Financial Planning 2 nd edition

Transcription

1 Solution Manual to accompany Financial Planning 2 nd edition Prepared by Mike Kerry Deakin University John Wiley & Sons Australia, Ltd 2014 John Wiley and Sons Australia, Ltd

2 Chapter 10 Superannuation PROFESSIONAL ADVICE Salary sacrifice Jess is 28 and works 4 days a week in a costume shop. Her employer contributes the standard superannuation guarantee amount into her nominated superannuation fund. Jess does not salary sacrifice into superannuation but her employer is happy to organise this if she wants. Jess has also been very successful in attracting a lot of contract costume work. Last year, Jess earned $ more than the threshold at which the 37% marginal tax rate commences. She was annoyed that she lost $7400 in tax on this income. This year, she is determined not to let this happen and has decided to salary sacrifice into superannuation. The problem is that her income level fluctuates so much she is not sure how to organise this. QUESTIONS 1. What advice can you give Jess with respect to the concessional contribution limit? The concessional contribution limit is $25,000. The SGC that Jess s employer is making is already consuming some of this limit. If Jess were to salary sacrifice $20,000 then she might exceed the limit all contributions in excess of the limit are taxed at the individuals marginal tax rate plus Medicare. 2. Is Jess likely to qualify as a self-employed person with respect to superannuation contributions? The money that Jess earns from the costume shop is likely to exceed 10% of her total income therefore she will not be able to make personal deductible contributions to superannuation. However she can still make deductible contributions via salary sacrifice with her employer although she is constrained by the amount of income she earns with her costume shop employer. 3. If Jess is able to estimate the minimum amount she is likely to earn this financial year, how can you build a salary sacrifice strategy around this? If Jess was able estimate a minimum amount, for example, as a minimum she will earn $10,000 more than the 37% tax threshold she could commence a salary sacrifice of $200 per week. This amount could be adjusted up (or down) as the financial year unfolds and Jess gets a better idea of how much she will earn. 4. Can Jess wait until April/May when she has a clearer idea of how much she will earn in the financial year before implementing her salary sacrifice strategy? The decision to salary sacrifice must be made prospectively not retrospectively. If in April/May Jess finds that she needs to salary sacrifice another $10,000 it is unlikely that she John Wiley and Sons Australia, Ltd

3 will earn enough income at the costume shop before the end of the financial year to allow this to happen. Jess needs to act sooner if possible. John Wiley and Sons Australia, Ltd

4 Solution Manual to accompany Financial Planning 2e PROFESSIONAL APPLICATION QUESTIONS 10.1 Given that we have the age pension why do we need superannuation? From an individual perspective most Australian s would find it difficult to live the lifestyle they desire in retirement if they had to rely on the aged pension alone. From a government perspective the aging of the Australian population means that the government will find it very difficult to fund its commitment to the aged pension in the future. Numerous policy initiatives have been introduced which seek to reduce the reliance on the aged pension Feng, aged 38 has $250,000 to invest in order to help fund his retirement but is unsure as to how to invest the funds. Assume each of the following investments are returning 5% per annum superannuation, share portfolio and rental property. How would you advise Feng? If Fen invests in superannuation he needs to realise that his money will be preserved until retirement. However earnings on funds invested in a superannuation environment are only taxed at 15% compared to the individuals marginal tax rate when those earnings are made outside a superannuation environment. The 5% return is the total return compared to the returns he may be able to generate from a share portfolio or a rental property (see below). In terms of the share portfolio Fen needs to know if the 5% represents only the dividend income or the dividend income and capital gain combined. Fen also needs to know if only the cash income has been included within the 5% or whether this figure has been grossed up in recognition of the tax credits associated with the dividends. If he invests in the share market he can sell the investment at any time he chooses. Similarly with the rental property Fen needs to know if the 5% represents only the rental income or the rental income and capital gain combined. The investment could be sold at any time but may not be as liquid as investing in the share market What is the three pillars policy? What tax incentives drive the third pillar? Tier 1 A tax payer funded social security pension (a safety net) which is means tested Tier 2 Compulsory employer contributions to superannuation for employees. Tier 3 Tax incentives for voluntary contributions to superannuation o Concessional contributions are tax deductible o Government co-contribution and spouse rebate encourage non concessional contributions. o Earnings are taxed at 15%. o Capital gains are effectively taxed at 10% ( 2/3rds of 15%) John Wiley and Sons Australia, Ltd

