj current age 47 years: Remaining working years (64-47=17 years)
Sally: current generation is 45.Remaining working years 62-45=17 years)
Both of you have 17 years more to work if you don’t postpone your retirement dates. The 17 years are sufficient enough for both of you to achieve comfortably. However, the fact that Sally can scale down and work on a semi-permanent basis is also a good idea. I, therefore, recommend Raj to consider that option because it will help him achieve a more comfortable retirement without straining more.
After-tax income
If I assume the income will be produced tax-free after retirement, it is easy to know the amount they expect in today’s dollars. Therefore, according to the information, they have provided, Raj and Sally require after-tax income amounting to $80,000 in today’s dollars after they retire. The required amount can be computed using the following formula; (Howard, 2018, N.p)
Required amount=amount (1+inflation rate) number of years
=80,000(1+0.035)17
$143,574.04
In our case, I have used the seventeen years remaining upon retirement in case they decide to retire as they have planned. I have also used the wage inflation rate of 3.5%.That means, by 17 years, both Raj and Sally will be earning $143,574.04.
Whether latest superannuation changes (July 2017) impact their retirement and saving plan
The latest superannuation changes that came into effect on the July 1st, 2017 will impact your retirement and savings plan. There are various changes relating to the current personal circumstances of Raj and Sally which would affect their plans.
Your transition to retirement will now be taxed up to 15%.However; the ordinary withdrawals will not be taxed. The non-concession contributions will be reduced from 180,000 to 100,000 per annum before super tax contributions remain at $250,000 for everyone. Also, the fact that Raj and Sally earn income exceeding $250,000 means they will have to pay extra tax as per the new laws.
Paying off their loans as soon as possible
According to the available information, the current credits include the car loan worth $40,000 with an interest 8.5%.Also, there is a home loan of $900,000 with an interest of 5.25% which in this case is variable. To pay these loans as soon as possible, you need to increase monthly payments so that the duration of loan payment is reduced. I recommend that for the car loan, they need to pay $5,000 per month. By doing so; the loan will be cleared in only one year. The other credit they have to pay is the home loan. If they decide to pay $5000 monthly, the investment will take only fifteen years to be cleared. That means, you can make their mortgage even before they retire in seventeen years time. Also, if you sacrifice and service the car loan in one year, the only burden left will be the home loan alone which they can comfortably evident in 15 years by paying $5000 each month.
Save and invest
I recommend both Raj and Sally to make more savings which they can spend. The amount should not necessarily be equal to that of Sally is more conservative, and therefore can save less for investment purpose. The table below shows the current savings and the proposed savings for investment purpose.
RajSally
Employer superannuation (retail funds) Account Balance: $550,000
Insurance inside the super funds: $800K life and TPD
SuperFund Investment: Balance (75%Growth, 25% Defensive) Acc Balance: $285,000
Insurance inside the super fund: $500K life and TPD
Superfund Investment: Moderate (50% Growth, 50% Defensive)
My recommended savings for investment
Employer superannuation (retail funds) Raj Raj
Account balance raised to $800,000 Account balance raised to $350,000
Superfund investment balance raised to:80% growth,20% defensive Superfund investment raised to:60%growth,40% defensive
Superfund investment balance raised to 80% growth,20% defensive
Superfund investment increased to 60%growth,40% defensive
The growth fund will result in an appreciation of capital invested. Therefore, I recommend both Raj and Sally to investment more on this resource because of its excellent returns. Also, I recommend them to increase savings to at least $800,000 for Raj and $350,000 for Sally. The total capital available in the superannuation accounts would be 800,000+350,000=1,150,000.This amount would be sufficient to invest.
Borrowing and invest
Borrowing for investment is a very significant idea for Raj and Sally. However, the concept of acquiring to finance if viable if the benefit accruing from the investment is higher than interest paid on the borrowed money. There are various benefits which come in as a result of spending in borrowed capital. One of them is the fact that Both Raj and Sally can access the tax benefits. They are likely to enjoy a tax deduction for the interest they pay o these loans. Similarly, if they opt to borrow, they are likely to increase the value of their investment without having to pay the entire loaned amount at once.
