Financial Planning Project: Annuity and Retirement Income Strategies

This report presents a comprehensive analysis of financial planning strategies, focusing on retirement income. It examines the application of fixed-term annuities, account-based pensions, and mean-variance strategies within the context of a case study involving Mary and Thomas. The report includes calculations for annuity amounts, assesses the relationship between account-based pensions and drawdown strategies, and identifies the association between mean-variance strategies and retirement income. Additionally, it compares and contrasts the advantages and disadvantages of different annuity options. The report concludes by summarizing the effectiveness of these strategies in retirement planning and provides references to relevant sources. This report offers valuable insights into the practical application of financial planning principles.

Financial Planning Written project

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
a. Assessing the manner in which fixed term annuity can be used as a retirement income
drawdown strategy.......................................................................................................................1
b. Calculating annual annuity that can be received from the concerned investment...................1
QUESTION 2..................................................................................................................................3
a. Explaining the manner in which account based pension and retirement income drawdown
strategy are related.......................................................................................................................3
b. Computing annuity amount that is associated with first 10 years of retirement.....................3
QUESTION 3..................................................................................................................................4
a. Identifying association which takes place between mean variance strategy and retirement
income drawdown strategy..........................................................................................................4
b. (1). Finding annuity cost..........................................................................................................4
(2). Assessing expected accumulation of the remainder pertaining to lump sum.......................4
QUESTION 4..................................................................................................................................5
Comparing and contrasting the advantages and disadvantages of different annuity options......5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
In the recent times, individual’s lay high level of emphasis on the development of
competent financial plans that provides assistance to them in meeting all the requirements. The
present report is based on the case situation of Mary and Thomas who are planning to make
effectual retirement plan which in turn helps them in maintaining the current lifestyle.
QUESTION 1
a. Assessing the manner in which fixed term annuity can be used as a retirement income
drawdown strategy
In context with securing the future after retirement Mary and Thomas will be benefited
with the drawdown strategies such as they will be accessing the resources and the needs in the
current situation. Hence, due to these strategies they must take a portion of their income into
savings on the monthly basis which will be fruitful after the retirement. Annuity or the income
generated through various other sources like from rental property which will be benefited them
in gathering the favourable portion of income as well as it will be easier for them in having the
qualified retirement.
b. Calculating annual annuity that can be received from the concerned investment
Starting annuity:

Given that:
In the case of Mary starting annuity amount will be
N = 25
P = 26
g = 0.03
i = 3.79% or 0.0379
i (p) = 0.03722607
a (p) n: i:g = 22.409
Starting annuity amount = 203175 / 22.409
= 9066.67
In the case of Thomas starting annuity amount is as follows:
N = 18
P = 22
g = 0.03
i = 3.85% or 0.0385
i (p) = 0.038
a (p) n: i:g = 22.409
i = 3.79% or 0.0379
i (p) = 0.03722607
a (p) n: i:g = 22.409
Starting annuity amount = 119325 / 22.409

= 5324.87
Thus, by considering all the above aspects it can be stated that total starting annuity
amount @ 3% inflation accounts for $14391.54 respectively.
QUESTION 2
a. Explaining the manner in which account based pension and retirement income drawdown
strategy are related
These strategies facilitate an individual to make the savings on the account based pension
work which are mainly work as the account which collects the lump sump of the amount and
transfer money from an accumulation supper account. Thus, Mary and Thomas if implement
such accounting techniques to collect the money and make the beneficial savings than such
amount will be payable to them on the basis of Account based pensions at the time when they
will reach the age of retirement. Thus, it can be said that they will be going to have such money
back which are to be saved by them in current time by their employment.
b. Computing annuity amount that is associated with first 10 years of retirement
Years Thomas Mary
Half yearly
returns
Yearly
returns
1 4021 6864 10885 21771
2 4272 7292 11564 23127
3 4522 7720 12242 24484
4 4725 8066 12791 25582
5 4916 8392 13308 26616
6 4701 8025 12727 25453
7 4606 7862 12468 24936
8 4546 7760 12307 24613
9 4499 7679 12177 24355
10 4463 7618 12081 24161

QUESTION 3
a. Identifying association which takes place between mean variance strategy and retirement
income drawdown strategy
From assessment, it has been identified that mean variance strategy and income
drawdown policy is highly associated to a great extent. Moreover, in this, retirees tend to make
focus on investing their entire lump sum in risky assets and thereby take income through
drawdown.
b. (1). Finding annuity cost
On the basis of cited case situation, Thomas and Mary has maintained superannuation
fund with an amount of $645000. Along with this, it is mentioned in the case study that 50%
amount will be invested by them in dividend paying shares. On the other side, both the entities
decided to invest 50% amount in annuity. As per this aspect amount which will be invested in
annuity implies for $322500.
Assumptions:
 Annuity indexed at 3% p.a. as well as payable monthly at a yield of 5.5% p.a.
 net return on Challenger ASX index fund = 10% per annum
a (12) 10:0.055:0.03 = $8.742139
By considering all the above aspects, it can be stated that Mary can purchase the annuity of
$20000 per annum.
Cost: $20,000×a (12) 10:0.055:0.03 = $174,843
Leaving to accumulate for 10 years at the expected annual compound return of 10%:
$322500-174843
=$147657
(2). Assessing expected accumulation of the remainder pertaining to lump sum
Expected market accumulation: $147657 × 1.1(10) = $907288.3

Money value in 10 years time
Thus, the value should be deflated by 1.0310 giving $627,549.46
QUESTION 4
Comparing and contrasting the advantages and disadvantages of different annuity options
Fixed term annuity
Advantages Disadvantages
 Fixed term annuity offers tax deferred
earnings to the individuals
 Such annuity provides investors or
concerned entities with lifetime income
 It is not influenced from market
downturns
 This annuity system offers greater
payout per month (Advantages and
Disadvantages of Fixed, life Annuities
for Retirement, 2017).
 In this, purchasing power can be
degraded by inflation
 Further, in the case of early withdrawal
there is the system of penalty such as
10%
Account based pension
Advantages Disadvantages
 Offers regular income to the individual
 Along with this, on the basis of account
based pension system individuals can
withdraw unlimited money on the basis
of their need (Pros & cons of account-
based pensions, 2017).
 In this, earnings are not fixed and
fluctuate in line with the market trend
and performance.
Mean variance strategy

Advantages Disadvantages
 Helps in assessing average return
 Provides suitable input for planning
 It is highly sensitive to extreme values

CONCLUSION
From the above report, it has been concluded that account based pension, fixed term
annuity and mean variance strategy is highly effectual which in turn assists in retirement
planning.

REFERENCES
Online
Advantages and Disadvantages of Fixed, life Annuities for Retirement. 2017. [Online]. Available
through: <http://www.easyretirementknowhow.com/articlecategories/annuities/
sya110803fxannu-prosvsconsannuity.htm>. [Accessed on 18th October 2017].
Pros & cons of account-based pensions. 2017. [Online]. Available through:
<https://www.canstar.com.au/account-based-pensions/pros-cons-account-based-pensions/>.
[Accessed on 18th October 2017].