TASK 6: GOALS ANALYSIS:
TASK 6: GOALS ANALYSIS:
Introduction:
Following is the evaluation based of historical returns or current interest rates offered by the selected providers. Karl has $8000 in Sharesies account which can stay there to grow if Karl wants to.
The goals are saving for a trip to China, saving for a house deposit and saving for retirement.
SHORT TERM GOAL: saving for a trip to China.
Goal: Save $20,000 in 12 months
Customer can contribute $500 fortnight into heartland saving account with IR 4.60% would give them the following after 12 months.
Calculations:
FN contribution is $500.
Total savings in 12 months: would be $26261 with $261 interest earned over 12 months.
Following is the screenshot.
Conclusion:
Karl and Rui can easily meet their short-term goal of saving $20,000 for a trip to China within 12 months, so they need to keep contributing $500 FN to their savings account which would give them, $26261 after 12 months which is lot more what they projected.
Medium term goal: Saving for a house.
Goal: save $200,000 in 3-5 years for a house deposit (lets say 5 years)
Fund: Milford conservative fund
Projected Interest: 7.18%
Current savings: $100,000 from inheritance allocated for a house deposit, $20,000 in savings. So total $120,000. Invested for 5 years. (If invested for 3 years may not be able to achieve this goal and will fall short so 5 years is recommended)
Conclusion: Karl and Rui will have.
By accurately calculating the future value of their savings would be $208,384 in 5 years, Karl and Rui can confidently meet their goal. For house deposit. $100,000 from inheritance and $20,000 existing saving used as total $120,000 to grow over 5 years. (Please note inflation is not considered into this)
LONG TERM GOAL:
Karl has remaining $100,000 left which can be invested for retirement. Karl mentioned he is risk tolerance is balanced and want to retire at 60 years. Which is 5 years earlier from NZ super retirement age. Which mean Karl should invest $100,000 to grow for 30 years into managed fund. Which can give him funds for those 5 years which as result Karl can retire at 60. From Milford balance fund returns Karl would have $2,779,252 in 30 years. Those funds would assist Karl to retire yearly. Ongoing monitoring and regular review would be required. Those return based on Karls balanced risk approach.
Karl would require starting KiwiSaver contribution now. Rui already contributing 3% with $38000 balance. They would like to retire at 60. Remember Rui would be 58 when Karl turns 60. However, to receive super in NZ retirement age is 65. So, for those five years Karl and Rui would only have their investment funds for those 5 years (Rui would be only 58 when Karl will be 60) and beyond. New Zealand super age is 65 so which means if Karl retires at 60 for 5 years Karl can access funds from this managed fund of (projected $2742178 for 5 years before accessing they both access KiwiSaver and super will enhance their retirement yearly income. If Rui retire at 58 and Karl retire at 60 then they will not be able to access KiwiSaver and New Zealand super.
Retirement for Rui at 58 and Karl both at 60
Current savings:
Karls inheritance for retirement $100,000 would grow to $2,742,178.
Ruis KiwiSaver = $38,000 balance currently 3% (which will be accessed after 65.)
Monthly contribution is 3% from $68,000 salary ($2040 annually)
Following is the screenshot of FV calculations for Karl and Rui: this calculation is after 65 years of age however Karl retirement plans are 60 years of age which means if Karl retire at 60 then he would need to access his managed fund investments following calculations are only after 65 which included income from super, Ruis KiwiSaver only.
NZ super and KiwiSaver is accessed at the age of 65 but will enhance their retirement income but after they both turn 65. Also, Karl
Ruis KiwiSaver will grow to $299,246 until she turns 65 and Karl and Ruis super will get them weekly income of $1003 which would then times 52 would give us $52156 a year. (Remember Karl not contributing just year, so if Karl starts contribution, then KiwiSaver balance will be more then this as its only calculated with Ruis income.
Future value calculations for Rui:
Monthly contribution: 3% of $68,000 = $2040 per annum
Years to retirement: 32 years (age 28 to 65)
Current KiwiSaver balance $38000
Ruis KiwiSaver will grow to approximately $299,246.
Conclusion:
Karl and Rui can meet their short term and long-term goals comfortably using the selected providers. They will exceed their house deposit goal by saving and investing wisely, ensuring they can achieve all their financial objectives. Regular reviews and adjustments to their investment strategy will help them stay on track.
SECTION B: TIME VALUE OF MONEY
TASK 7 FUTURE VALUE AND RETIREMENT ADVICE:
Parameters:
Initial investment (PV)= $100,000
Annual interest rate: 7.18%
Number of years= 30
Karl wants to retire at 60. However, I would advise Karl that KiwiSaver can only be accessed at the age of 65 along with super. However, these calculations are based on NZ retirement age which would be calculated from 65. Karl needs to understand super annulation will only starts at age 65. Given Karl want to retire at 60 would mean 5 years there will be no income from other sources like KiwiSaver or super. Only thing Karl can do is invest $100,000 into managed fund which can keep Karl with income for those 5 years.
RETIREMENT ADVICE:
Future value of Karls inheritance by age 60 will grow to approximately $2,779,252 assuming 7.18% annual return.