I therefore strongly recommend you to borrow from the various financial institutions to invest. The borrowed amount will accelerate their wealth creation. They will be able to buy assets like property and shares with ease. Viewing at your total income of $600,000 per year, I advise them to be wise enough and borrow not more than four times this amount. The amount should be diversified in various portfolios like property, shares, among others. They should not invest the entire amount in a single business because it would be too risky. Another precaution they should take is to make sure they borrow the amount they can be able to serve in at least 14 years. Remember, they are likely to retire in the next 17 years. Similarly, they have other loans they are currently functioning. Therefore, even though borrowing to invest is a good idea for them, they should not rely too much on financing. But it is also advisable to borrow a reasonable amount like $12,000,000 which they can invest in various projects and service by the next fourteen or fifteen years.
House renovations after retirement $142,000
The house renovations which Raj’s family would undertake after retire is expected to take $142,000.But we have to factor in inflation cost of 3% per annum. Also, I have assumed that the renovation will take place immediately they retire, that is, 17 years from now. Therefore, the formula for the required amount is shown below (Howard, 2018).
Required amount=amount (1+inflation rate) number of years
=142,000(1+0.035) 17
$ 254,843.93
Therefore, by the next 17 years, the value of $142,000 would be $234,000.That is the total amount they will use for house renovation in the next 17 years. However, there is an assumption that they will renovate the house when both of them retire. Both will have retired in the next 19 years because of their age difference of two years. Assuming the house will be renovated at this time,$142,000 in today’s dollar will change to:
142,000(1+0.035)19
=$272,995.19
Taking family trip to Disney land, next two years, cost in today’s$16,000
Taking inflation as 3% per annum the $ 16000 required to take the family to Disney land in the next two year will change to $16,974.40.The required amount would be calculated as follows:
Required amount=amount (1+inflation rate) number of years
=16,000(1+0.03)2
$16,974.40
Ability to start their SMSF
SMSF is a superannuation trust structure that offers benefits to the retiring members. In short, SMSF is a method of saving for an individual’s retirement remuneration. The self-managed super funds (SMSF) offer various benefits to the members. Firstly, the SMSF create an appropriate investment strategy that meets the needs of the individuals. SMSF is flexible enough. Members can shift from accumulation phase to pension phase depending on their decisions concerning the tax benefits. More so, SMSF is cost-effective than other types of superannuation accounts. SMSF will allow for you to the intergenerational transfer of the assets among the family members.
On the other hand, SMSF has its own risk towards its members. The owner will encounter penalties as a result of non-compliance. In fact, the tax value of the non-complying funds has the highest marginal rate. The charges are likely to destroy the retirement savings for the SMSF member. There is also a risk of reduced diversity. Sometimes, SMSF can buy a single asset that is valuable. However, the fate of the funds will depend on the asset performances. More so, the diversification of the risk depends on the hold of other superannuation and non-superannuation assets of the members.
Therefore, I recommend Raj and Sally start their SMSF for the following reasons;
First, they are likely to enjoy benefits, especially upon retirement. Also, the method is flexible, meaning; they can shift from one phase to another depending on the tax benefits. They are likely to benefits from this fund because it is relatively cost-effective. Therefore, even though it has a few risks, it is a good strategy that Raj’s family should focus and invest.
Borrowing from SMSF to purchase a property
I recommend Raj and Sally to borrow from SMSF and buy a property. The SMSF actually, the best tax incentive because of its negative gearing tax perks. In fact, many investors have followed the similar path and succeeded greatly. The fact that Raj has an account balance of $ 550,000 and Sally $285,000 means they are eligible to borrow up to70% of their total deposits. The amount would be enough to purchase a property. An SMSF loan would, therefore, allow Raj and Sally to acquire property that is income –producing. Another significant advantage of this investment is the fact that they are non-recourse. That means, if Raj and Sally go for the loans, they will not risk other assets like car and home as security. Therefore, considering those entire merits, I recommend the Raj’s family to discuss borrowing from SMSF and purchase properties with the funds.
