Objectives of the Financial Plan
The financial plan shall be formulated for Stephen and Linda Cheung after calculating the expected annual surplus income of the couple over the next 18 years by which time their children are expected to attend college. Firstly, let calculate the expected annual surplus amount of income of the couple (family) after considering the income, annual living expenses and annual inflation rate (Wu, 2015).
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The expected total annual income of the couple at present is calculated below:
|
Particulars
|
Amount ($)
|
Amount ($)
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|
|
Income of Stephen from It Contracts
|
1,755,000.00
|
|
|
Income of Linda Cheung
|
483,600.00
|
|
|
Average investment return (3650000 x 16%)
|
584,000.00
|
|
|
Total family income (after tax)
|
2,822,600.00
|
Though average annual return on investment in China over the last decade and more has been around 20% still in order to be conservative in predicting the expected net savings of the couple to correct plan for the future of the family it has been assumed that the expected return to be received from the current investment portfolio would be around 16% per annum. Taking into consideration that the annual income of the couple in the first year is calculated below (Saxena, Phadke & Gopal, 2014).
|
Particulars
|
Amount ($)
|
Amount ($)
|
|
Income of Stephen from It Contracts
|
1,755,000.00
|
|
|
Income of Linda Cheung
|
483,600.00
|
|
|
Average investment return (3650000 x 16%)
|
584,000.00
|
|
|
Total family income (after tax)
|
2,822,600.00
|
Taking into consideration the above income in year 1 the expected annual income and surplus annual income after meeting living expenses is calculated below to correct plan for the retirement and future requirements of the Cheung family.
|
Year
|
(A): Family income after adjusting inflation
|
(B): Annual living expenses
|
Surplus income (A-B)
|
|
1.00
|
2,822,600.00
|
840,000.00
|
1,982,600.00
|
|
2.00
|
2,879,052.00
|
856,800.00
|
2,022,252.00
|
|
3.00
|
2,936,633.04
|
873,936.00
|
2,062,697.04
|
|
4.00
|
2,995,365.70
|
891,414.72
|
2,103,950.98
|
|
5.00
|
3,055,273.01
|
909,243.01
|
2,146,030.00
|
|
6.00
|
3,116,378.48
|
927,427.87
|
2,188,950.60
|
|
7.00
|
3,178,706.04
|
945,976.43
|
2,232,729.61
|
|
8.00
|
3,242,280.17
|
964,895.96
|
2,277,384.20
|
|
9.00
|
3,307,125.77
|
984,193.88
|
2,322,931.89
|
|
10.00
|
3,373,268.28
|
1,003,877.76
|
2,369,390.53
|
|
11.00
|
3,440,733.65
|
1,023,955.31
|
2,416,778.34
|
|
12.00
|
3,509,548.32
|
1,044,434.42
|
2,465,113.90
|
|
13.00
|
3,579,739.29
|
1,065,323.11
|
2,514,416.18
|
|
14.00
|
3,651,334.08
|
1,086,629.57
|
2,564,704.51
|
|
15.00
|
3,724,360.76
|
1,108,362.16
|
2,615,998.60
|
|
16.00
|
3,798,847.97
|
1,130,529.40
|
2,668,318.57
|
|
17.00
|
3,874,824.93
|
1,153,139.99
|
2,721,684.94
|
|
18.00
|
3,952,321.43
|
1,176,202.79
|
2,776,118.64
|
As per the information Stephen and Linda require around $2,200,000 to carry out improvements in the property where they are living. Since the requirement of amount is quite large hence, the couple should take loan from a bank at 6% per annum to repay the loan with equal annual instalments within next 10 years. Accordingly, the loan repayment schedule for the loan is prepared below to be considered while making the recommendations about investments strategy to ensure the couple have necessary funds required for retirement and education of their children (Lardy, 2016).