Retirement income needs: Karl and Rui aim to retire with combined annual income of $52,000 including NZ super. NZ super for a couple is approximately $35,000 per year. But however, at 0 there will be no super or KiwiSaver so managed fund would provide them yearly income.
Conclusion and advice:
Sufficiency of funds: Karls investment of $324,340 can generate approximately $12973.60 per year at 4% withdrawal rate which falls short of the $17,000 required annually to supplement their NZ super income.
Additional considerations:
Increase contribution: Karl and Rui should consider additional contribution to their investment savings to close the gap.
Diversify investment: maintain a diversified portfolio to manage risk and potential improve returns.
Monitor inflation: ensure that the investment growth considers inflation as it can erode the purchasing power of the savings.
ADVICE FOR KARL AND RUI:
While the current investment plan will grow significantly, it wont fully cover the retirement income needs. Increasing contribution and regularly reviewing their investment strategy are essential to ensure they can retire comfortably. Regular adjustments and proactive financial planning will help them achieve their goal of secure retirement.
TASK 8 OPTION COMAPRISON:
Karl and Rui can either receive half the inheritance as a lump sum ($100,000) or as an annuity of $5700 per year over 30 years, reinvested at 4% real return.
Calculations:
Future value of lump sum
Initial investment = $100,000
Annual interest rate= 4%
Number of years= 30 years
Future value of annuity:
Annual payment = $5700
Interest rate= 4%
Number of years= 30 years
Recommendations:
Karl and Rui should take the lump sum of $100,000. Future value of the lump sum ($324,339) slightly exceeds the future value of the annuity ($319,684.15). additionally, the lump sum offers greater flexibility and immediate access to the full amount, which can be beneficial for other investment opportunities or unexpected expenses.
TASK 9 OPTION ANALYSIS:
Scenario A. use the $200,000 inheritance to buy a house now, they will not have this amount invested for retirement. Thus, the future value of this inheritance 2 for retirement purpose is $0Scenario B. if Karl and Rui save the entire $200,000 inheritance for retirement assuming 4% interest over 30 years, the future value can be calculated using following calculator from www.calulator.net
FV would be $648,679.50.
Comparison:
Scenario A: No future investment growth from the $200,000. The couple has a house but needs to save separately for retirement.
Scenario B: the $200,000 grows to $648,679.50 providing substantial retirement funds but requiring the couple to find alternative mean to fund their house purchase.
Other factors to consider:
Housing market condition
Interest rates and term of their mortgage
Retirement fund needs for comfortable retirement:
Inflation can impact both the cost of the house and the purchasing power of retirement funds.
Liquidity needs for emergency funds etc.
Conclusion:
If Karl and Rui use the inheritance to buy a house now, then they forego significant future retirement funds. However, saving the entire inheritance for retirement significantly enhances their retirement funds but necessities finding alternative solutions for purchasing a home. They should weigh these options carefully considering their long-term financial goals, housing needs, and the impact of inflation and market conditions.
TASK 10: ONGOING ANALYSIS:
Introduction: clients are often concerned about the performance of their investments. Providing regular updates can help address these concerns. There are few scenarios impacts investments and general quarterly updates:
SCENARIO A. the reserve bank cuts the OCR by 50 basis points in the line with market expectations.
Impact on investments:
Interest rates: lower interest rates reduce borrowing cost, potentially stimulating economic growth.
Equities: generally positive for stock markets as companies can borrow more cheaply to invest in growth.
Bonds: existing bonds with higher interest rates become more valuable but new bond yield decreases.
Real estate: lower mortgage rates and boost real estate investments.
In my quarterly updates I would include the following:
Economic outlook with rationale behind reserve bank decision.
Portfolio performance with highlighting how lower interest rates positively affect equity markets and real estate markets.
Future expectations and provide insights on any outlook.
SCENARIO B: firm XY, a large and well-known constituent of the S&P 500, files for bankruptcy.
Impacts on investments:
Equities: negative impact on the stock market, particularly on related sector and indexes.
Sentiment: Increased market volatility and investor anxiety.
Specific holding: direct impact on portfolio holding XYZ stocks or sector ETFs.
Quarterly updates:
Event overview and explain reasons behind firm XYZs bankruptcy and its impact on market.
Portfolio exposure: details the extent of exposure to firm XYZ within the portfolio.
Diversification benefits.
Outline steps taken to planned to relocate investments to more stable opportunities.
SCENARIO C: The market has declined 10% in the past quarter.
Impacts on investment:
Equities: decline across stock markets and effects most equity holdings.
Bonds: potentially mixed impact, safe haven bonds may see increased demand.
Investor sentiments: concerns and potential for panic selling amount investors.
Quarterly update:
Would provide market context for market decline.
Transparently review the portfolio performance.
Discuss the risk management strategies in place such as diversifications.
Rebalancing portfolio and position for recovery.
Encourage client to maintain a long-term perspective.
Conclusion:
Regular investment monitoring and update help clients understand the impact of economic events on their portfolio. By providing clear explanation, performance reviews and outline risk management strategies, clients can feel more confident and informed about their investments.
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