Using salary sacrifice to superannuation to maximize retirement income
Using salary sacrifice to the pension to maximize retirement income is a good option for both Raj and Sally.
The following calculation shows the two options
Raj No salary sacrifice Salary sacrifice
Salary $380,000 $280,000
Superannuation contribution Nil $100,000
Income tax(45%) $171,000 $126,000
Contribution tax to super (15%) Nil $15000
Net package $209000 $239000
There are two scenarios I have considered. The first scenario is when Raj makes in salary sacrifice to superannuation and the second scene is when he makes salary sacrifice for the contribution. In the first situation, the net package remains $209000 because he has to pay more tax on income. The next case has a net package of $239,000 because the amount sacrificed for superannuation is taxed at only 15%.Therefore, sacrificing for pension is a good plan for Sally’s family because they end up saving more for the retirement.
Eligibility to get age pension upon retirement
According to Raj and Sally current plan, they are likely to retire at 64 and 62 years respectively. According to the present Australian law, the person has to attain 66 years to be eligible for retirement age pension. Therefore, the two of you are not legible. However, I recommend that you extend your working period and retire at 66 years so that they can benefit from this fund. The other eligibility that they should meet according to the law is the asset and income test. According to the income test, you are eligible for at least half of their retirement age pension. The couple does not meet the eligibility if because they live in an expensive home. Therefore, putting the three tests into consideration, the Raj family is not legible for age retirement benefits because they do not meet the criteria required under Australian laws. The Raj family may as well not be eligible for social security benefits because they do not meet the income and asset test. Both Raj and Sally have invested, bought a home, purchased a car and are earning high salaries. Those who are eligible for social security benefits are the poorest. In this case, I will not recommend Raj and Sally to expect either retirement age benefits or Social security benefits because they do not meet the required criteria.
Setting up sinking fund for children’s education
Setting up sinking fund is a good idea because they will be depositing, say monthly and by the end of the year, the $25,000 will be available. I, therefore, recommend them to commit $2100 each month to the sinking fund. At the end of the year, the total amount accumulated would be 2100 *12=$25,200.The above $200 can cover miscellaneous expenses on top of the fees. The sinking funds will relief both Raj and Sally the burden of having to pay lump sum amount at once. It is also worth to note that they have other loans to service. Also, they want to save some amount and invest. That means, it is good to set up the sinking fund and be depositing $2100 monthly instead of paying $25,000 at once at the end of the year. But the fact that they have two children means they have to budget for the education of both of them. Therefore, the amount of deposit to sinking fund each month now changes to 2100*2=$4200.The fact they are likely to retire in 17 years, means they can pay for all the 12 years of high school and university for their children before retiring. So, I recommend both Raj and Sally to deposit $4,200 monthly to sinking fund account to cater for the children’s school fees.
Different types of pensions they can start their superannuation savings
There are two main types of annuities that both Raj and Sally can start their Superannuation savings. These types of pensions include Income Stream or Account-based retirement and Transition to retirement pension. The account-based retirement is usually typical when it comes to superannuation pensions. The model is advantageous in that tax and flexibility concessions. Therefore, for Raj and Sally to access this type of retirement, they need to invest part of their super to the open pension account. Eventually, you will be able to get pension payments from their minds regularly. You can even withdraw some amounts from the balance in case you want. The second option they can consider is the transition to retirement pension. This pension account will give Raj and Sally an opportunity to receive income from super even before retiring permanently.
