FIN200 Assignment T1 2018: Retirement Investment Analysis

This report, based on a FIN200 assignment from 2018, evaluates superannuation plans for retirement planning, specifically focusing on the suitability of Defined Benefit and Investment Choice plans for tertiary sector employees. It delves into the factors influencing these choices, including risk tolerance, financial status, and the impact of inflation. The report further examines the issues of time value of money and taxes in decision-making, emphasizing the importance of understanding these concepts for effective retirement investment. It provides insights into the advantages and disadvantages of each plan, offering a comprehensive analysis to aid in informed financial planning for retirement. The report concludes with a comparative analysis to guide employees in selecting the most appropriate superannuation plan, considering their individual circumstances and financial goals.

FIN200 Assignment T1, 2018

TABLE OF CONTENTS
Introduction................................................................................................................................3
Retirement investment planning................................................................................................3
Defined Benefit Plan or the Investment Choice Plan.............................................................3
Factors to be considered to determine to place their superannuation contributions in the
Defined Benefit Plan or the Investment Choice Plan.............................................................4
Issues related time value of money and taxes in decision making procedure........................6
Conclusion..................................................................................................................................7
References..................................................................................................................................9
References................................................................................................................................10

INTRODUCTION
In order to stimulate the habit of saving, the Australian government has acted as a support
system, minimum efforts, charges and contribution fees are obliged on super plans so that
employees can have the benefit of savings in their future retirement period (Prast and van Soest,
2016). Since the importance of savings is increasing amongst the employees, it is essential for
the firms to provide them necessary superannuation plans while providing them with the
appropriate knowledge of the same, to make it simple for the employees in choosing the best
plan. The present study is based on the analysis and evaluation of the most suitable
superannuation plan for tertiary sector employees to make investments and savings at retirement
age. It is focused on Factors to be considered to determine to place their superannuation
contributions in the Defined Benefit Plan or the Investment Choice Plan. Further, it includes
Issues related to decision making procedure.
RETIREMENT INVESTMENT PLANNING
In order to eliminate the forces pushed by social security system regarding pension plans, the
introduction of low contribution level was made, supported by firms and government to promote
higher savings for retirement stage. In Australia, there is the presence of viable and fair
retirement laws that help employees in choosing their respective superannuation plans based on
their need, expectations and wants (Clark, Lusardi and Mitchell, 2015). In the present era, it is
significant for the employees to get aware and realize about the retirement planning and selection
of superannuation plan to determine their retirement objectives as a whole. Considering the case
of tertiary employees, their employment life is short, so they must do proper planning for their
retirement to save their earnings in a viable manner. The organizations wherein tertiary
employees are working offer them two type of retirement plan in order to safeguard their future
and help them in managing their financial targets. These pension plans are Defined Benefit and
Investment Choice plan.
Defined Benefit Plan or the Investment Choice Plan
Defined benefit plan

Defined benefit plan is a retirement plan financed and funded by the employer; it is highly
beneficial for employees, as the amount is measured by using a specific formula. The formula
considers various forces by which the overall working period of employee and their provided
wages are taken into account. Since, this retirement plan is borne by employer or organization,
the risk and management of the portfolio is also undertaken by them. In other words, defined
benefit plan is referred to a plan wherein employee is given compensation in terms of financial
terms benefit, and the same is determined by using formula which reviews the concerns such as
the last salary of employee and their employment starting date, along with considering their
overall time they rendered their services to organization (Ali and Frank, 2018). Furthermore,
some limitation are there when it comes to withdrawing finds; every organization has different
methods to withdraw funds which employees are required to follow and comply with. Under this
plan, the employee is given guarantee for a specified amount of pension funds, either on the
lump-sum amount or by the withdrawal of funds.
Investment choice plan
Investment choice plan is a type of benefit offered by superannuation funds. This offer provides
the eligibility to the investor for selecting if or if not they wants to make investment in retirement
plan. Sorts of portfolio investments are placed in front of employees, wherein employees can
make own decision and choose a plan (Aren and Aydemir, 2015). Employees agreeing to choose
investment benefit plan are given the opportunity to retain own investment account inclusive of
own efforts and funds sponsored by employers as well. Along with this, an annual assessment of
earnings made in investment is measured wherein administration charges are deducted.
Further, it can be said that tertiary employees in the current context can do voting on asset types
and type of portfolio according to the choice of investment to be made in superannuation plan
while considering the strategies to make the investment.
Factors to be considered to determine to place their superannuation contributions in the Defined
Benefit Plan or the Investment Choice Plan
Risk and uncertainty
Defined benefit plan and investment choice plan have risk exposures; it can be said that it is vital
to consider these risks while selecting any of plan to ensure security and safety. According to the

