Financial Planning - Research Paper Example

? Final Paper - Financial PlanFinancial Planning An essential part of knowing what an investor would like to accomplish is identifying his/her present position. For this it is required to analyse the vital information and details of an investor, upon which the strategies for the financial planning for the investor would be based (Crumbley & Smith, 2002). This paper would formulate the financial planning of a client, Mr. James Patterson. The financial plan is based on the information that was obtained from Mr. James Patterson about him. The recognition of the present situation of Mr. Patterson is decisive because that would decide whether the recommended strategies are suitable, in the light of his personal situation, needs or objectives. Summary of Client Personal Details Name of Client: James Patterson, Gender: Male, DOB: 01/01/1961, Age 51, Status: Single. Occupation: Marketing Manager at ABC Pvt. Ltd. Objectives and Goals James Patterson wishes to retire by the age of 56. Nevertheless, if retirement at the age of 56 looked difficult he would consider cutting back to 4 days one year, then 3, and so on. The age pension would start from the time Mr. Patterson attains the age of 65. So it is imperative that Mr. Patterson makes proper arrangement for the financial needs arising during the big gap from the age of 56 to 65. Thus, his prime objective is to accumulate sufficient Retirement Income to fulfil all his responsibilities during that period in addition to fulfilling his personal interests. The interests of James Patterson after retirement comprise of travelling extensively, and attending summer school courses on aspects of ancient history particularly about Greece and Rome among others. He also wants to remain associated with Community Aid and one of his prime responsibilities is to look after his aged mother, and his nephew and nieces. The target retirement income that Mr. Patterson is looking forward to is equivalent to 60% of his pre-retirement income. The disposable income of James Patterson at present is $50567, 60% of which would be equivalent to $30340. Thus, the client would require an annual income of around $30340 following his retirement after about 5 years. He could continue to require an income of $30340 for at least the subsequent 9 years, until he attains the age of 65 and his age pension starts. On the basis of the information provided by Mr. Patterson and the following discussions, his lifestyle objectives and goals were reviewed. The recommendations provided in this financial have been developed to help Mr. Patterson in accomplishing these objectives: Living Expenditure: Mr. James Patterson would like to afford for his living expenses of around $30,500 per year. Holidays: James Patterson would like to expend $5,000 on a travel holiday every year. Family: James Patterson has a large extended family comprising of his mother and five siblings. He intends to take care of her mother and also assist his nephews and nieces financially. Retirement: James Patterson would like to withdraw from full time work in 5 years time when he attains 56 years of age. He is willing to draw down on his capital with the purpose of accomplishing her retirement objectives. Identification of Issues and Problems The total cumulative value of capital and assets owned by James Patterson is equivalent to $718,781. Assuming the life expectancy level of Mr. Patterson to be 80 years, he needs to arrange for the financial requirements of 25 years. It should be noted that the client intends to retire at 55. He would get some amount of assistance from the Age pension after he attains the age of 65. However, he needs to build a decent corpus of capital for his retirement plans. Mr. Patterson is single and does not have any direct responsibility of a family, but the downside is that he has to prepare for his old age finances on his own. The present level of savings will most likely not be adequate to build up the assets essential for Mr. Patterson to be able to preserve his preferred standard of living post retirement. Moreover, it was observed that the client does not have an income protection cover yet. Hence, if James Patterson were to endure a long term or everlasting disability, he might have to considerably trim down her standard of living and perhaps might even have to liquidate assets. This would sequentially hamper the retirement income objectives. Another key observation was that he lacks emergency cash reserve. It is wise to maintain an urgent situation reserve that would cover for the basic living expenses of around 5 to 6 months. In case of Mr. Patterson, this balance should be in between $25,000 to $30,000, while he has merely around $4500 in his savings account. In order to take care of this issue, the client needs to put up a reserve of at least $25,000, and maintain that value in the form of investments that can be transformed into cash at any moment without principal loss or a penalty payment. Cash Flow The disposable income of the client is around $50567, and his total expenses are listed below: Expenses Value per Year Notes Mortgage payment $16250 Laundry $300 Food & grocery $8400 $700 per month Clothing & shoes $1000 Electricity & gas $660 $110 per two months Phone & Internet $1800 $150 per month Municipal Rates $1000 Water $600 Car Expense Licensing $500 Comprehensive insurance $500 Running cost & repair $2500 Car Loan 0 Medical expense $1200 $100 per month Holiday expense $ 5000 Entertainment $4800 $100 per week Gifts $1920 (of which $633.6 is tax deductable) $40 per week (33% of which is in donations to community aid and tax deductable) Other expenses $2400 $200 per month Superannuation Expense $1380 Total Expenses $50,210 Total Assets Assets Value Notes Cash $4500 $4444 Balance in Savings account Balance in Holiday account House $350000 to $400000 Currently valued by real estate agent Content $80000 Car $21300-$23600 Shares $ 13,000 Total Assets $525544 Considering the upper range for both the house and the car Note: The cumulative total balance of the superannuation funds of the client is equivalent to $216837. Debt Type of loan Amount Payment Interest Notes Mortgage $75,000 $1,362.41 monthly 7% Personal $1200 $60 monthly 24 payments remain Credit card $2,000 Minimum $100 monthly 13.49% p.a. on purchases Note: Mortgage will be paid off in 15 years. Personal Investment The assessment of the disposable income as well as the cumulative expenses of Mr. J James Patterson revealed that the client is at present deficit of funds. This is owing to the mortgage payment he has to make. The more rapidly, he pays it off, the quicker he would have access to larger amounts of funds at his disposal. He could use these funds to fulfil his wish to study further about ancient Greece or Rome. Furthermore, he could even use these funds to plan for a Europe trip, which would fulfil his desire to travel. Moreover, James Patterson had mentioned that he intends to look after his mother. Investment in high yielding saving accounts would facilitate him and act as an emergency fund intended to serve his mother’s age related problems. Since, Mr. Patterson dislikes taking up too much of risk, it would be best for him to invest in managed funds. This is because the managed funds would provide her with diverse investment opportunities, which would in turn limit her direct risk exposure unlike investing in different kinds of assets. Moreover, the fund manager would be more expertise and would have more access to internal information, helping Mr. Patterson in choosing the right mix of assets in her fund. The investment in the management fund as well as the growth investment bond is for the purpose of asset accumulation for Ms. Patterson’s retirement. The growth investment bond will keep its annual earnings and also forfeit its 30% tax involved on its own. Thus, Mr. Patterson would not have to pay any further tax unless he withdraws before the completion of the 10 year period. If he does so, then the withdrawn amount would be shown as earnings in his accessible income. This is a much acknowledged investment method used for accumulating fund for the future, while controlling risk and gaining from tax benefits. Personal Insurance At the moment James Patterson has only one insurance scheme, which is death + disability protection, as follows: Insured Type of cover Level of cover Benefit payable James Patterson Death + Permanent Disability $203,000 Lump sum He should take up an income protection cover, so as to ensure continued flow of a definite income in cases of illness or inability to work. In the case that Mr. Patterson retires at the age of 56, the income protection insurance would not be necessary because he would not be employed anymore. However considering the financial position of Mr. Patterson, it is unlikely that he would be able to retire so soon; instead he might have to work part time, cutting back to 4 days one year, then 3, and so on. Analysis The personal debts of James Patterson being paid off in addition to setting up a high yielding savings account would create supplementary savings. This will permit Mr. Patterson to enjoy the lifestyle he wishes to carry on with minimum concern. The value of the fresh investments in the growth managed funds as well as the Client’s present share portfolio will accumulate further over time. Moreover, these investments would assist Mr. Patterson the most, because they would grow while still being accessible to the client. As a result, this will assist the client to accomplish his retirement goals. Furthermore, the taking up of an income insurance cover will enable the client to have effectual income insurance and health cover in the unlikely events of sickness or injury. James Patterson should delay his retirement to the age of 60. Postponing his retirement would ensure that he has more savings in his superannuating account and the amount of money needed for his retirement will decline considerably. Recommendations Short Term: pay off personal debts in the form of credit card and personal loan open a savings account providing high yields and put around $10,000 within it for emergency purposes invest in an income protection cover Medium Term: pay off mortgage loan completely invest $80,000 in the growth option of a managed fund for a minimum period of 5 years Long Term: invest about $70,000 in a growth investment bond for a time frame of about 10 years Reference Crumbley, D. L., & Smith, L. M. (2002). Keys to Personal Financial Planning. USA: Barron's Educational Series. Read More