Therefore, considering their current situation, Raj and Sally should start depositing at least $6000 each month to their superannuation savings. Raj can contribute $35000 and Sally,$2500 for the total amount to add up to $6000 each month. The contribution should remain instant so that by retirement date, they will have sufficient amount of investment in their account. If they contribute a total of $6000 each month, the total amounts available in the next 17 years will be 6000*12*17=$1,224,000.This amount will be sufficient to cater to their needs and investment if they decide to do so. However, I recommend that you diversify your portfolio and deposit $3000 monthly in each of the two pension accounts. Sometimes the future is uncertain, and it’s good to expand the options so that they can enjoy the unique advantages of the two reports.
Advice on share portfolio
Investing in various share portfolios is the best strategy because it assists in risk mitigation .The current information about the share portfolio for both Raj and Sally are as follows. Super Fund Investment: Balanced Raj (75 % Growth, 25% Defensive).
Sally: Superfund Investment: Moderate (50 % Growth, 50% Defensive currently, there are only two options for both the Raj and Sally. That means the share portfolio is not well diversified. They concentrate on Growth and defensive only. However, they need to make the shares more diversified as risk mitigation strategy. Therefore, instead of focusing on only growth and defensive, they can as well include conservative and balanced share portfolios. I, therefore, recommend them to follow the following guidelines;
Share portfolio growth Defensive conservative Balanced
Raj 40% 25% 15% 20%
Sally 30% 20% 30% 20%
Raj should ensure that he utilizes the $120,000 share portfolio by including various asset mixes for security purpose. These assets would consist of short-term investments, stocks, and bonds among others. I, therefore, recommend Raj to invest his $120,000 in the following order. By doing so, he will take advantage of all most of the markets. In case local stocks fail to do well in a particular year, probably, the foreign capital will compensate the deficit. There are also bonds and short-term investments which can as well bring about good returns to close any gaps if it arises. Therefore, if Raj diversifies his portfolio as per the recommendation below, he is likely to enjoy good returns with lower risks because the collection will be well diversified.
Portfolio diversification Percentage Values
Short term investments 20% 24,000
Local stocks 20% 24,000
Foreign stocks 10% 12,000
Emerging market stocks 20% 24,000
bonds 30% 36,000
A managed fund is a viable investment option for Sally because she is not used to taking higher risks. According to current information, she has contributed a total of $45,000 in managed fund account. The fund is convenient, and she can utilize it for diversified investment strategy. Once she invests in this fund, she would expect returns after a given duration, say eight years. I recommend Sally to opt for mixed asset managed the fund and diversify the portfolio as follows.
Diversification percentage Amount Investment mix Expected return
Growth 30% $13,500 Shares and property 7% in 5 years
Balanced 20% $9,000 Shares and property 5 % in 5 years
Conservative 20% $9,000 Shares and property 4% in 5 years
Cash 30% $13,500 Shares and property 3% in 5 years
Therefore, I recommend Sally to consider utilizing her managed fund and invest in both the growth, conservative and cash options as a way of mitigating risks. Both possibilities have varying levels of risks and hence the returns. Thus, the more risky choices, like growth, has a higher gain of 7% in five years whereas a less dangerous option like cash deposits have expected return is amounting to 3%.Sally should consider investing her managed fund in shares and property. She is not used to taking risks, and therefore, for her, it is not advisable to go for risky ventures like Raj.
Setting up sinking fund for children’s education
Setting up sinking fund is a good idea because they will be depositing, say monthly and by the end of the year, the $25,000 will be available. I therefore recommend the m to commit $2100 each month to the sinking fund. At the end of the year, the total amount accumulated would be 2100 *12=$25,200.The above $200 can cover miscellaneous expenses on top of the fees. The sinking funds will relief both Raj and Sally the burden of having to pay lump sum amount at once. It is also worth to note that they have other loans to service. Also, they want to save some amount and invest. That means, it is good to set up the sinking fund and be depositing $2100 monthly instead of paying $25,000 at once at the end of the year. But the fact that they have two children means they have to budget for the education of both of them. Therefore, the amount to deposit to sinking fund each month now changes to 2100*2=$4200.The fact they are likely to retire in 17 years, means they can pay for all the 12 years of high school and university for their children before retiring. So, I recommend both Raj and Sally to deposit $4,200 monthly to sinking fund account to cater for the children’s school fees.