employee perception, they are not likely to bear much risk because of low risk-bearing capacity
and fear of losing earnings; in this case, employee should go for defined benefit plan (Prast and
van Soest, 2016). It is because defined benefit plan has no or less risk associated due to the
sponsorship of an employer. However, the employee can choose investment choice plan, if they
have high risk-bearing capacity. There is the presence of no or less risk in the defined benefit
plan, as it is entirely abided by the organization whereas there is the presence of high risk in
investment choice plan because employee manages their own portfolio. Before making an
investment, employees must consider and ask themselves if they are able to tolerate risk or not
and must make a decision after that.
Thus, if the tertiary sector employee is not willing to get engaged with risk and are not risk-
takers, then the most appropriate plan for them is the defined benefit one (Clark, Lusardi and
Mitchell, 2015). Conversely, if the tertiary employees are risk-takers and are willing to get
engaged with risk, then they must give preference to investment choice plan.
Financial status
Financial status is the key to know where an employee is standing currently and what their
financial position is. It is significant to be determined to get in pursuit of income and savings
while considering expenses and debts alongside. For developing an effective structure for
savings, expenses and other related factors, it is essential to balance everything in an appropriate
manner to ensure smooth base for decision making (Keele and Alpert, 2015). If the employee has
weak financial status, that means if the employees do not have any investment, savings and
shares in financial terms for the future then must choose defined benefit plan , as it does not an
associated risk. On the other hand, if the employee has saved some investment, savings and
amount saved for future, then the employee must select investment choice plan, as they have the
capacity and status to hold risk.
Risk Factor of Inflation
There is a risk of inflation damage for the saved money for future. This risk can lower the value
which is saved for the future by the employee. This is main rationale to be considered in order to
ensure that their savings in the retirement plan are free of inflation damage, to do so appropriate
methods and ways must be kept in mind (Topa, Lunceford and Boyatzis, 2017).

Issues related time value of money and taxes in decision making procedure
In addition to the above-described factors, following issues are required to be made viable
decisions for retirement planning:
Time value of money
The time value of money is the notion that a general person is required to understand while doing
personal investment and finance. There are three key rationales in order to support the time value
of money. Initially, money can be invested to earn interest over the time, providing the
possibility to get more of earning power. Moreover, money can be referred to inflation that
means taking the consuming power away from the money over the time, which can lessen the
value of same in the near future (Chandra, 2017). Lastly, mostly there is a risk of not obtaining
the money in upcoming future if the person retains the money at the present time, and then there
will be no uncertainty. In order to get a perfect prediction of the risk, it is very complex to do so,
and thus it is difficult to make use of the same in an accurate manner.
In the TVM, the value of money gets declined as the time passes. The phenomenon is generally
called inflation. This concept that cash in hand is highly worth rather than on a later date, it is
because it can get returns are known as the time value of money (Aren and Aydemir, 2015). This
theory has a higher value when it comes to thinking about investment or making investment.
When a person makes an investment, then they are fundamentally consuming it today. At
present, investors know that their money will be of less value because of inflation over time
(Ball, 2017). Thus, the expectation of investor must depend on the terms that investment must
grow at a higher speed when the value of money is declining. The TVM theory is probably one
of the foremost theory in terms of financial planning or investment. If the employee does not
want to appreciate the inflation damage that can impose on the spending power of the assets, it
will be hard to do financial planning. It is essential for the employees to take into account that
the present money is highly worthwhile that the similar amount at a later date (Keynes, 2016). If
the money is investment immediately, it will be easy to earn a high return while ending up with a
greater amount.
Hence, by considering the overall aspects of TYM theory, it can be suggested to tertiary sector
employees to invest their money immediately, so as they can earn high ret5urn otherwise they

will experience low worth and inflation damage on a later date (Earl, Bednall and Muratore,
2015). Further, it can be said that the money must be invested as soon as possible to earn interest
rates and thereby higher returns.
Taxes
On the other hand, the decisions of retirement planning and pension plan are also affected by
taxes either in positive or negative (Muratore and Earl, 2015). Tertiary employees are required to
interpret about the applicable taxes on plans initially, and further, make decisions on selecting
the same.
The pre-tax contribution might assist in increasing the savings in the employee’s pre-years of
retirement, whereas the after-tax contribution might assist in reducing the stress of tax at the
stage of retirement (Mihaylov and et al., 2015). The retirement income or savings of employee
can come up in the form of a retirement plan or wither the investment account of after-tax.
In pre-tax investments which are also known as tax-deferred, this will enable the employee to
delay their payment of the tax on the contributed amount and the generated earnings as long as
they are in the account. The value of account might grow at a higher pace as compared to the
taxable investment, as the gaining in the same account can develop tax-deferred (Williams,
2015). If the taxes are paid at the postponed date, there is a possibility for the investment or
gaining of the employee to be taxed at a reduced rate.
The after-tax contributions can establish a free of tax income source in the near future, in case
there is the satisfaction of some qualifications and requirements. In the saving years of
employees, the contributions made will not be deductible by tax, but the free of tax withdrawals
can help in reducing the net taxable income when the employee is at the stage of retirement
(Dalton, Dalton and Cangelosi, 2016). There is one more option that can be considered by the
employee which is an annuity; it is a lasting insurance type that helps in paying out income.
Generally, most of the investors buy an annuity in order to offer an integration of security, tax-
deferred and retirement income.
CONCLUSION
By considering the present study, it can be concluded that tertiary employees must make
investment choices for their retirement planning by considering all the factors associated with the

plan to ensure safe and wealthy pension plan. As a concluding statement, it can be said that
tertiary employees are required to select a plan in accordance with their requirements along with
considering tax obligations and the time value of money.

REFERENCES
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REFERENCES