Introduction to Financial Planning: Demographic Factors, Investment Alternatives, and Retirement Income Adequacy

This report covers the process of financial planning, demographic factors causing rapid ageing population, superannuation adequacy, investment alternatives, and cash flow and balance sheet preparation.

Introduction to financial
planning

Table of Contents
INTRODUCTION...........................................................................................................................3
Question 1........................................................................................................................................3
a) Identification of demographic factors and evaluating its impact on rapidly ageing population
......................................................................................................................................................3
b) Process of financial planning and requirements of financial advisor......................................4
c) brief assessment of superannuation adequacy.........................................................................5
Question 2........................................................................................................................................6
a) Calculation of expected income and capital generation..........................................................6
b) Ranking of investment.............................................................................................................6
c) Risk attached to each investment alternative:..........................................................................7
d) Issues and benefits Gordon could achieve by diversification of investments.........................7
Question 3........................................................................................................................................7
a) preparation of cash flow statement..........................................................................................7
b) preparation of personal balance sheet......................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................1

INTRODUCTION
This report will identify and evaluate the demographic factors that are the cause behind
the problem of rapid rise in ageing of population in developed countries across the world. The
report will highlight the process of financial planning.
Further in this report assessment of superannuation contribution requirements for
adequacy evaluation will be covered. This report will also analyse three investment alternatives.
In addition, preparation of cash flow and balance sheet will be discussed.
Question 1
a) Identification of demographic factors and evaluating its impact on rapidly ageing population
Demographic Factors
Demographic factors is the sum total of factors such as gender, age, race and ethnicity.
The demographic factors that are the cause reason for the issue of rapidly ageing population are
lower fertility and mortality.
Attainment of older population age structures already exists in many countries especially
the developed ones (Nepomuceno and et.al., 2020). Many developing countries are currently
facing an inclement in relative numbers of children, population within working age and older
citizens. People belonging to the age criteria sixty and sixty plus are consists of ten percent of the
world population.
Ageing of population is measured with the help of changes in the proportion of the
population based on categories namely old and middle age. The trends in fertility rates and
mortality rates are the primary determinants of population ageing.
Mortality rate: Also referred as death rate is a measure of the number of deaths in a
particular population per thousand individuals in a year (Downey, Kelly and Quinlan, 2019).
Fertility Rate: Total fertility rate of a population is the average number of children that a
woman would give birth to during her entire life if:
she was to experience the current age specific fertility rates through her lifetime,⇒
⇒ and she was to live from birth until the end of her reproductive life.
Lower mortality and fertility rate increases the share of retired people in the total
population. Increase in number of retire persons in the population exerts pressure on spending by

government. The government will have to spend more on the pension and healthcare services
that are needed for people in old age.
Less innovation is also a result of low fertility and mortality rates. With older or less
young people ideas of innovations are less likely to come (Allai and et.al., 2018). Low birth and
death rates possess adverse economic effects like less number of workers, consumers, older
population, decline in wealthy markets, push for automation.
b) Process of financial planning and requirements of financial advisor
Financial Planning
Financial Planning refers to the process of forecasting the requirements for capital and
determination the competition regarding it (Santos, Piresand Fernandes, 2018.). Through
financial planning policies are made in relation to acquiring, investing and administering the
funds of the company.
Process of financial planning:
 Financial Situation Identification: The first step is concerned with being familiar with the
current financial situation and thinking the ways to bring about change in the situation.
Forming household budget on the basis of living expenses, managing outstanding taxes,
current investments and reserves along with all other financial obligations (Davis and
et.al., 2018).
 Determination Of Financial Goals: In this financial goals such as purchasing a property,
ensuring good education to children, etc., that are to be achieved are determined.
 Identification Of Various Investment Alternatives Available: All the possible alternatives
that exists to invest in are identified.
 Evaluation Of Each Alternative: Each alternative identified is evaluated in accordance to
the risks attached to them in this step.
 Putting Financial Plan For Implementation: This step is the action plan stage as all the
above steps are put together, based on which financial plan is created and executed. Follow-Up The Plan: Financial planning is an ongoing process. The outcomes of the
implemented financial plan are evaluation and measures are taken to correct them in case
of deviations.
Financial Advisor or Financial Planner

The professional providing financial services is referred to as financial advisor or financial
planner.
Requirement of financial advisor or planner:
 Assistance in keeping finances in order: Financial advisor helps in putting strategies for
achieving goals and priorities based on current finances.
 Help with career and business strategies: They offer solutions to handle varied phases of
the career.
 Organize after retirement life and plans for future generations: They help in developing
retirement focus plans (Oehler ,and et.al., 2018). Also, helps in adopting smart financial
plan for securing future of future generations.
 Develop effective insurance strategies that helps in times of crises: Financial planner
analysis insurance plans that are affordable and efficient in crises or change in situation.
c) brief assessment of superannuation adequacy
Superannuation: It the amount paid regularly by an employee into a fund towards a future
pension. In the current superannuation regime every employee whose monthly income is more
than $450 have to pay ten percent of their ordinary time earning towards the superannuation
contributions. It is before tax contribution (Hayne, 2019). Ordinary time earnings include salaries
or wages, commissions and allowances but overtime is excluded. Superannuation is mandated
for citizens earning more $450 monthly.
Assessment of adequacy of superannuation contribution requirement in providing suitable
retirement income
 Adequacy Objective: To access whether the retirement income is adequate or not first
objective need to be set. Objective set reflects the income value that will be adequate.
Objective need not be same for all. Different objectives gives different perspectives for
what might be considered as adequate. Commonly objectives can be procurement of
property, attainment of certain standard of living after retirement, etc.
 Indicator Measuring Adequacy: An indicator is a measure of income at retirement. The
measuring indicator should be perfect substitute for a specific objective. Although, there
exist a number of indicators but some indicators are more used and prevalent than the
others. One such indicator is the retirement income replacement rate.