Proposed personal insurance
Raj, I recommend that you apply $600,000 of life which would be linked with TPD insurance. On the other hand, I suggest Sally employ a total of $ 400,000 of life, bound with TPD insurance. The amounts will cover personal risks, cost of children in future, debts payments, and medical expenses and funnel arrangement expenses. All the above charges will have stepped premium structures.
I recommend Raj to apply trauma insurance which will cover the cases of critical illness. The benefit of this cover amounts to $60,000 per year. On the other hand, I recommend Sally to apply for trauma insurance with benefits totaling to $50,000.The coverage will assist in living expenses, medical cover and recovery time. The premiums for this cap will be deducted monthly from your bank account. Income protection cover is also viable for both Raj and Sally. The period for this benefit is usually 65 years, with a 30 days waiting period. The premiums for this particular cover will be stepped. In summary, I recommend the following for both Raj and Sally;
adequate general and personal insurance
Raj: Insurance inside the super fund: $800K life and TPD
Sally: Insurance inside the super fund: $500K life and TPD
Insurance inside super fund Type
Raj $ 800,000 Life and TPD
Sally 500,000 Life and TPD
Cover type Payer Life insured Sum insured Options
Income protection Raj Raj $3000 per month Benefit period 65 years
Premium basis: stepped
Waiting duration:30 days
Trauma Raj Raj $60,000 p.a Premium basis. Stepped
Life Raj Raj $600,000 Basis: stepped
TPD Super fund Raj $600,000 Premium basis: stepped
The premium for Trauma fund would be $62 per month. The life and TPD premiums would be$ 75.00 per month. The total annual premiums for Raj would be:
(62*12)+ (75*12) =$1644.00 per year
Sally
Cover type payer Life insured Sum insured options
Income protection Sally Sally $2000 monthly 30 days waiting period
Age benefit 65 years
Premium: stepped
Trauma Sally Sally $50,000 per annum Stepped premium basis
Life Sally Sally 400,000 Stepped premium basis
TPD Sally Sally 400,000 Stepped premium basis
The premium paid per annum would be 384.00 for Trauma and $420.20 for life and TPD. The total annual premiums would be 384.00+420.20=$804.20 per year.
They would like you to consider their estate planning needs
The current information shows that both Raj and Sally have no Wills that would govern their estate planning. Therefore, I recommend both Raj and Sally to make appointment with the Solicitor so that you can discuss the needs pertaining to the estate planning. I recommend that you draw a will so that it can capture the Enduring Power of Attorney, Testamentary Trusts as well guardianships.
The table below contains recommendations pertaining to your estate planning
Invest superannuation fund into property Consider diversifying portfolio, by investing in stocks, bonds, property purchasing among other
Sally is quite conservative, and therefore, she should invest more on property purchasing because it is less risky.
They should consider borrowing to at least make the amount to invest more sufficient.
What to do with term deposit upon maturing
You are likely to receive a renewal advice letter immediately you term deposit get developed. You can be able to contact back in case you want to change the instructions contained in the term deposit. Therefore, upon maturity of the deposit, I recommend that you read the renewal notice because it will be sent to you two weeks before the maturity of the term deposit. You should provide the renewal instructions correctly so that it can be renewed automatically upon maturity. It is essential to confirm upon receiving the renewal letter to avoid the fund being kept in your account’s holding facility. Also, in case your term deposit is reinvested in unfavorable interest, ensure you contact back and make immediately. By doing so, you will enjoy the benefits of the term deposits.

Reference
Howard, R. (2018). Inflation Calculator – Save Enough to Account for Inflation. [online] Buyupside.com. Available at: http://www.buyupside.com/calculators/inflationjan08.htm [Accessed 11 Jan. 2018].