Reference no: EM131039850 , Length: word count:3500

CASE STUDY - Jerry and Jenny Jones

45 Trouble Street, Thornbury

Jerry and Jenny Jones approach you for some financial planning advice. The couple earn a good level of combined income and enjoy a very comfortable lifestyle. They have accumulated a few investments but have not taken much interest in their superannuation balances. However, they have read a few reports of late which point out that the accumulated superannuation balances of many Australians will not be sufficient to support their retirement. The couple now feels that perhaps the time has come to seek some professional advice before it is too late.

INITIAL MEETING - May 2015

1. Personal Details:

Jerry Jones

Address - 45 Trouble Street, Thornbury

Age - 45

Health - good (smoker)

 

Employment:  Marketing manager with Support Beds

-Salary of $105,000 p.a. plus 9.5% superannuation guarantee contribution based on salary

-Employer allows salary sacrificing

Jenny Jones

Address - 45 Trouble Street, Thornbury

Age - 45

Health - good (non-smoker)

Employment:  Part-time accountant at Creative Accounts

-Salary of $50,000 p.a. plus 9.5% superannuation guarantee contribution based on salary

-Employer allows salary sacrificing

The couple has 3 children: Jack (aged 14), Jade (aged 12) and Jasmine (aged 8).

2. Client objectives:

• Build wealth between now and when they retire - expected to be when Jerry and Jenny turn 60
• The couple estimates they will require a combined real income of $58,000 per annum in present value dollars from their superannuation funds when they retire
• They want an investment plan that is easy to manage
• The want to ensure that their overall investments are well proportioned based on their risk profile and of a suitable quality
• To continue to have their children attend private schools.
• They would like to minimise their tax liability as much as possible
• They wish to reduce their level of debt as quickly as possible

3. Attitude to investment risk:

The couple advise that they have a reasonably good knowledge and interest in financial markets but do not have the time to manage their investments themselves. They are prepared to take on some risk in order to achieve a higher rate of return but not an excessive amount of risk. They realise that there will be some short-term volatility in financial markets and are prepared to invest for the long-term. They also realise that their current investment allocation and plan is unlikely to provide them with an appropriate nest-egg in retirement.

The couple has completed the following table to assist you in the task of identifying their risk profile.

Your concerns.  Mark each dotted line with a number.

Not concerned: 1             Slightly concerned: 2         Concerned: 3     Very concerned: 4

...4 Keep pace with inflation                            ...4 Desire for tax effectiveness 

...2 Easy access to cash                                  ...2 Need to receive income from investments

...3 Easy to manage                                       ...4 Desire for capital growth from investments

...2 Attitude to short-term volatility in investments

4. Assets and liabilities - expected as at June 2015:

Assets	Cost and year of purchase	Current market value at 30 June	Owner	Net return
Family home	$480,000 March 2005	$620,000	Joint	Nil
Boat	$25,000 January 2005	$20,000	Jerry	Nil
Cars	$42,000	$35,000	Jenny	Nil
	October 2011
	$22,000	$12,000	Jerry	Nil
	June 2008
House contents	$90,000	$50,000	Joint	Nil
Commonwealth Bank shares 625 shares	$25,000 November 2002	$53,000	Jenny	Fully franked dividend of 4% p.a. of current value
Savings account with Bundoora credit union		$26,900	Jerry	1% p.a.
Term deposit with Bundoora credit union - 3 month rolling balance		$165,000	Jerry	2.7% p.a.
Superannuation -conservative fund		$195,000	Jerry	5.2% p.a. (average 5 year return after taxes and fees)
Superannuation -capital stable fund		$135,000	Jenny	4.9% p.a. (average 5 year return after taxes and fees)

Notes-

-The savings account balance is the expected closing balance as at 30 June 2015 and already incorporates all cash inflows and outflows made during the year.

-The opening savings account balance can be assumed to be $12,800.

-The super balances for both Jerry and Jenny are made up solely from the 9.5% compulsory employer contributions. The couple have not made any additional voluntary contributions at this stage.

-The couple's superannuation is made up of the following:

Jerry: Cash 10%; Fixed Interest 35%; Property 15%; Australian shares 30%; International shares 10%.

Jenny: Cash 20%; Fixed Interest 40%; Property 10%; Australian shares 20%; International shares 10%.

Liabilities

Item	Owner	Amount outstanding	Annual repayments	Interest rate
Family home mortgage -15 years	Joint	$250,000	$25,400	5.8% p.a.
Personal car loan -5 years	Jerry	$16,000	$4,100	8.5%
Credit card	Joint	$6,000	Paid in full each month by due date so no interest is charged	16.5%

5. Budgeted expenses for 2015 financial year

Mortgage and loan payments (including interest and principle)	$29,500
Work related expenses - tax deductible (Jerry $1,500 and Jenny $1,000)	$2,500
Insurance	$3,000
Household (eg food, clothes)	$25,800
Private education expenses	$17,000
Utilities	$4,300
Entertainment	$8,000
Travel and holidays	$7,000
Motor vehicle expenses (includes comprehensive car insurance)	$8,500
Sundries	$2,000

Additional information / assumptions:

