CARMEN VENTER WORKSHOPS FOR CFP EXAMINATIONS 2014

Transcription

1 CARMEN VENTER WORKSHOPS FOR CFP EXAMINATIONS 2014 RETIREMENT PLANNING Page 1

2 Retirement Planning is : 1. Ensuring that you understand the taxation of any lump sums that may be due at retirement as, your client will only be able to utilize the net amount after tax. The taxation of lump sums will however be covered in the Session titled Employee Benefits and Taxation. 2. Calculating the client s need at and for retirement to establish whether, after taking into account all available assets for retirement, he has either a surplus or a shortfall. This involves the use of financial calculations which is addressed in the notes below. 3. Making the necessary recommendations to address this shortfall if one exists. Part of your recommendation will always be to calculate a contribution to a retirement annuity and the maximum allowed for retirement purposes. Part of your recommendations will involve the financial calculation of annuity contributions at times escalating over the term and other times not. Take the following pointers into account: 1. While reading your case study start by drawing pictures if necessary. Very important is to DRAW YOUR TIME LINE. 2. Eliminate from your picture and or case study facts, any assets mentioned that will not form part of retirement planning. To do this you have to carefully and with your full attention, read the facts! 3. Make sure that your picture / time line, clearly indicates: (a) What payment, in current value, is needed in their first year of retirement (b) How many years /months do they have before they retire? This would be the same term in which they have to save for retirement. (c) How long do they want this payment for and will this payment have to escalate over the retirement term. (d) The capital amount that is needed at the date of retirement ie: how much do they have to have in their savings vehicles when they open their eyes on their first day of retirement? (e) how much they would to save today, until they retire, to make sure that they have the necessary capital amount for their retirement days. (f) Ensure you understand at what rate will the investment grow BEFORE retirement and is there a different growth factor on investments AFTER retirement? (g) Is there an inflation rate? or are they mentioning specifically the rate that the pension annuity must escalate by? (h) Clearly establish which assets your client is prepared to convert into cash for retirement planning use. Page 2

3 Perhaps the following steps will make the process a little easier for you: Step 1 Determine needs Current age and retirement age: {Period between these two ages equals :- how long before retirement and the term you have in which to save:} What is the annual payment (current value) needed at retirement age: For how long is this income needed: Will this retirement income increase and by what rate: Step 2 project current value income needed at retirement to a future value at retirement age. {This will become the PAYMENT needed for retirement term} Step 3 Convert the payment needed into a capital amount that is required at retirement age {Do this by calculating the PV of all the payments needed over the term, using the resultant rate} Step 4 Determine all liabilities that will be met at retirement as well as, any other needs at retirement {project current value to future value at retirement, using the relevant growth factor} Add step 3 and step 4 = total capital needed at retirement for retirement purposes Step 5 Determine all assets available for retirement purposes and do calculations by projecting the values to retirement age using the relevant growth factors.. Step 6 compare total capital available at step 5 with the total capital needed at step 4 Capital Needed Capital Available = shortfall/surplus If examiner requests: Step 7 calculate level/escalating premium needed to meet capital shortfall Page 3

4 RETIREMENT PLANNING EXERCISE Facts Mrs Able, 47 yrs old, receives a gross salary of R per annum and will retire at the age of 65 years. She expects her salary to grow at a rate of 6% per annum. She would like income equal to 85% of her current gross salary and her pension annuity must increase at an annual rate of 12%. She expects to live until her age of 90 years. She is a member of her employers Provident Fund the current value being R Her Employer Contributes 9% & she contributes 7.5% of her salary towards the provident fund. The Employer contribution however includes 1.5% which is for the risk component of the fund. She also contributes R pm towards her own retirement annuity. The current value being R She will pay premiums until her age of 65. Contributions are not increasing. She currently has the following assets that will be utilised for retirement purposes: Asset Current Value Growth rate Shares R % Business Interest R % She also has the following assets which she would ideally not want to use for retirement purposes unless absolutely necessary: Asset Current Value Growth rate Artwork R % She would like to purchase a new car when she retires the current value of the car is R assumption is made that the cost will increase with inflation. She expects that she will have to pay off a last amount of R on her bond at retirement. This is the value at the time of retirement. Make the following assumptions unless otherwise stated. Inflation rate is 7% per annum throughout The net return on capital before retirement is 12% per annum The net return on capital after retirement is 10% per annum She has a marginal tax rate of 40%. Page 4

5 You are required to: 1. Calculate any shortfall 2. Calculate capital needed to meet this shortfall 3. Calculate monthly premium required to meet this capital Level premium and Escalating premium 4. If she had to sell the artwork how much difference would this make to the capital needed? 5. Assume that she has decided not to sell the artwork by how much can her retirement annuity increase by, to take full advantage of tax benefits? [other relevant information for this question: Receives rental income of R a month. She has trade expenses of R a year on this income. She receives annually: R local interest, R 2400 foreign interest and R foreign dividend.] 6. Were she not able to contribute any more into her retirement annuity for tax purposes what other recommendations would you make? Any other considerations? Page 5

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