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1 Statement of Advice Prepared for Mr Thomas and Mrs Jenny Pike on 23 April 2012 Prepared by Financial Planning Group 15 Brooke Berry Brett Atkinson Darryl Date-Shappard Mohammed Alzaharni Lu Yan WeiYi Xi (n7592493) (n8336822) (n8413428) (n7691394) (n8002843) (n7703767) 2 Key information Thomas Pike 37 years of Age Employed as a Lecturer Excellent health No private hospital cover Current Will in place Jenny Pike 36 Years of Age Employed as a Project Manager Excellent health No private hospital cover Current Will in place The scope of this advice The scope of advice will allow you to make an informed decision about our recommendations. You have asked us to provide you with advice regarding: > The preferred option in relation to your Brisbane residence and whether to rent/buy in Perth. > Provision for your children’s private high school education > Planning for your retirement Your goals and objectives > You are planning to work in Perth, and are considering whether to sell your Brisbane house and buy one in Perth, or retain the Brisbane house and rent in Perth. > You have three children - 4, 6 and 9 years old. They currently attend elementary school. You plan for them to attend private high school and you wish to devise a plan to fund this. > You want to prepare for retirement through superannuation and savings. > You are mainly interested in property investment and superannuation funds to achieve your goals, but would also consider shares or managed funds. > You would consider using equity in your Brisbane house towards your goals, as well as taking on another mortgage if affordable. 3 Risk profile Risk Profile Assessment – “Conservative to Moderate” Thomas and Jenny seek a balance of income and capital growth over the medium-tolong term. You are prepared to take short-term risk for potential long-term capital growth. The recommended minimum investment timeframe is 4-5 years. Our advice to you will be influenced by your risk profile, so if our assessment is not correct please let us know immediately as this could affect the recommendations we provide. The characteristics of each of the risk profiles are set out in the table below. Aggressive Growth • Comfortable with short-term volatility • High levels of capital growth with a moderate level of income • 20% exposure to income and 80% to growth assets • Likelihood of a negative return 1 in every 5 years • 4–5 year time frame • Medium to high levels of shortterm volatility • Increased risk of capital loss • Very high levels of capital growth with a moderate level of income • 100% exposure to growth assets • Likelihood of a negative return 1 in every 4 years • 5–7 year time frame • High to very high levels of shortterm volatility Moderate • Aims to achieve long-term capital growth • Moderate to high levels of income and growth • 40% exposure to income and 60% to growth assets • Likelihood of a negative return 1 in every 6 years • 3–4 year time frame • Medium levels of short-term volatility Conservative Volatility (risk) • Priority is preservation of capital, but prepared for some short-term risk • 70% exposure to income and 30% to growth assets • Likelihood of a negative return 1 in every 8 years • 2–3 year time frame • Low to medium levels of shortterm volatility Defensive • Focus is preservation and stability of capital • 90% exposure to income and 10% to growth assets • Likelihood of a negative return 1 in every 20 years • 1–2 year time frame • Low levels of short-term volatility Returns 4 What is our advice? Short-term goal: Relocation to Perth with an appropriate strategy to buy/sell/rent. Your short-term goal is to move to Perth for career opportunities. Your initial plans are to live there for approx 5 years. To view your home affordability analysis, please refer to Excel Spreadsheet tab "Home Affordability Analysis". • Option 1 - Retain House in Brisbane and rent a property in Perth. You current home mortgage is approx $266,000 with monthly repayments of $1,898. Should you rent out this property, we calculate you would receive approx $2,800/mth rent (before agent costs @ 10%), resulting in a positively geared investment property. We calculate this would provide surplus rental income of approx $422/mth after agent costs, which could be utilized to partially offset a rental property in Perth. Option 2 - Rent Brisbane House and buy a similar size/style property in Perth (median house price $460,000). Similarly, should you rent your Brisbane property, in addition to surplus rental income of $422/mth, your combined wages would afford the purchase of a residence to the value of circa $500,000. Not only would this increase your current asset position, there may be tax concessions/advantages in your favour (we recommend you consult a qualified tax accountant to confirm any tax concessions applicable). Option 3 - Sell Brisbane House and buy in Perth. Should you prefer not to take on the added risk of converting your Brisbane residence to an investment property, your have the option of selling your Brisbane property, pay out the existing debt and utilize this equity to purchase a new home in Perth. • • Recommendation Your South Brisbane house has steadily increased to approx $700,000 in value, which provides you with a