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FinancialaPlanningaReportprepared afor

David aand aKerry

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1 Introduction ...................................................................................................................... 32 Aims aand aObjectives ........................................................................................................ 33 Assumptions .................................................................................................................... 34 Overview aof arecommendations ....................................................................................... 55 Will aI aachieve amy aobjectives? ........................................................................................... 66 Will aI aachieve amy aobjectives? a(2) ...................................................................................... 77 Cash aFlow ......................................................................................................................... 88 The aMortgage .................................................................................................................. 199 The aModels amain aassumptions aand adefaults ............................................................... 2010 Definitions .................................................................................................................. 21

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1 Introduction

Financial aPlanning awill ahelp ayou ato aachieve ayour agoals athrough athe aproper amanagement aofayour afinancial aresources. a aTo ado athis awe aassess ayour apresent aposition, aidentify ayouraobjectivesaand athen adetermineatheabest away atoaachieve athem.

A afinancial aplanning amodel ais aused ato aanalyse ayour acurrent asituation aand ato aproject ait aintoathe afuture. a aThe aanalysis ais abased aon athe ainformationacontained ain athe aFinancial aPlanningaQuestionnaire acompleted aon aXX-XX-XXXX. aA arange aofacharts aare aprovided awhichamake ait aeasy ato asee aand aunderstandawhat ais agoingaon. aa

We athen aconstruct ayour afinancial aplan, afirstly aconsidering abasic aelements abefore amovingaon ato aaddress athe amore aspecific aand acomplex aissues awhich awe aidentified. a aBased aon atheaanalysis, arecommendations aare amade awhich aare adesigned ato aenable ayou ato aachieve ayouravarious aaims aand aobjectives. a aWe aconsider athat athese arecommendationsaare awell asuited atoayour acurrent aneeds, apriorities aand aavailable abudget aand athat athey aalso aoffer athe aflexibilityatoabe aadjustedatoameet aany afuture achangesain ayour apersonal aor afinancialacircumstances.aa

Projectionsasuch aas athese aare asensitive ato athe aassumptionsabeing amade. a aA asmall achange ainaassumed ainvestmentareturn, afor aexample,awill ahave aa asignificantaimpact aon ayour aprojectedafinancial asituationain athe afuture. aaBy athe asame atoken, ain athe areal aworld, aifaactual ainflationaorainvestment agrowth aor aearnings agrowth aor aany aofathe avariables afor awhich aassumptionsahave abeen amade aturns aout ato abe adifferent afrom athat aassumed athen ayour aactual afinancialaoutcome awill aturn aout ato abe adifferentafromathat aprojectedaaperhaps aradicallyadifferent.aa

For athis areason aa astochastic atechnique ais aused ato agive asome aidea aofathe arange aofapossibleaoutcomes aand aofathe alikelihood aofaachieving ayour aobjectives. a aThe aresults afrom athis aareapresented aon apage a7. a aIn athis auncertain aworld, anothing ashould abe ataken afor agranted. a aIt aisamost aimportant, atherefore,athat ayou aundertakearegular areviews ato aensure athat ayou aremain

a

ona

coursea

anda

soa

thata

correctivea

measuresa

cana

bea

takena

ifa

circumstancesa

change.a a

Weastronglyaadvise athat ayour asituationabe areviewed aon aan aannual abasis.

2 Aims aand aObjectives

You ahaveaidentifiedathe afollowingarequirements:-

On afurtherareflection,aI athinkayou ashouldaalso aconsider:-

3 Assumptions

All aofathe aassumptionsaused ain athe areport aand afor athe aprojections a(charts) aare aset aout ain atheasections atitled aAssumptionsaand aThe aModels aMain aAssumptionsain athe aappendix.aaThoseaassumptionsawhichahave athe amostaimpactaare:

(Forecastavaluesaareathoseaactuallyaused.a aIfatheseadifferafromayouacurrentadefaults,atheafollowingatexta

maya

needa

toa

bea

altered.)

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3.1 Inflation

Our ainflation aforecast ais a4.0% awhich ais athe afinancial amarkets aestimate aofaexpected alongaterm ainflation aderived aby acomparing athe ayields aon along-dated aconventional aand aindexalinkedagilts.

3.2 Investmenta

ReturnThis ais aassumed ato abe a7.00% abefore atax, aexpenses aand ainflation aand ais ain aline awith atheacentral arate arecommended aby athe aFinancial aServices aAuthority afor athe areturn aon apensionafundsa(i.e.along aterm atax-free aassets).