5 10.4 Superannuation in Australia is primarily regulated by the Superannuation Industry (Supervision) Act What are the key underlying principles upon which this Act is based? The trustees remain responsible for all the decisions of the fund. Where possible members should participate in the decision making process. All investment decisions must be directed towards funding retirement. Compliance with the Act does not guarantee the performance or the financial viability of the fund Distinguish between the roles of APRA, ASIC and the ATO with respect to the regulation and control of the superannuation industry. APRA o Monitors the risk taking behaviour of individual (non SMSF) funds o Ensures the compliance of individual funds to the SIS Act o Issues RSEs ASIC o Protects consumers o Ensures markets are conducted in a fair, orderly and transparent manner o Issues AFSLs ATO o Prudential regulator of SMSFs o Collecting tax from superannuation funds o Administers the tax concessions available to individuals. o Auditing employers to ensure they meet their requirements under the Superannuation Guarantee (Administration) Act Why has there been a shift away from defined benefit schemes and towards accumulation schemes in Australia? In most defined benefit schemes the investment risk is borne by the employer. By encouraging new employees into accumulation style schemes the employer is able to shift the investment risk to the employee. Defined benefit schemes are also better suited to employees who stay with the one employer for a number of years as employees become more mobile the attractiveness of defined benefit schemes decreases Why are actuarial calculations and estimations critical to the viability of defined benefit schemes? In a defined benefit fund the amount notionally accumulated is determined by a formula. Actuaries are required to prepare the formula and to monitor the performance of the fund over time. If the actuaries get the formula right there will be enough money in the fund to pay out members as they retire. This can be contrasted to an accumulation fund where the claim John Wiley and Sons Australia, Ltd

6 Solution Manual to accompany Financial Planning 2e of the individual is equal to the balance of their account, in which case, by definition there can never be a shortfall of funds. The formulae applied by various funds will vary from fund to fund. A simple formula might take the form of: Final average salary times years of services times a factor = defined benefit account balance. This formula will require actuaries to estimate the growth of salaries over time and estimate how long individuals are likely to remain members of the fund and this information has to then be fed into the determination of the factor to ensure that the rate of contributions and earnings will be sufficient to cover the fund s commitments Distinguish between funded and unfunded superannuation schemes. How will the commitments to unfunded schemes be met? A funded superannuation scheme is where the employer has actually contributed the cash to the nominated fund of the member. The obligation to the member is matched by a pool of assets invested on the member s behalf. An unfunded superannuation scheme is where the employer has not contributed the cash to the nominated fund of the member. The obligation to the member is effectively a promise to pay. Some public sector schemes are unfunded or partially funded. Ultimately the obligation to members of unfunded public sector schemes is underwritten by the governments ability to levy taxes and raise the funds it requires. The Australian government has created the Future Fund and some of the assets in this fund will be used to meet this unfunded liability as it falls due What public policy initiatives have been introduced to encourage Australian s to stay at work longer? A progressive increase in the age pension entitlement age for women from 60 to 65. An increase in the age pension entitlement age from 65 to 67 for both men and women over the period 2017 to 2023 The introduction of a Transition to Retirement Income Stream The introduction of the Work Bonus Scheme A progressive increase in the preservation age from 55 to 60 The Howard/Costello superannuation changes in 2007 to encourage people to keep working at least until 60 years of age in order to release money from superannuation tax free What is the difference between a concessional and a non-concessional contribution? What are the different tax consequences when these contributions enter the superannuation fund? John Wiley and Sons Australia, Ltd

