ACCT 2886 Yawensu s3621201 PDF

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Cover sheet for submission of work for assessment RMIT

SCHOOL:

Office use only

Program name

Program code Client Strategy Report

Course/unit name

Superannuation and Retirement

TAFE National Module Unit of Competency (UOC) name

Assignment no.

Course/unit code ACCT 2886

TAFE National Module Unit of Competency (UOC) ID

Due date 2

Campus

Assignment Task 2

Name of lecturer/teacher 07/10/19

Class day/time city

School date stamp

Maggie

Tutor/marker’s name Monday

STUDENT/S Family name

Given name

(1)

Student number

YAWEN

SU (2)

s3621201

YUXIAO

ZHU (3)

s3567293

JIANYE

CHEN

3558152

(4)

(5)

(6)

DECLARATION AND STATEMENT OF AUTHORSHIP 1. I/we hold a copy of this work which can be produced if the original is lost/damaged. 2. This work is my/our original work and no part of it has been copied from any other student’s work or from any other source except where due acknowledgement is made. 3. No part of this work has been written for me/us by any other person except where such collaboration has been authorised by the lecturer/teacher concerned. 4. I/we have not previously submitted this work for this or any other course/unit. 5. I/we give permission for this work to be reproduced, communicated, compared and archived for the purpose of detecting plagiarism. 6. I/we give permission for a copy of my/our marked work to be retained by the school for review and comparison, including review by external examiners. I/we understand that: 7. Plagiarism is the presentation of the work, idea or creation of another person as though it is my/our own. It is a form of cheating and is a very serious academic offence that may lead to exclusion from the University. Plagiarised material can be drawn from, and presented in, written, graphic and visual form, including electronic data and oral presentations. Plagiarism occurs when the origin of the material used is not appropriately cited. 8. Plagiarism includes the act of assisting or allowing another person to plagiarise or to copy my/our work.

Student signature/s I/we declare that I/we have read and understood the declaration and statement of authorship.

(1)

(3)

YAWEN SU

JIANYE CHEN

(5)

(2)

YUXIAO ZHU

(4)

(6)

Further information relating to the penalties for plagiarism, which range from a notation on your student file to expulsion from the University, is contained in Regulation 6.1.1 Student Discipline and the Plagiarism Policy which are available on the Policies and Procedures website at www.rmit.edu.au/policies. Copies of this form can be downloaded from the student forms web page at www.rmit.edu.au/students/forms. Cover sheet for submission of work for assessment

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Client Strategy Report Guide Executive Summary In the most recent meeting with Paul Jones (the client), we reviewed the recent changes in Paul’s income and financial positions. In the past 12 months, Paul has encountered change in income—he now earns $1000 redundant income per week. He also purchased a sports car with a $30,000 loan. Although Paul would like to retire now, it is determined that his current financial conditions are nit sufficient to allow him to enjoy a modest living standard if he retires immediately. He is recommended to work for another five years so that he would be able to enjoy at least a modest living standard after retirement. After reviewing her financial conditions and risk preferences, it is determined that Paul is an assertive balance investor, who should have 70% assets invested in growth asset and 30% defensive assets in the portfolio. His investment objectives are determined to be: 1. Achieving a return that beats inflation and ranges roughly between 4%-6% annually 2. Paying off the car loan before retirement 3. Simplifying the management of super accounts With these investment objectives, Paul is recommended to change his current portfolio composition by investing 40% of funds in ASX200 Index, 20% funds in SCentre REITs, 10% in the bond market, 15% in term deposit and 15% in gold. This investment strategy would achieve an expected annual return of 6.21%. He is also recommended to switch his super to a single self-managed super funds and make more voluntary contribution each year to obtain greater tax savings. If he properly executes the strategy, he will have a superannuation position of 440,140.7 in five years, which is sufficient for him to maintain a modest living standard until the age of 82.5. Besides, he will be able to pay off the car loan in five years and achieve easier super management under the proposed strategy.