3.3 ReturnafromaEquityaBasedaInvestments

Our acurrent aforecast afor athe atotal agross areturn afrom aequity abased ainvestment ais a8.00%awhichais a

3.4 MortgageaRate

Thea

forecasta

whicha

wea

area

usinga

fora

mortgagea

ratesa

isa

6.50%a

whicha

isa

ina

linea

witha

current

arates.

3.5 EarningsaGrowth

Our acurrent aforecast afor aearnings agrowth ais a5.20% awhich ais a1 a% aover aour aforecast aforainflation.

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4 Overview aof arecommendations

The aLifeStyle aIndex ais aa ameasure aofafinancial aindependence. a aA avalue aofa100% a(or ahigher)a

indicatesa

thata

youa

havea

achieveda

financiala

independence.aa

Thisa

indexa

isa

explaineda

ina

moreadetailain atheaappendix

4.1 ComparisonaofaRecommendationsavs. aExistingaPlansa(Lifestyle)a

4.2 MainaRecommendations

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5 Will aI aachieve amyaobjectives?

Clearly ait ais ahighly adesirable athat afinancial aindependence ashould abe aachieved aby athe atimea

onea

retires.a a

Thea

charta

abovea

setsa

outa

thea

resulta

ofa

calculatinga

thea

LifeStylea

Indexa

afteraretirement aone athousand atimes aon athe abasis athat athe aforecasts aset aout ain athe aassumptionsasection aare anormally adistributed awith athe ameans aas agiven aand aappropriate astandardadeviations.

Interpretation: a aIfathe acurve acrosses athe a100% aindex aline aat a(say) a800, athis ameans athat aina800 a(out aofa1,000) asimulations ayour aLifeStyle aIndex awill abe a100% aor aabove, aimplying athatafinancialaindependenceawill ahave abeen aachieved.

The afurther ato athe aright ais athe ainverted aS athe abetter. a aIt aimplies athat ayou aare astill asaving,aeven aafter aretirement, aand acould aspend amore aifayou aso awished. a aThe asteeper athe acurve, atheamoreacertain atheaoutcome.aa

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6 Will aI aachieve amyaobjectives? a(2)

This achart ais abased aon atheasame adata aas atheapreviousachart,agiving aa adifferentaview aofatheasame astory. aaThearelativeaheight aofatheabars aindicatesathealikelihoodaofaparticularaoutcomes.A alow,awide abell ashaped adistributionasuggestsaa arelativelyahigh arisk awithathe apossibilityathat atheaactual aoutcomeacouldadifferasignificantlyafrom atheacentral aprojection.aA asteepanarrowadistributionais aindicativeaofalow arisk awith athe aexpectationathat atheaactual aoutcome awill abe areasonably aclose atoatheacentral aprojection.

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7 Cash aFlow

7.1 Income, aExpenditureaandaSavinga

This atable ais aderived afrom athe afact afind. a aIt adoes anot ainclude aany aof athe aoccasionalapayments aor areceipts aentered ainto atheafact afind.

Statement of cash flow

Salary - David

81,750

Salary - Kerry

55,000

136,750

Less Tax 41,025

Less credit card interest2,700

Less credit card interest 3,360

Less home loan

7,823

Operating expenses

49,994

Cash flow

31,848

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7.2 Incomeainatodaysamoney

a a a a a aEarned aIncome aincludesapensionaincome.

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7.3 Earningsadetailainatodaysamoney

a a a a a aEarned aincomeaincreases ain alineawith aassumed aearningsagrowth aadjustedafor ainflation.

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7.4 InvestmentaIncomeainatodays amoney

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7.5 Spendingainatodaysamoney

The ascale aon athis achart ais athe asame aas afor athe aIncome achart aon apage a9. a aBy acomparing atheaheight aofathe abars aon athe atwo acharts ayou acan aget asome aidea aofathe alevel aofasaving. a aThis aisainvestigatedamore afully ain atheaSaving achart aon apage a14.

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7.6 SpendingaDetailainatodaysamoney

a a a a a aThe alevel aofarequired aspending a(excluding aany aexceptional aexpenses) ais aassumed atoa

remaina

constanta

ina

reala

terms. a a a a a a a a aDiscretionaryaspending ais aassumed atoarise aor afall adependingaon atheasavingsaratio.aa(Theasavingsaratioais adefined ain atheaappendix.)

a Income atax ais acalculated afor aeach ayear. a aHowever, ain athe ainterest aofaspeedingacalculation,aifataxableaincome ain aany ayear arises a(or afalls) aby aless athan a5% athen aincome atax aisaassumed ato aincrease a(reduce) aby aa asimilar aamount. a a aIfathe achange ain ataxable aincome aisagreaterathan a5% athen aincome atax ais arecalculatedafrom ascratch.

a a a a a aThe arates afor aNational aInsurance aContributions aare aassumed ato aincrease ain aline awithainflation.