7 A concessional contribution is where a tax concession has been claimed effectively the individual is streaming some of their income into superannuation. Concessional contributions are taxed at 15% when they enter the fund. A non-concessional contribution is where a tax concession has not been claimed effectively the individual is moving some of their capital into superannuation. Concessional contributions are not taxed when they enter the fund Why is it important to distinguish between an employee and a contractor? How do we distinguish between them? If a person is considered an employee than the superannuation guarantee contribution needs to be added to the cost of their employment. If the person is a contractor then the superannuation guarantee contribution does need to be added. No one factor is necessarily decisive in determining whether a worker is an employee or a contractor it is generally some combination of factors which helps determine the issue. The following factors would tend to suggest contractor rather than employee: The client has limited control over the workers actions the worker decides what to do and how to do it. The worker has their own business organization. The worker has a large number of clients. The worker risk bears the risk of unsatisfactory work or results and of cost increases. The worker has the freedom to employ others. The worker provides their own tools. The ATO has provided guidance on this issue with the Commissioner s view given in Superannuation Guarantee Ruling SGR 2005/ Each investment choice within a superannuation fund must have investment objective which must be supported by investment strategies. What are the key investment strategies which must be addressed? Risk and return Diversification Short term liquidity Long term liquidity How have the FOFA reforms shifted advice fees from the product to the advisor? One of the key elements of the FOFA reforms is to remove conflicted remuneration, that is, remuneration which might cause an advisor to recommend a product that was not in the best interests of the client. Fees which in the past were notionally product fees but which were then rebated to the advisor have the potential to cause conflict. As a result of the FOFA reforms we have seen an increase in advice fees directly charged to the client. John Wiley and Sons Australia, Ltd

8 Solution Manual to accompany Financial Planning 2e Distinguish between direct and indirect superannuation fees. In the longer term which fees are likely to have the most impact on the amount accumulated? Why might an individual choose a fund that has higher indirect fees? A direct fee is any fee which can be attributed to a members account, for example switching fees and withdrawal fees. An indirect fee is any fee which cannot be attributed to a members account all management and other expenses are totaled and this is then divided by the total funds under management to produce an Indirect Cost Ratio (ICR). This ratio (percentage) is then deducted from the investment returns otherwise payable to the member. In the longer term, as the superannuation balance grows, the impact of a percentage based indirect fee will have a significant dollar impact on the amount accumulated and this impact is likely to be substantially more than any direct fees payable. An individual still might choose a fund with a higher ICR because they believe that the fund can produce superior returns which will more than compensate for the higher ICR and/or the fund offers a range of other services. John Wiley and Sons Australia, Ltd

9 PROFESSIONAL APPLICATION EXERCISES AND ANSWERS Tax saving from concessional contributions * Chitra is self employed and earns $200,000 per year. If she makes a concessional contribution to superannuation of $8,000 how much tax will she save? $8,000 * 45% = $3,600 saving in income tax $8,000 * 15% = $1,200 cost in contributions tax Net saving = $2, Eligible spouse rebate * Trish has an assessable income and reportable fringe benefits of $12,800. Her spouse Philipe makes a non concessional contribution of $3,000 on her behalf. What tax rebate is Philipe entitled to? Over the income threshold: $12,800 - $10,800 = $2,000 Reduction in eligible contribution: $3,000 - $2000 = $1,000 Rebate: $1,000 * 18% = $ Impact of fees on amount accumulated * Jiang has received his Choice of Superannuation Funds form from his employer. He is undecided whether to contribute to the FlexE Superfund or the PeqSA Superfund. He believes that both funds are very similar and that the only significant difference between them is the FlexE Superfund has an ICR of 0.9% whilst the PeqSA Superfund has an ICR of 2.2%. If Jiang was to contribute $5,000 per year for the next 20 years and the investment return for each fund was 7% per annum before the application of the ICR what would be the future value of Jiang s superannuation in each fund? In Excel Future Value (FV) = (rate, number of periods, amount) Fund FlexE FV = $185,917 (6.1%, 20, 5000) Fund B FV = $161,877 (4.8%, 20, 5000) John Wiley and Sons Australia, Ltd