The loan will be taken in next year as the improvements shall be carried out to the property in next year. The surplus amount of income after taking into consideration the annual instalment to repay the loan is calculated below.
|
Year
|
(A): Family income after adjusting inflation
|
(B): Annual living expenses
|
(C) Annual instalment to repay the loan
|
Surplus income (A-B-C)
|
|
1.00
|
2,822,600.00
|
840,000.00
|
|
1,982,600.00
|
|
2.00
|
2,879,052.00
|
856,800.00
|
298909.5
|
1,723,342.49
|
|
3.00
|
2,936,633.04
|
873,936.00
|
298909.5
|
1,763,787.53
|
|
4.00
|
2,995,365.70
|
891,414.72
|
298909.5
|
1,805,041.47
|
|
5.00
|
3,055,273.01
|
909,243.01
|
298909.5
|
1,847,120.49
|
|
6.00
|
3,116,378.48
|
927,427.87
|
298909.5
|
1,890,041.09
|
|
7.00
|
3,178,706.04
|
945,976.43
|
298909.5
|
1,933,820.10
|
|
8.00
|
3,242,280.17
|
964,895.96
|
298909.5
|
1,978,474.70
|
|
9.00
|
3,307,125.77
|
984,193.88
|
298909.5
|
2,024,022.38
|
|
10.00
|
3,373,268.28
|
1,003,877.76
|
298909.5
|
2,070,481.02
|
|
11.00
|
3,440,733.65
|
1,023,955.31
|
298909.5
|
2,117,868.83
|
|
12.00
|
3,509,548.32
|
1,044,434.42
|
|
2,465,113.90
|
|
13.00
|
3,579,739.29
|
1,065,323.11
|
|
2,514,416.18
|
|
14.00
|
3,651,334.08
|
1,086,629.57
|
|
2,564,704.51
|
|
15.00
|
3,724,360.76
|
1,108,362.16
|
|
2,615,998.60
|
|
16.00
|
3,798,847.97
|
1,130,529.40
|
|
2,668,318.57
|
|
17.00
|
3,874,824.93
|
1,153,139.99
|
|
2,721,684.94
|
|
18.00
|
3,952,321.43
|
1,176,202.79
|
|
2,776,118.64
|
The couple should make long term plan by contributing in long term recurring account which will give 12% annual return compounded annually. By contributing to the recurring account the couple will be able to save significant amount of money for their future. The following schedule will help to understand the short term, intermediate and long term investment strategy of the couple (Bushee, Goodman & Sunder, 2018).
|
Year
|
(A): Family income after adjusting inflation
|
(B): Annual living expenses
|
© Annual instalment
|
(D) Annual recurring
|
Surplus income (A-B-C)
|
Interest
|
|
1.00
|
2,822,600.00
|
840,000.00
|
|
1,586,080.00
|
396,520.00
|
|
|
2.00
|
2,879,052.00
|
856,800.00
|
298909.5081
|
1,378,673.99
|
344,668.50
|
20,619.04
|
|
3.00
|
2,936,633.04
|
873,936.00
|
298909.5081
|
1,411,030.03
|
352,757.51
|
38,809.85
|
|
4.00
|
2,995,365.70
|
891,414.72
|
298909.5081
|
1,444,033.18
|
361,008.29
|
57,657.77
|
|
5.00
|
3,055,273.01
|
909,243.01
|
298909.5081
|
1,477,696.39
|
369,424.10
|
77,179.75
|
|
6.00
|
3,116,378.48
|
927,427.87
|
298909.5081
|
1,512,032.87
|
378,008.22
|
97,393.14
|
|
7.00
|
3,178,706.04
|
945,976.43
|
298909.5081
|
1,547,056.08
|
386,764.02
|
118,315.68
|
|
8.00
|
3,242,280.17
|
964,895.96
|
298909.5081
|
1,582,779.76
|
395,694.94
|
139,965.51
|
|
9.00
|
3,307,125.77
|
984,193.88
|
298909.5081
|
1,619,217.90
|
404,804.48
|
162,361.20
|
|
10.00
|
3,373,268.28
|
1,003,877.76
|
298909.5081
|
1,656,384.81
|
414,096.20
|
185,521.73
|
|
11.00
|
3,440,733.65
|
1,023,955.31
|
298909.5081