• Interest received on the savings account should be based on the opening savings account balance each year
• Term deposit interest rates can be assumed to remain unchanged. You can also assume that interest received on the term deposit is withdrawn as cash each year and forms part of the cash flow statement.
• The capital value of the shares is expected to grow by 5% p.a. The value of the family home is expected to grow by 7% p.a. whilst the contents and boat can be assumed to increase by the CPI. You can ignore changes to the value of the cars.
• All of the couple's expenses will increase by the CPI each year
• The salary of Jerry and Jenny will increase by the CPI each year
• CPI is 3.0% p.a.
• Superannuation earnings are to be based upon the opening superannuation account balance
• Annual loan repayments remain the same dollar amount each year until all debts are paid off
• Any cash surplus (deficit) is accumulated in the couple's savings account.
• The couple's eldest child Jack requires a lap-top computer for school - expected cost of $3,500 required during semester 2 2015.
• The credit card is used to pay their normal household expenses
• The couple advises that during the 2016/17 financial year, the kitchen will need renovating at an expected cost of $35,000. They expect to fund this by withdrawing monies from their term deposit.
• The couple do not have private health insurance
• Use current tax rates for all tax calculations

SECOND MEETING - end of June 2015

• Jenny advises that she is to be retrenched from her employment effective from 1 July 2015 and that she will receive a lump sum termination payment from her employer of around $15,000 in accrued annual and long service leave and other employment payments. Assume these are fully taxable.

Jenny wants to now stay at home for a period to look after the children and will not seek to resume employment until 1 July 2016 (expected pre-tax salary of around $30,000 p.a. working 2.5 days a week; work related expenses of $500).

• To cover the lost income in the event of a retrenchment, the couple advise that although they would like to retain their current lifestyle as much as possible, they are prepared to reduce their entertainment expenses to a net $5,000 p.a. and reduce their travel and holiday expenses also to a net $5,000 p.a. commencing in July 2015. They do not believe they could cut back on much else.

Required:

The couple requests that you analyse their current and future financial situation based on the above information and provide some suggestions on how they could improve their long-term net wealth. The couple are not sure what their financial situation will be once Jenny is retrenched although they realise it will be a struggle.

You are required to prepare a report for the couple answering the issues detailed below. The report should be addressed and written for the couple. The report should contain a covering letter addressed to the couple detailing the purpose and general content of the report.

There are no specific requirements for the format of the report.

It should be user friendly for the client, answer the following questions through the use of headings, and make use of tables, charts etc where appropriate.

You are required to provide the following:

1. Cash flow statements for the 3 financial years ending 30 June 2015 - 2017, including detailed tax calculations (use current tax rates).

2. Balance sheets for the 3 financial years ended 30 June 2015-2017.

3. i. An excel spreadsheet of accumulated superannuation for both Jerry and Jenny for each year from 1 July 2015 to their retirement in 30 June 2030.

You should use the following column headings in your spread sheet to illustrate the accumulation of their superannuation funds to retirement.

Year	Age	Salary	Opening super balance	Add employer super contributions	Less 15% contributions tax	Add net earnings	Closing super balance

ii. An excel spread sheet of accumulated superannuation for both Jerry and Jenny from    the commencement of their retirement on 1 July 2030 detailing how long their superannuation is likely to last.

To answer this part of the question, you are required to:

• determine what amount of "real income" the couple require from their superannuation accounts at the time of retirement (see client objectives).
• based on receiving the required level of "real income" in retirement, determine how many years the couple's accumulated superannuation is likely to generate an income (ie. withdraw a pension payment).

You can assume that the couple combine their accumulated super into one combined pension account upon retirement and earn the rate of return currently received by Jerry.

You should use the following column headings in your spread sheet to illustrate the reduction of their superannuation funds in retirement:

Year	Age	Opening super balance	Less pension withdrawal	Add net earnings	Closing super balance

4. i. Determine what you believe the risk profile of the couple to be based on the information provided in this case study (ie. conservative, balanced, growth, highly aggressive etc) and discuss the reasons for your view.

ii. Determine the couple's current asset allocation (across all their investments including super) in both $ and % terms and present this in the form of the following table. Discuss the extent to which the current asset allocation is consistent with the couple's risk profile determined in (i) above.

	Current asset allocation
Name of investment	Cash	Fixed interest	Property	Australian shares	International shares	Total
Total of asset class in $ terms
Total of asset class in % terms

5. i. Critically analyse the financial situation of Jerry and Jenny based on the information provided and provide an overall analysis of the couple's situation identifying problem areas and weaknesses.

ii. Based on the weaknesses identified above, provide  any  four  possible  financial  strategies that the couple may be able to use to improve their short-term and long-term financial situation.

You are required to write a paragraph for each strategy explaining generally how the strategy works and what the benefits and risks are for the couple. As a guide, a discussion of 150-200 words per strategy would be expected.

6. The couple are thinking about borrowing some money to buy an investment property in 2017.

Do you believe this is a good strategy for the couple? Discuss the appropriateness of the strategy for the couple including the benefits and disadvantages of negative gearing and investing into property.

Based on using the funds from the balance of the term deposit and requiring a 20% deposit  to be able to purchase an investment property, what price range is the couple reasonably able to afford and accordingly how much will they be required to borrow from a bank?

Will the couple be able to afford to pay the loan repayments? Discuss.