10 Solution Manual to accompany Financial Planning 2e Excess concessional contributions accumulation ** Mark is 29 and earns $100,000. As part of the applicable industrial award his employer contributes an amount equal to 12% of his salary to his nominated superannuation fund. If Mark salary sacrifices $20,000 into superannuation how much contributions tax will he pay? How much would you suggest Mark salary sacrifices into superannuation? Employer contribution = $12,000 Salary sacrifice = $20,000 Total contribution = $32,000 First $25,000 of contribution taxed at 15% = $3,750 Next $7,000 of contribution taxed at 37% = $2,590 Total contributions tax = $3,750 + $2,590 = $6,340 Mark should limit his salary sacrifice to $13,000 to avoid the excess concessional contributions tax Excess concessional contributions defined benefit ** Janice is 31 and earns $100,000. She is a member of her employers defined benefit scheme. She has just received a notice from her superannuation fund which indicates that her notional taxed contribution is 17%. If Janice salary sacrifices $18,000 into superannuation how much contributions tax will she pay? How much would you suggest Janice salary sacrifices into superannuation? Standard contribution = $17,000 Salary sacrifice = $18,000 Total contribution = $35,000 First $25,000 of contribution taxed at 15% = $3,750 Next $10,000 of contribution taxed at 37% = $3,700 Total contributions tax = $3,750 + $3,700 = $7,450 Janice should limit her salary sacrifice to $8,000 to avoid the excess concessional contributions tax Determining the SG obligation ** Peter believes that his employer has not contributed enough in superannuation guarantee payments. The table below shows what Peter has earned over the last financial year. If we assume a superannuation guarantee rate of 10% then how much should the employer contribute? earnings for ordinary hours of work $40,000 John Wiley and Sons Australia, Ltd

11 overtime pay $6,250 over award payments $3,320 loadings for night shift $4,800 annual leave loading $500 Christmas bonus $1,000 Total $55,870 Ordinary Times Earnings earnings for ordinary hours of work $40,000 over award payments $3,320 loadings for night shift $4,800 total $48,120 SG at 10% of $48,120 = $4, Government co-contribution under the income threshold ** How much government co-contribution will each of the following people be entitled to? Barnaby earns $30,000 per year and makes a non concessional contribution of $1000. Pixie earns $30,000 per year and makes a non concessional contribution of $700. Rufus earns $30,000 per year and makes a non concessional contribution of $2,000. Barnaby will receive co-contribution of $500. Pixie will receive a co-contribution of $350. Rufus will receive a co-contribution of $ Government co-contribution over the income threshold ** How much government co-contribution will each of the following people be entitled to? Ed earns $40,182 per year and makes a non concessional contribution of $1,000. Darren earns $40,182 per year and makes a non concessional contribution of $250. John Wiley and Sons Australia, Ltd