Goals Discussion In the latest meeting, Paul and I discussed about the most recent changes in his financial conditions and his investment goals. In the past twelve months, Paul has been doing a lot of work and made some redundancy income. Using the redundancy incomes, Paul has purchased a sports car, on which he took a loan of $30,000 to finance the purchase. Personally, Paul would like to retire soon. He also expects that if he continues to work, his salaries will reduce in the future. In the meeting, Paul demonstrated the concerns regarding whether the current size of his super could fulfil the expense needs in his life after retirement. Paul also demonstrates some frustration regarding the currently wide dispersion of his super funds. Based on his current financial positions and specific requirements, this client strategy is designed to provide limited advice addressing the following four main priorities: 1. Develop a savings and investment plan that allows Paul to achieve an adequate level of funds to enjoy the life after retirement 2. Consolidate Paul’s superannuation funds for easier management 3. Provide advice on how to manage Paul’s redundancy payments 4. Reduce Paul’s debt level (allow him to pay off the $30,000 loan on the sports car he purchased)

The investment strategy also considers the personal profile and risk profile of Paul. Paul is current aged 57, with a monthly total income of $5,628 ($67,536 annually), which consists of weekly salaries and other taxable income from account-based pensions. His annual expense is $60,000; therefore, Paul would have $7,536 free cash each year at disposal. Paul also has a monthly $411 SGC contributing to his superannuation ($4,932 annually). His total superannuation value of $300,000 ($280,000 personal super as account-based pension and $20,000 employer super). In addition, Paul has a bank deposit of $6,000 and fixed assets in terms of house, home contents and moto vehicle totalled $565,000. Paul has two children, Mike and Kate. Mike is current 26 years old and is financially independent. Kate is 17 years old and she will become independent soon. Therefore, Paul will face little pressure from expense on children in the future.

According to GESB1, the annual cost for a single person to have a “modest” and “comfortable’ living standard is $27,814 and $43,601, respectively. Using the inflation rate of 3%, and assuming Paul will liv to 82.5 years old, which is the current life expectancy for male in Australia2, the present value of the superannuation Paul needs to have for these two types of retirements are $464,254 and $727,761, respectively. If he retires in five years, the present values will become $390,530 and $612,191, respectively. Although Paul is not able to afford to repay the loan and maintain a modest retirement now, given Paul’s personal and income conditions, it will not be challenging for him to achieve his investment objectives and at least maintain a modest living standard if he decides to retire in five years rather than now. Paul scored 210 in the Investment Risk Profile questionnaire. This score indicates that Paul’s investment type is assertive “balanced”, which means a moderate risk tolerance, and seeking for more growth than revenue. This type of investors’ portfolio typically consists of around70% of growth assets, and 30% of defensive assets. With such an asset allocation, the investment strategy aims to achieve 4-6% annual return that beats the inflation rate (assumed to be 3% annually); a certain level of return variability is allowed within the investment horizon. In fact, a certain degree of volatility is totally acceptable to Paul as he understands the volatile nature of the capital market and he would like to achieve tax efficiency by investing in more volatile investments. Paul also has both the capacity and willingness to withstand certain degree of losses that may not recover in the very short term.

Considering Paul’s risk profile, the investment strategy is determined to have the following three goals: 1. To achieve an annual return of 4-6% over the next five years that enables Paul to enjoy at least a modest living standard after retirement 2. To allow Paul to pay off the loan on the car in the next five years 2. To have minimum impacts on Paul’s current living standard and enable him to have an at least modest living standard after retirement

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 !GESB.!2019.!The!Cost!of!Living!in!Retirement.!Viewed!October!5th,!2019,!from! ! 2 !ABS.!2019.!Life!Expectancy!at!Birth.!.!Viewed!October!5th,!2019,!from! !

Strategy Discussion Based on the client’s investment objectives, a superannuation investment and retirement planning strategy is developed.