As acompared ato athe aprevious aspending achart, athe achart aabove agives amore adetail aon atax,aNIC aand ainterestapayments.

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7.7 Savingainatodaysamoney

Theachart aillustratesawhere aeach ayears asavingsaare aallocated.

Saving ais atheadifferenceabetweenatotal areceipts aand atotalaexpenditure.

It ais aassumed athat aplanned asaving, anamely apension acontributions, ainsuranceapremiums aand acapital arepayments, awill abe amade aregardless aofawhether aor anot athere aisasurplus aincome. aaTherefore, ait ais apossible afor athere ato abe aan aincome ashortfall aand a(someaplanned)asaving aat atheasame atime.

After aplanned asavings ahave abeen amade, aany aadditional asavings aare aapplied afirst atoarepaying athe asecond amortgage a(if aany); athen ato atax-efficient ainvestments aup atoaallowable alimits; athen ato alow arisk ainvestments aaccording ato athe alow arisk aratio: aandalastly ato aequity abased ainvestments aand adeposits a(which aincludes afixed ainterestainvestments)aaccordingato atheaequity aratio.aa

Any aincome ashortfall ais acovered afirst aby arealising ataxable ainvestments; athen alow ariskainvestments; aand afinally atax-efficient ainvestments. aOnce athese aare aexhausted, ait aisaassumed athat atheashortfallais afinancedaby atakingaout aa asecond amortgage.aaThis awill ahaveatheaeffect aofareducingatheaequity ain ayour ahousea(i.e. anon-investmentaassets).

Ifaa apersistent aincome ashortfall alooks alikely, ayou ashould aseek aprofessional afinancialaadvice aas asoon aas apossible.

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7.8 AssetsaandaInvestments

The atable asummarises ayour apresent apersonal abalance asheet ai.e. aassets aand aliabilities, aorawhatayou aown aand awhat ayou aowe.aaAssets: athese aare athe athings athat ayou aown awhich aare acorrectly acounted aas apart aofa ayouraestate abut awhich aare anot aliquid, ai.e. athey acould anot abe aeasily adisposed aofaor athey aareaessential afor ayour acurrent astandard aofaliving. a aThey aare anot atherefore ataken ainto aaccountawhen aconsideringayour ainvestment astrategyafor aexample.Investments: a aTax-efficient ainvestments ainclude aPersonal aEquity aPlans a(PEPs), aTaxaExempt aSpecial aSavings aaccounts a(TESSAs), aIndividual aSavings aAccounts a(ISAs),aVenture aCapital aTrusts a(VCTs), aetc. a aEquity aBased aInvestments aincludes apooledainvestments asuch aas aunit aand ainvestment atrusts. a aInsurance abased ainvestments aincludeaendowments aand ainsuranceabonds.aaLowarisk ainvestmentsaare aindexalinkedagilts.Pension aFunds: athis aincludes afunds awhich ahave aa areal avalue awhich acan abe aidentified aasabelongingatoayou. a a

Statement of Financial Positions

Balance Sheet

AssetsProperty 295000

Superannuation 22000

Car 20000

Term deposit 25000

Bank account 5000

Furniture 10000

Total 377000

Liabilities

Home Loan 250000

Credit Card 15000

Credit Card 21000

Loan 91000

Total 377000

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7.9 ComparisonaofaRecommendationsavs. aExistingaPlansa(NetaWorth)

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7.10 TotalaWealthaincludingaPersonalaPensionafundsainatodaysamoney

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7.11 InvestmentaDetailainatodaysamoney

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7.12 CashaManagement

7.13 CurrentaAccount

You ahave aa acurrent aaccount awith aXXXXXXXXXXXX. a aThe aaccount apays ainterest aonacredit abalances aofaX.XX% agross avariable ap.a.. aaIt ais athereforeasensible ato aensure athat acreditabalances aare akept ato aa aminimum, awith aany asurplus aobtaining aa ahigher arate aofainterestaelsewhere.a

Other aorganisationsahave aaccounts awhich apay ahigher arates aofainterest aon acredit abalances. aaHowever, athere ais athe aquestion aofaconvenience.aaAs ait acan abe aa acomplex abusiness ato achangeacurrent aaccounts aI ararely acounsel achanging aproviders, abut ainstead arecommend athat atheaaccountais aused awisely, aavoidingacharges aas afar aas ais apossible.