12 Solution Manual to accompany Financial Planning 2e Ed is $6,666 over the income threshold so his maximum co-contribution entitlement is reduced to $222. [$500 ($6,666 * $ )]. Ed will receive a co-contribution of $222. Darren is $6,666 over the income threshold so his maximum co-contribution entitlement is reduced to $222. [$500 ($6,666 * $ )]. Darren will receive a co-contribution of $ Government co-contribution an efficient co-contribution amount ** Audrey earns $40,000 per year and wants to make the smallest non concessional contribution possible and still get the maximum government co-contribution payment available. How much will she need to contribute? A $568 non concessional contribution by Audrey will attract a $284 co-contribution Investment restrictions ** The trustees of Uripper Superannuation fund have made the following investment decisions. As Auditor of the Uripper Fund advise the trustees as to whether you believe the decisions comply with the investment restrictions outlined Superannuation Industry (Supervision) Act 1993 and its associated regulations. (a) The trustees of the fund have bought a beach house for the exclusive use of members. Likely to fail the sole purpose test. All investments need to be undertaken for the purpose of providing retirement benefits superannuation funds are not for the purpose of providing free/cheap holidays to members. (b) The trustees have acquired shares in Uripper Pty Ltd which amount to 40% of the total assets of the Uripper fund. Uripper Pty Ltd is owned by two of the members of the Uripper Superannuation Fund. Likely to fail the in-house asset rule. In-house assets are limited to 5% of all assets. (c) In order to fund a payout to a recently retired member the fund has borrowed $100,000 for a period of two years. Likely to fail the borrowings rule. Funds are not allowed to borrow except for short term transactional purposes. (d) The fund has loaned Kita, who is a member of the fund, $200,000 to help fund a new business venture. The loan has been offered on commercial terms. Likely to fail the loans and financial assistance to members rule. Funds cannot lend money to members under any circumstances. John Wiley and Sons Australia, Ltd

13 (e) Masami, who is a member of the fund, has sold a parcel of vacant land to the fund at a price which is considerably below its market value. Likely to fail all transactions on an arm s length basis rule. All transactions need to be conducted on commercial terms Determining the taxable income of a superannuation fund *** During the financial year the Stone Masons superannuation fund receives the following amounts. The Stone Masons fund is a complying superannuation fund. Superannuation guarantee contributions $400,000 Salary sacrifice contributions (includes $20,000 which are $185,000 contributions received to pay for life insurance). Cash received from fully franked dividends $21,000 Unfranked dividends $10,000 Non concessional member contributions $127,000 Income from investments overseas (includes $10,000 in tax $100,000 withheld the country has a reciprical tax agreement with Australia) Proceeds from sale of property (Cost $120,000 in 2010) $210,000 Income from investments used to fund pensions $40,000 What is the assessable income of the fund and how much tax will be payable by the fund? Assessable income Superannuation guarantee contributions (defined under the ITAA as assessable income) $400,000 Salary sacrifice contributions (defined under the $185,000 ITAA as assessable income) Fully franked dividends (the cash received needs to be grossed up) $30,000 $21,000 /( 1 company tax rate) = Unfranked dividends $10,000 Capital gain from sale of property ($210,000 - $120,000) * 2/3rds assessable (defined under the $60,000 ITAA as assessable income) Total assessable income $685,000 Allowable deductions Contributions received to pay for life insurance (defined under the ITAA as an allowable deduction) ($20,000) Taxable income $665,000 John Wiley and Sons Australia, Ltd

14 Solution Manual to accompany Financial Planning 2e Tax payable (taxed at 15%) $99,750 Less franking credits (Grossed up amount less cash received) $30,000 less $21,000. ($9,000) Less foreign tax credits ($10,000) Net tax payable $80, Determining the balance of a defined benefit account *** Tran is a member of a defined benefit superannuation scheme. His superannuation entitlement is determined by the following formula: Final average salary times years of service times a factor. Final average salary is determined by taking the average salary over the last three years of work. His salary over the last the years has been $80,000. Years of service is equal to the number of equivalent full time years he has worked for the firm. Tran has worked with the firm for over 25 years however some of that has been part time work and there was also a period of six months where he took leave without pay. Tran has the equivalent of 18 years of equivalent full time service. The factor which is relevant to Tran is determined by a number of variables. The key variable is the rate of salary sacrifice that Tran has made to the fund over the years. The choices for Tran were 0%, 5% and 7%. Tran has salary sacrificed 5% during his working career. As a result his factor is 15%. (a) What is Tran s current superannuation balance? $80,000 times 18 times 15% = $216,000 (b) Tran has noticed that if his rate of salary sacrifice was 7% rather than the current 5% his factor would rise to 18% and this would give him a superannuation windfall. Advise Tran on the benefits of increasing his rate of salary sacrifice. Tran might believe that if he worked for two additional years his superannuation balance would become: $80,000 times 20 times 18% = $288,000 It is unlikely however that the rules of the fund will allow him to make such a windfall. If for example Tran contributed 7% of his salary for two years his superannuation balance would become: (80,000*18*15%) + (80,000*2*18%) = $244,800 If Tran had been allowed his windfall then all rationale members should contribute at the rate John Wiley and Sons Australia, Ltd