Asset allocation As Paul is an assertive balanced investor, the strategic asset allocation will have 70% of Paul’s super invested in growth assets, including stocks, property and high-yield fixed income assets. 30% of Paul’s super will be invested in defensive assets including cash/deposits and gold. Most of Paul’s return from the investment will be in the form of capital gains, as capital gains would produce tax benefits when he realizes the gains after he indeed retires. Furthermore, the recommended asset classes mostly require a relatively long holding period (35 years) to realize an expected level of return. Significant fluctuation in portfolio value may occur in the short term.

Growth assets The growth assets recommended to Paul include stocks, real estate investment trusts (REITs) and corporate bonds.

1. Stocks

Paul is recommended to invest in the ASX50 Index, which is a weighted index tracing the performance of the 50 largest stocks listed in Australian Securities Exchange (the “blue chip” stocks) for stock investment, instead of investing in individual stocks. There are two reasons for this recommendation. Firstly, since 2000, the ASX50 Index has an average annual return of 9.14%3; in the most recent year, the ASX50 Index had a return of 7.84%, which outperformed all other Australian share market benchmark indexes such as ASX20, ASX200 and All Ordinaries. This superior performance of the ASX200 index will better help Paul to achieve the return objectives. Secondly, directly investing in this index rather than a selected group of stocks enables Paul to achieve greater diversification benefits, while incurring a lower cost than purchasing the 50 largest stocks individually. In the market, there are a number of ASX200 products (funds) available. Paul could either choose to purchase the SPDR S&P/ASX 50 Fund listed on the ASX to make this investment, or invest in the index through other investment fund companies such as Vanguard. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3 !Market!Index.!2019.!Market!Statistics-ASX.!Viewed!October!5th,!2019,!from! !

Paul is recommended to liquidate all his holdings in international stocks, especially those of US and European companies. The main reason for this recommendation is the increasing concern of economic slowdown in the US and Europe. Recently, there has been warning signs (the appearance of inverted yield curves) that the US economy may enter a recession in the next year or two4; the US Federal Reserve and European Central Bank have been implementing very expansionary monetary policies to boost the economies, yet the effectiveness of the policies is diminishing. Amid the current trade tensions between the US and China, as well as between the US and Europe, Paul is recommended to minimize his exposure to international equity market to mitigate the potential downside risk. Moreover, reducing the position in international shares allows Paul to minimize his exposure to foreign exchange risk, which has become a major concern to his portfolio value as a currency war is likely to occur under the central banks increasingly expansionary monetary policies.

2. REITs

Paul is recommended to continue to invest in the property market. However, rather than directly investing in individual properties, Paul is recommended to invest in REITs. REITs usually holds a portfolio of commercial and residential properties; via professional operation of the propertied, REITs generate income to shareholders through both the lease/rental income on the properties, as well as the capital gains. On advantage for REITs is that they usually distribute a majority of incomes to shareholders in the form of dividends. This will allow Paul to have a reliable stream of income, while retaining the potential for capital gain. In the past 12 months, the average return for 6 largest Australia REITs is 14.24%5. Taking a conservative standing, we estimate the average yearly return from REITs in the next 5 years will be 7%. Therefore, by investing in REITs, Paul would obtain a return that is much higher than the inflation rate.

There are a number of REITs available in the market. Paul is recommended to invest in the REIT of SCentre Group, which is the operator of the shopping mall chain Westfield. The reason is that the !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4 !Leong,!R.,!Burns,!D.!&!Brettell,!K.!2019.!Explainer:!Countdown!to!recession!-!What!an!inverted!yield!curve! means.!Reuters.!Viewed!October!5th,!2019,!from!! 5 !!IG!Group.!2019.!Top!6!Real!Estate!Investment!Trusts!(REITs)!to!watch.!Viewed!October!5th,!2019,!from! !

SCentre REIT has a history of good dividend and capital growth rate, and its properties are all located in Australian and New Zealand, which help to limit the portfolio’s exposure to global economic risks and foreign exchange risks. The SCentre REIT can be directly purchased on the ASX.