7.14 EmergencyaReserve

The aactual aamount adeposited awill adepend aon aindividual acircumstancesabut athe aequivalentaofathree ato asix amonths anet aincome ais agenerally adeemed ato abe aa asensible alevel. a aBank aandabuilding asociety adeposits acannot ago adown ain avalue aand ahence acan abe aconsidered ato abe averyalow arisk. a aThe ainterest arates aoffered areflect athis asecurity aand aare atherefore anot aattractiveafor amedium ato along aterm ainvestments. a aThe ainterest apayable ais ataxable airrespective aofawhether ait ais awithdrawn aor aallowed ato aaccumulate. a aTax ais ausually adeducted aby athe abankaor abuilding asociety aat athe asavings arate aofa20%, aalthough atax amay abe areclaimed aby anon-taxpayers

8 The aMortgage

8.1 Theacurrentasituation

8.2 Recommendation

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9 The aModels amain aassumptionsaand adefaults

The alow arisk ainvestment acategory ais aintended afor aindex alinked agilts aand aindex alinkedanational asavings acertificates. a aThe ainvestment areturn aon alow arisk ainvestments aisaassumed atoabe ainflationaplus a1.5%.a aIt ashould abe anoted athat athe alow arisk aclaim afor asuchainvestmentsaonly aappliesaifathey aare aheld atoamaturity.

National aInsurance aContributions aare acalculated afrom athe afigures aprovided. a aTheseacontributionsaare aassumedato aremain aconstantain areal aterms auntil athey acease awhen ayouastop aworkingaor aat aage a65 aifaearlier.

Ifathe aentry afor astate apension awas aleft ablank ain athe afact afind, ayou aare aassumed ato areceiveathe aBasic aState aPension ain afull aat athe asingle aor amarried arate adependingaon astatus. aaThisais aassumed atoaincrease ain alineawith ainflation.

Ifathe a"Type aofaAnnuity" abox ain athe afact afind ais aleft ablank, athe amodel aassumes aanaannuity aescalating ain aline awith ainflation a(i.e. athe aRetail aPrice aIndex). a aFor amarriedacouples, ait ais aassumed athat, aon athe afirst adeath, athe aannuity awill acontinue ato abe apaid atoa

thea

survivinga

spouse.a a

Wivesa

area

assumeda

toa

bea

fivea

yearsa

youngera

thana

their

ahusbandsa(for atheapurposesaofalookingaup aannuityarates).

Pensions afrom afinal asalary aoccupational aschemes aare aassumed ato aincrease ain aline awithainflationaor aat a5% ap.a. aifalower. aa

For afinal asalary aoccupational aschemes ait ais aassumed athat, aat anormal aretirement aage, aaatax-freealump asum aofa2 a atimes apensionabefore acommutation awill abe ataken.

Ifayou acontinue ato amake apension acontributions aafter ayou ahave astarted ato adraw aaapension,atheseacontributionsaare aassumed atoavest aimmediately.

The amodel adoes anot acheck awhether apension acontributions aor areceipts aare awithin aallowablealimits.

Theagross ainvestmentareturn aappliesatoapensionafundsaand atax-efficientainvestments.

Property avalues aand arental aincome aare aassumed ato agrow aat aa amargin aofa1.5% aover atheaassumed arate aofaearnings agrowth. a aOther afixed aassets aare aassumed ato amaintain atheiravalueain areal aterms.

Insurance abased aassets aare aassumed ato agrow aat aa arate awhich ais a80% aofathe aassumedainvestment areturn. a aThis ais abecause athey aare ataxed awithin athe afund aat athe ainsuranceacompanys atax arate awhich ais aassumed atoabe a20%.

Equity aBased aInvestments aare aassumed ato agrow aat aa amargin aofa1% aover athe aassumedainvestmentareturn. a aOn aa along aterm aperspective, aequity abased ainvestmentsahave adonea

bettera

thana

this,a

soa

thisa

assumptiona

isa

conservativea

anda

reflectsa

oura

viewa

thata

thea

highareturns aproduced aby aequity abased ainvestments aover athe apast aten aor atwenty ayears awillanot abe arepeated ato atheasame aextent ain atheafuture.

The arate aofareturn aon aDeposit aand aFixed aInterest ainvestments ais aassumed ato abe aat aaamargin aofa1% aunder athe amortgage arate. a aWhilst adeposits awould atypically areturnarather aless athan athis, afixed ainterest ainvestments ashould areturn amore aon aa alonger atermaview, aso athis ais aconsidered aa areasonable acompromise.