substantial source of untapped equity. Apart from your superannuation, this is your primary asset. It is anticipated that your house value will increase at an average rate of 7% pa over the long-term (based upon 10 year historical trends). In Brisbane, the property market has shown little growth in the past two years, with some properties evidencing a retraction in values. This trend has also been experienced in the Perth property market. Subsequently, we are currently witnessing a "buyers market" rather than a "sellers market". This means that selling your property in this market could see you make a reduced capital gain. Consequently, we believe the most suitable option for you, given your current financial position, is to rent your Brisbane property and initially rent a property in Perth. Should your term of stay in Perth extend beyond 12 months, you could then investigate purchasing a residence in Perth. 5 What is our advice? Medium-term goal: Children’s private school education Please refer to the "Education Strategy" tab within the Excel worksheet for our calculations. We have calculated that you will require approx $25,000/child pa for private tutorage in today's dollars. • Option 1 - Investing surplus cash flow of $3,489/mth into a Term Deposit/Managed Equity Fund. Should you invest your surplus cash flow into a term deposit, with monthly interest re-deposited for compound growth, we calculate you will have sufficient funds to afford the education of your children at a well-respected high school (Perth/Brisbane based). Should you deposit your surplus cash flow into a Managed Equity Fund (given you lack time to manage direct equity investments), historic evidence indicates you may achieve higher returns than a term deposit, however, there would be some additional risk. • Option 2 - Depositing surplus cash flow of $3,489/mth into home loan/investment loan with the view to redrawing at a later stage. Alternatively, you have the option of depositing your surplus cash flow into debt reduction, with the view to redraw at a later stage. Costs associated with this option are normally low i.e. under $500. Recommendation Over the past couple of years we have witnessed volatility within the Australian Stock Market. However, recent market research indicates that due to renewed global stability, we are potentially on the upswing of the equity cycle. Subsequently, we see a prime opportunity to invest in the equity market over the medium to long term. Due to your risk adverse appetite, we would recommend a managed fund, within a balanced fund. The advantages are two fold – (1) we think that you will achieve a higher rate of return than a term deposit and, (2) we feel that you would be diversifying your portfolio to have property plus equity investments. 6 What is our advice? Long-term goal: Saving for retirement Please refer to the "Superannuation" tab within the worksheet for our calculations. Our calculations are based upon assumptions of 6% return on super investments, which is deemed conservative based upon historical trends over the long term. Thomas Pike Currently Thomas has super funds to the amount of $88,000, with employer cocontribution. Our projected calculations indicate that Thomas will not have sufficient contributions to allow for a future annual super income of $30,000pa at age 60. Our recommendation is for Thomas to contribute an additional $209 per month. Jenny Pike Currently Jenny has super funds to the amount of $57,000, with employer cocontribution. Jenny has two super funds, which we would recommend amalgamating in order to reduce fees and capitalise on earnings. Our projections indicate that at Jenny's current rate of contribution, she will have more than sufficient funds to achieve an annual income of $30,000 at retirement age 60. Thomas and Jenny Pike Given that super funds are not static, they require constant management. Subsequently, we recommend that both of their funds be revisited on an annual basis to recalculate our projections and to ensure that their contributions are sufficient to meet their desired retirement lifestyle. Additionally, we note that Thomas and Jenny are prepared to sell their property close to retirement to downsize and boost their retirement funds. Naturally, this will depend upon the property market at that time. 7 Assumptions • • • • • • Sufficient life and income protection insurance is in place for both Thomas and Jenny via their superannuation funds. Both Thomas and Jenny are able to secure and maintain employment in Perth on similar remuneration (with increases aligned to CPI). Superannuation Investment Returns of 6% p.a. Inflation 3% p.a. Wills detailing guardianship and Enduring Powers of Attorney are in place for both Jenny and Thomas. Thomas and Jenny to consider Private Health Cover. Fees The fee for our service is $1,000. This being payment for the analysis, calculations, advice and preparation of the Statement of Advice. Agreement to proceed By signing below, I agree to take the following course of action (tick option to be taken). I wish to: Proceed in full • Sign this ‘Agreement to proceed’ Do not proceed I do not wish to proceed with any of these recommendations. ___________________________ Mr Thomas Pike DATED: / /2012. __________________________ Mrs Jenny Pike