3. Corporate Bonds

Corporate bonds include both investment-grade bonds and high-yield bonds. High-yield bond usually refers to corporate bonds that are below investment grades. Although the risks of high-yield bonds are higher than government bonds, they are a suitable supplement to Paul’s portfolio because of their returns that are usually higher than the inflation rate, and their low correlation with the equity and real estate market6, which provides higher diversification benefits for Paul’s portfolio. A number of corporate bond funds are offered to retail investors like Paul by investment companies such as Vanguard. The Vanguard Australian Fixed Interest Index ETF (VAF) is a recommended product to Paul to invest in because of its relatively low management fee (0.20% p.a.) and 4.79% annual return since inception7.

Defensive assets The growth assets recommended to Paul include cash/deposits and gold.

1. Cash/deposits

Paul is recommended to invest a portion of his super into term deposits offered by banks and investment companies. After a selection among available term deposits, the AMP term deposit (5 year) is recommended to Paul because of the product’s higher return (1.50% p.a.) than the Big 4 banks (1.25%1.35% p.a.) and AMP’s strong reputation. Although this investment would generate a return lower than the projected inflation rate of 3%, it will preserve Paul’s capital with minimal downside risks.

2. Gold

Since 2000, Gold has an average annual return of approximately 7%. Yet it is still considered a defensive asset as gold is usually regarded as a good edge for inflation and macroeconomic risk, and it

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6 !Solnik,!B.,!Boucrelle,!C.!and!Le!Fur,!Y.,!1996.!International!market!correlation!and!volatility.!Financial-analystsjournal,!52(5),!pp.17-34.! 7 !Vanguard.!2019.!Vanguard!Australian!Fixed!Interest!Index!ETF!(VAF).!viewed!October!5th,!2019,!from! !

has very low correlation with the equity market8. To take a conservative standing, the annual return on gold in the next five years is expected to be 3%, which is the same as the projected inflation rate. While it might be difficult for Paul’s to directly purchase and own gold, he could obtain exposure to gold by investing in gold ETFs. There are a number of available gold ETF in the market, including the ETFs Physical Gold on traded on the ASX, which Paul can easily buy.

The proposed asset weights for Paul’s new portfolio are shown in the table below Asset Class

Expected Annual

Portfolio

Weighted average return

Return

Weight

ASX200 Index

9.14%

40%

3.66%

SCentre REIT

7%

20%

1.40%

VAF

4.79%

10%

0.48%

AMP Term Deposit

1.50%

15%

0.23%

Gold

3%

15%

0.30%

Total

-

100%

6.21%

Increase in Super Contribution Since July 1st, 2017, Paul has become eligible to enjoy a concessional contributions cap of $25,000 per year. However, the current yearly contribution to his super is only $4,932 in the form of SGC. Therefore, to achieve more tax savings, Paul is recommended to make more voluntary contribution to his super each year. Currently, it is calculated that Paul has $7,536 idle cash after paying for all living expenses each year. He is thus recommended to contribute all of these cash into his super each year.

Pay Off the Car Loan at the End of the Next Five Years Using His Super Since we do not know detailed information (loan structure, payment arrangements and interest rate) about the $30,000 loan Paul took to purchase the sports car, we assume that this loan has a maturity of five years and is a balloon loan that requires the repayment of principal at the end of the maturity. We further assume that Paul’s interest expenses on the loan are included in his annual living expense. As !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8 !Baur, D.G. and McDermott, T.K., 2010. Is gold a safe haven? International evidence. Journal of Banking & Finance, 34(8), pp.1886-1898.!

such, at the end of the next five years, Paul would need to pay off the loan using his super, in order to clear all the debts he took.

Consolidate his supers As Paul demonstrated his concerns regarding the complicated management of his super accounts, it is recommended that Paul should consolidate all his supers into a single account. In order to be enabled to conduct the proposed investment strategy, Paul is recommended switch to a single super that is a selfmanaged super fund, is eligible for account-based pension, and has the same insurance arrangements as his current super.

Illustration of Outcomes The outcomes on Paul’s annual cash flow of the proposed superannuation and retirement strategy in the next five years are presented in the following tables.

Cash Flow in the Next Five Years ($) 2020

2021

2022

2023

2024
...