 Comparing Indicator to a Target: Targets are the points that determine the adequacy of
retirement income (Haron, Razali and Mohamad, 2019). To set a target an adequacy
standard is established. Views are formed on areas like appropriate replacement rate, a
minimum standard of proxy, or the living standard that makes people live with comfort.
 Overall assessment with reference to policy goals: The outcomes of adequacy indicators
are considered and compared to set targets by policy-makers across the population to
make an assessment. The assessment is for knowing whether the system provides
adequate retirement income broadly. This assessment provides the base goals for the
policymakers.
Question 2
a) Calculation of expected income and capital generation
CALCULATION OF EXPECTED AMOUNT OF INCOME AND CAPITAL RETURN
Investment Alternative Initial investment Expected income
Expected
capital
return Total
1 year unsecured bank note 150000 15000.000 0 15000
1 bedroom rental property 150000 6000.000 12000 18000
Shares in Australian bank 150000 4500.000 18000 22500
b) Ranking of investment
Ranking of Investment
Investment Alternative Rank
1 year unsecured bank note III

1 bedroom rental property II
Shares in Australian bank I
c) Risk attached to each investment alternative:
Unsecured Bank Note: It is not secured by the bank's assets. It is similar to debentures, there's
only one distinction that rate of return is higher. It is not backed by any collateral so it has higher
risk to investors.
Rental property: Rental property that is not located in good market often have trouble in
fascinating tenants. This results in extended vacant periods. Extra costs may also incur due to
damage caused to property by tenant. Another risk is non-payment of rent by tenants.
Shares in Australian bank: This investment option may result in losing some or all money. It
may happen that the shares does not perform as expected and resulting in fall in the value of
shares.
d) Issues and benefits Gordon could achieve by diversification of investments
Issues: By diversifying investments Gordon can only earn average returns. Transaction costs
associated with diversified investment options are also additional. Plus Gordon may have
difficulty in managing too many investments.
Benefits: Diversified investments helps in levelling out the volatility and risk attached.
Opportunities to generate more profits open up through diversifying investments.
Question 3
a) preparation of cash flow statement
cash flow statement
Particulars Amount
Cash flow from operating
activities
Net income 71400
Operating Expenses
Household Expenses 39000
Entertainment Expenses 25000
Net cash outflow from operating
activities 64000

Cash flow from financing
activities
Mortgage loan repayments 24000
Car loan repayments 12000
Net cash outflow from financing
activities 36000
Net decrease in cash and cash
equivalents 7400
Savings Account 6000
b) preparation of personal balance sheet
Balance Sheet
Assets
House and personal effects 650000
Superannuation 160000
3150 163150
Car 40000
Savings Account 6000
Total 859150
Liabilities
Mortgage loan 350000
repayment 24000 326000
Net income 71400
Credit Card Balance 10000
Total 407400
CONCLUSION
Based on the report the demographic factors responsible for the problem of population
ageing have been discussed. The requirements of a financial advisor or planner have been
highlighted. The adequacy of retirement income has been analysed in the report.

This report have also evaluated investment alternatives through varied approaches. Lastly
it has been outlined on bases of report how to prepare cash flow and balance sheet.

REFERENCES
Nepomuceno, M. R. and et.al., 2020. Besides population age structure, health and other
demographic factors can contribute to understanding the COVID-19
burden. Proceedings of the National Academy of Sciences. 117(25). pp.13881-13883.
Downey, C., Kelly, M. and Quinlan, J. F., 2019. Changing trends in the mortality rate at 1-year
post hip fracture-a systematic review. World journal of orthopedics. 10(3). p.166.
Allai, L.and et.al., 2018. Supplementation of ram semen extender to improve seminal quality and
fertility rate. Animal reproduction science. 192. pp.6-17.
Hayne, K., 2019. Royal Commission into misconduct in the banking, superannuation and
financial services industry. Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry.
Haron, H., Razali, N. N. S. M. and Mohamad, F., 2019. Factors influencing financial planning
retirement amongst employees in the private sector in east coast Malaysia: Literature
review and research agenda. KnE Social Sciences. pp.1115-1129.
Santos, J . P. F. D., Pires, A. M. M. and Fernandes, P. O., 2018. The importance to financial
information in the decision-making process in company's family structure. Contaduría y
administración. 63(SPE2). pp.1091-1113.
Davis, R.A. and et.al., 2018. Inference on the tail process with application to financial time series
modeling. Journal of econometrics. 205(2). pp.508-525.
Oehler, A.,and et.al., 2018. Young adults and their finances: An international comparative study
on applied financial literacy. Economic Notes: Review of Banking, Finance and
Monetary Economics. 47(2-3). pp.305-330.
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