15 of 0% for all the years they are a member except for the last when they should increase their rate of salary sacrifice to 7%. Making such decisions is often called making an adverse selection against the fund and superannuation funds rules, in the interests of equity for all members, seek to avoid this from happening. (c) Tran has recently been offered a promotion which would increase his salary by 40% however the new position is highly stressful and Tran is not sure how long he would be able to cope with the stress. Advise Tran on the arguments for and against taking the promotion. The final average salary tends to be the most volatile factor in the defined benefit equation earning 40% more for three years would have the same superannuation impact as working on the same salary for another 11.4 years. (112,000 * (18 + 3) * 15%) = $352,800 ($80,000 * ( ) * 15%) = $352,800 For Tran there are a number of factors to be considered. In order to get the most superannuation benefit out of his new stressful job he will need to stay in that role for three years. He then needs to consider his position beyond those three years, will he be ready to retire, will he be capable of continuing in this highly stressful role? If he decides not to take on the new role is he willing to keep on working for another 11.4 years to achieve the same superannuation result? John Wiley and Sons Australia, Ltd

16 Solution Manual to accompany Financial Planning 2e CASE STUDY SALARY SACRIFICE TO ACHIEVE AN ACCUMULATION TARGET Belinda is an engineer who likes precision in everything she does. Belinda is 50 years old and wants to retire in 10 years time. She has been doing some reading about retirement incomes. If Belinda was 60 years old today and was to retire today she has calculated that she would require $587,574 to afford the type of income stream she desires in retirement. However Belinda is 50 years old not 60, she has 10 years to accumulate this amount. Belinda also knows that inflation over the next 10 years will mean that she will need to accumulate more than $587,574. Belinda has worked out that $789,650 received 10 years from today has the same value as $587,574 has today if we assume an inflation rate of 3% per annum. As her financial advisor you explain that the broad scope of the assumptions which underpin such modelling mean that such precision is very difficult to achieve nonetheless a plan is much better than no plan even if we have to come back to the plan from time to time and adjust our assumptions. Belinda wants you to build a model which accumulates a nominal $789,650 in superannuation over the next 10 years. She has supplied you with the following information and assumptions: Her opening superannuation balance is $367,823. Her income is $70,000 per annum and will grow in nominal terms by 4% per year. Her investment choice inside her fund is expected to earn 6% nominal returns per annum after fees but before taxes. Her employer contributes an amount equal to 12% of her income to superannuation. To make the modelling simpler we will model in calendar years and assume that contributions are made in December each year so that they do not attract earnings in the current year. The missing variable is the percentage of salary sacrificed into superannuation. Belinda is happy to sacrifice as much as possible to achieve her goal provided she stays within her concessional contribution limits. Belinda uses spreadsheets a lot in her work and has found the GOALSEEK function very useful in trying to solve problems like this. a) What percentage of her salary must Belinda sacrifice into superannuation in order to accumulate $789,650 in nominal terms in 10 years time? John Wiley and Sons Australia, Ltd