The amodel adoes anot acalculate athe atax aon abond awithdrawals ain aexcess aofa5%. a aThis aisaonly arelevant ato ahigher arate atax apayers aand athey aare aconsidered aunlikely ato amakeawithdrawalsain aexcess aofa5%.

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In aany agiven ayear, athe avalue aofaassets ais athat apertaining aat athe abeginning aofathe ayear.aAll aincome ais aassumed ato abe apaid aat athe aend aofathe ayear aand aany asavings a(or aincome ashortfall) afor athe ayear ais aadded ato a(subtracted afrom) athe arelevant aasset aclass afor atheabeginning aofathe anext ayear. a aFor athis areason, atax-free alump asums afrom apension afundsaare aassumed ato abe areceived aon athe alast aday aofathe ayear aprior ato athat ain awhich atheapension ais afirst areceived. a aThis ais aso athat athe asum ais aimmediately aavailable ato aproduceaan aincomeain atheayear aofaretirement.

Income ayields aon aequity abased ainvestments,alow arisk ainvestments, adeposits aand afixedainterestainvestments aare aassumed atoaremainaconstant.

10 Definitions

10.1.1 SurplusaIncome:aaSurplusaincomeais aincome aremainingaafterarequired aspending,ataxaand ainterest ahaveabeen aaccountedafor. aa

10.1.2 Savinga

Ratio:aa

Isa

thata

proportiona

ofa

surplusa

incomea

toa

bea

saved.a a a a

E.g.a

ifa

thea

savings

aratioais a60% athen a60% aofasurplusaincome awill abe aallocatedatoasaving aand a40% atoadiscretionaryaspending.aa

10.1.3 Post-RetirementaSaving aRatio:aThe asavingaratioais aassumed atoachangeaafteraretirementaon atheabasis athat ahigh alevels aofasaving ashould ano alongerabe anecessary. aaPost-retirement,aifathereais astill asurplusaincome aavailable,atheamodelaassumes athatatheapost-retirementasaving aratioawill abe asuch athat athe alevel aofadiscretionaryaspendingain atheayear aimmediatelyaprecedingaretirementacan abe amaintained. a aIfathereais ainsufficientasurplusaincomeafor athis,athen athe apost-retirementasaving aratioais aassumed atoabe azero

10.1.4 LowaRisk aRatio:aIs atheaproportionaofaavailableasavingatoabe aallocatedatoalowariskainvestments.aIn athis acontext,aavailableasaving ais athat asavingawhichais aavailableaafteramakingapensionacontributionsaand acapital arepayments,apaying apremiums atoainsuranceabased ainvestments aand amaking amaximumaallowableapayments atoatax-efficientainvestments.a a a a

10.1.5 Equity aRatio:aIs atheaproportionaofaavailableasavingato abe aallocatedatoaequity abasedainvestment. aIn athis acontext, aavailableasavingais athat asavingawhich aremains aafteramaking athe alowarisk ainvestment aas adescribed ain atheaprecedingaparagraph.aa(Non-equityabased ainvestmentsaare alikelyatoabe amainly adepositsaand afixed-interestasecurities.) aaExample:aIfatheaequity aratioais a75% athen a75% aofaavailableasavingsawillabe ainvestedain aequity abased ainvestmentsa(includingaunit aand ainvestmentatrusts).aaThearemaininga25% awill abe ainvestedain afixed ainterest ainvestments aand adeposits.

10.1.6 LifeStyleaIndex:aaThe aLifeStyleaIndex ais aa ameasureaofafinancialaindependence.aaIt aisacalculatedafor aany agivenayear aby ataking ainvestmentsain athat ayear aand anotionallyaconvertingathem ainto aincomeafor alife aby aassumingathat athey aare aused ato abuy aan aindexalinkedaannuity.aaFrom aage a50, apensionafunds aare aalso anotionally aconvertedainto aan aincome afor alifeain atheasame amanner.aa(Thisais abecauseaunderacurrentalegislationayou aare aallowedato adraw aa apensionafrom ayour apension afund afrom aagea50.) aToathis ais aadded aany apension aincomeabeingareceived.aaThis aLifetime aincomeais athen acompared atoaspendingain atheagiven ayear atoaproduce atheaLifeStyleaIndex.aaIfaLifetimeaincomeais aexactly aequal ato aspending,athe avalueaofatheaindex ais a100%

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asuggestingathat athealifestyleaimpliedaby athat alevel aofaspendingacould abeamaintained afor athe aremainderaofayour alife.aa