FIN111 Lecture Notes - Lecture 11: Market Risk, Scenario Analysis, Systematic Risk
Week 11 – Personal Financial Planning
• Financial planning is often said to be a new profession.
• Starting point is preparation of personal financial statements.
• Next is identification of financial goals and relative time frames.
• All investors must have an understanding of risk and how this impacts on financial
objectives
What is Personal Financial Planning?
• The financial means to satisfy personal objectives
• Useful to consider objectives in 3 time frames:
- Short: within one year
- Medium: 2-5 years
- Long: 7 or 8 or up to 40 or even more years
• To be realistic a goal needs:
- 2 components, specific or quantifiable.
- To be referenced to a specified time frame
Why is Personal Financial Planning Important?
• Helping people achieve their financial goals
• It enables people to set in place personal objectives and arrange financial means to
satisfy these objectives.
• Has its roots in life cycle theory of consumption and saving → considers the matter
of income and expenditure over a lifetime
• Life cycle theory provides a framework to meet short, medium and long-term
objectives.
• While osuptio is relatiel sooth oer a persos life le, lifetime income is
quite uneven
Theoretical income and expenditure over a lifetime:
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• Many people do not have specific savings plans and tend to spend more than they
earn
• The Association of Superannuation Funds of Australia (ASFA) regularly prepare a
Retirement Standard (RS) which benchmarks the weekly and annual budget needed
by Australians to fund either a modest or comfortable standard of living in the
retirement years
• A persos retireet apital eeds deped o the lifestle the ish to hae i
retirement.
• Many retirees do not have sufficient funds for retirement
• The major reason for the increased importance of personal financial planning is the
trasfer of risk for proidig for oes old age fro the goeret age pesios
and employers (defined benefit superannuation schemes) to individuals
• Personal financial planning is gaining importance due to:
- increasing numbers in older age groups
- increase in longevity
- expected restrictions to accessing old age pension
- introduction of compulsory superannuation
- greater range of superannuation choices
- anticipated changes to government fiscal policy
Increasing Numbers in Older Age Groups
• Population is aging due to:
- falling birth rates
- falling death rates
- changing rates of immigration.
• “igifiat feature of the Australia populatio is the size of the a ooers
group (born 1945-60).
• It is expected that by 2050, the ratio of working people to retirees will fall from the
current level of 5 to only 2.7 workers per retiree.
Increase in Longevity
• Average life expectancy has increased from 55 for men and 59 for women in the
1900s to 79 for men and 84 for women in recent times.
• It is expected that life expectancy will increase to 91 for men and 94 for women by
2050.
• Reasons include:
- vast improvements in medical science
- changes in dietary habits
- awareness of health issues and the need for regular exercise
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Restricted Access to Age Pension
• In recent years, modifications have been made to eligibility for age pension.
- Age of entitlement for women rising to match that of men (currently 65).
• The government has further responded to the long‐term cost of demographic
change and will progressively increase the qualifying age for men and women to
access the age pension
- The qualifying age for the age pension will increase to 67 years, at a rate of 6
months every 2 years, beginning in 2017.
• Government offers incentives to encourage people of pension age to defer taking it
up beyond retirement age
- Continue working by allowing them to earn a higher amount of income before
their age pension payments are reduced
- Work bonus scheme
Compulsory Superannuation Contributions
• Compulsory employer superannuation contributions first introduced in 1992 at 3%
of eploees reueratio.
• Conditions:
- An employee had to earn more than $450 in a month
- No contributions were required for employees over 65 years of age
- An upper limit of income was applied to the requirement to contribute 3% as
superannuation
• Fro , eploers hae had to otriute % of eploees reueratio hih
is expected to increase to 12% by 2025
• Spread the cost of funding retirement incomes to employers while people are
actively working.
• Estimates conducted by many sources indicated that contributions need to be 3–5%
above 9% (i.e. 12–14% p.a.) over a period of 30–40 years of employment in order to
produe a retireet ioe of aout % of a persos fial ioe fro ork.
• Tax deduction offered to self-employed to encourage contribution towards their
own retirement.
• Other incentives have been introduced to encourage additional saving for
retirement.
Choice of Superannuation Fund
• From 1 July 2005, most employees have been able to choose the fund into which
their employer superannuation contributions are paid.
• This has encouraged funds to offer larger range of portfolio mixes.
• Competition between funds is expected to force underlying member fees to be
reduced over time.
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Document Summary
What is personal financial planning: the financial means to satisfy personal objectives, useful to consider objectives in 3 time frames: Long: 7 or 8 or up to 40 or even more years: to be realistic a goal needs: To be referenced to a specified time frame. Why is personal financial planning important: helping people achieve their financial goals. Theoretical income and expenditure over a lifetime: many people do not have specific savings plans and tend to spend more than they earn, the association of superannuation funds of australia (asfa) regularly prepare a. Expected restrictions to accessing old age pension. Anticipated changes to government fiscal policy introduction of compulsory superannuation. Increasing numbers in older age groups: population is aging due to: falling birth rates falling death rates changing rates of immigration, ig(cid:374)ifi(cid:272)a(cid:374)t feature of the australia(cid:374) populatio(cid:374) is the size of the (cid:858)(cid:271)a(cid:271)(cid:455) (cid:271)oo(cid:373)ers(cid:859) group (born 1945-60).