17 Belinda Superannuation Projection Assumptions and data Salary $ 70,000 Rate of growth of salary 4.00% Opening balance of superannuation $ 367,823 Earnings after fees but before tax 6.00% Earnings tax 15.00% Earnings after fees and after tax 5.10% Employer superannuation contribution before tax 12.00% Contribution tax 15.00% Employer superannuation contribution after tax 10.20% Salary sacrifice contribution before tax (Using GOALSEEK) 8.00% Salary sacrifice contribution after tax 6.80% Inflation 3.00% Workings Salary Year Opening balance Earnings after fees and after tax Employer superannuation contribution after tax Salary sacrifice contribution after tax Closing balance (S) (OB) (Earn) (Cont) (Salsac) (CB) =OB + Earn + Cont = OB * 5.10% = S * 10.2% = S * 6.80% + Salsac Concessional contribution check must be < $25k $ 72,800 1 $ 367,823 $ 18,759 $ 7,426 $ 4,950 $ 398,958 $ 14,560 $ 75,712 2 $ 398,958 $ 20,347 $ 7,723 $ 5,148 $ 432,176 $ 15,142 $ 78,740 3 $ 432,176 $ 22,041 $ 8,032 $ 5,354 $ 467,603 $ 15,748 $ 81,890 4 $ 467,603 $ 23,848 $ 8,353 $ 5,569 $ 505,372 $ 16,378 $ 85,166 5 $ 505,372 $ 25,774 $ 8,687 $ 5,791 $ 545,624 $ 17,033 $ 88,572 6 $ 545,624 $ 27,827 $ 9,034 $ 6,023 $ 588,508 $ 17,714 $ 92,115 7 $ 588,508 $ 30,014 $ 9,396 $ 6,264 $ 634,182 $ 18,423 $ 95,800 8 $ 634,182 $ 32,343 $ 9,772 $ 6,514 $ 682,811 $ 19,160 $ 99,632 9 $ 682,811 $ 34,823 $ 10,162 $ 6,775 $ 734,572 $ 19,926 $ 103, $ 734,572 $ 37,463 $ 10,569 $ 7,046 $ 789,650 $ 20,723 (b) Explain to Belinda how salary sacrificing represents a trade off between current consumption and future consumption and the factors she should take into account in determining the appropriate level of salary sacrifice. Quite simply the less income received today the less that is consumed today. The more that is accumulated in superannuation the higher the retirement income. Belinda needs to determine how important current consumption is if she has paid off her home and has a reasonable level of assets outside superannuation she might be in the position to sacrifice some of her current income. She needs to be mindful that salary sacrificed contributions are preserved in the superannuation environment and cannot be accessed until a condition of relaese is satsified. (c) What other factors beside salary sacrifice might Belinda alter in order to achieve her accumulation goal? Belinda might: Seek to invest her superannuation more aggressively and hopefully achieve higher nominal returns. John Wiley and Sons Australia, Ltd

18 Solution Manual to accompany Financial Planning 2e Make non concessional contributions to superannuation from assets held outside the superannuation environment. Work for more than 10 years. This will allow her to accumualte more whilst at the same time having a shorter retirement period to fund. d) If Belinda was 15 years from retirement rather than 10 years would her goal of accumulating a real amount of $587,574 in superannuation alter if her desrired retirement income stream remained the same? Would her goal of accumulating a nominal amount of $789,650 in superannuation alter? The real amount of $587,574 is an expression of the buying power the client wants in today s dollars. The buying power that the client seeks does not change whether we are projecting 5 or 25 years into the future. The nominal amount in the future which equates to $587,574 today will change due to inflation. If we assume an inflation rate of 3%: In 10 years time $789,650 will buy the same as $587,574 does today. [$587,574 * ((1+.03)^10) = $789,650] In 15 years time $915,421 will buy the same as $587,574 does today. [$587,574 * ((1+.03)^15) = $915,421] If Belinda was 15 years from retirement we would need to build a strategy which would accumulate $915,421 in nominal terms. John Wiley and Sons Australia, Ltd