|
1,694,295.06
|
423,573.77
|
209,466.51
|
|
12.00
|
3,509,548.32
|
1,044,434.42
|
|
1,972,091.12
|
493,022.78
|
234,215.41
|
|
13.00
|
3,579,739.29
|
1,065,323.11
|
|
2,011,532.95
|
502,883.24
|
262,897.40
|
|
14.00
|
3,651,334.08
|
1,086,629.57
|
|
2,051,763.60
|
512,940.90
|
292,464.99
|
|
15.00
|
3,724,360.76
|
1,108,362.16
|
|
2,092,798.88
|
523,199.72
|
322,939.96
|
|
16.00
|
3,798,847.97
|
1,130,529.40
|
|
2,134,654.85
|
533,663.71
|
354,344.57
|
|
17.00
|
3,874,824.93
|
1,153,139.99
|
|
2,177,347.95
|
544,336.99
|
386,701.56
|
|
18.00
|
3,952,321.43
|
1,176,202.79
|
|
2,220,894.91
|
555,223.73
|
420,034.21
|
|
Total
|
|
|
|
31,570,364.35
|
7,892,591.09
|
3,380,888.28
|
|
Year
|
(A): Family income after adjusting inflation
|
(B): Annual living expenses
|
© Annual instalment
|
(D) Annual recurring
|
Surplus income (A-B-C)
|
Interest @1.3%
|
|
1.00
|
2,822,600.00
|
840,000.00
|
|
1,586,080.00
|
396,520.00
|
|
|
2.00
|
2,879,052.00
|
856,800.00
|
298909.5081
|
1,378,673.99
|
344,668.50
|
190,329.60
|
|
3.00
|
2,936,633.04
|
873,936.00
|
298909.5081
|
1,411,030.03
|
352,757.51
|
378,610.03
|
|
4.00
|
2,995,365.70
|
891,414.72
|
298909.5081
|
1,444,033.18
|
361,008.29
|
593,366.84
|
|
5.00
|
3,055,273.01
|
909,243.01
|
298909.5081
|
1,477,696.39
|
369,424.10
|
837,854.84
|
|
6.00
|
3,116,378.48
|
927,427.87
|
298909.5081
|
1,512,032.87
|
378,008.22
|
1,115,720.99
|
|
7.00
|
3,178,706.04
|
945,976.43
|
298909.5081
|
1,547,056.08
|
386,764.02
|
1,431,051.45
|
|
8.00
|
3,242,280.17
|
964,895.96
|
298909.5081
|
1,582,779.76
|
395,694.94
|
1,788,424.36
|
|
9.00
|
3,307,125.77
|
984,193.88
|
298909.5081
|
1,619,217.90
|
404,804.48
|
2,192,968.85
|
|
10.00
|
3,373,268.28
|
1,003,877.76
|
298909.5081
|
1,656,384.81
|
414,096.20
|
2,650,431.26
|
|
11.00
|
3,440,733.65
|
1,023,955.31
|
298909.5081
|
1,694,295.06
|
423,573.77
|
3,167,249.19
|
|
12.00
|
3,509,548.32
|
1,044,434.42
|
|
1,972,091.12
|
493,022.78
|
3,750,634.50
|
|
13.00
|
3,579,739.29
|
1,065,323.11
|
|
2,011,532.95
|
502,883.24
|
4,437,361.57
|
|
14.00
|
3,651,334.08
|
1,086,629.57
|
|
2,051,763.60
|
512,940.90
|
5,211,228.92
|
|
15.00
|
3,724,360.76
|
1,108,362.16
|
|
2,092,798.88
|
523,199.72
|
6,082,788.02
|
|
16.00
|
3,798,847.97
|
1,130,529.40
|
|
2,134,654.85
|
533,663.71
|
7,063,858.45
|
|
17.00
|
3,874,824.93
|
1,153,139.99
|
|
2,177,347.95
|
544,336.99
|
8,167,680.04
|
|
18.00
|
3,952,321.43
|
1,176,202.79
|
|
2,220,894.91
|
555,223.73
|
9,409,083.40
|
|
Total
|
|
|
|
31,570,364.35
|
7,892,591.09
|
58,468,642.30
|
Note: Interest on recurring account has been paid on the principal and accumulated interests each year.
The consolidated balance at recurring account after 18 years will be $34,951,252.63 (31,570,364.35 + 3,380,888.28).
Thus, only from investing recurring account the couple will have more than $34 million in recurring account to fund the education of their children as well as fund their retirement. The short term goal of the couple is to use loan funds to carry out improvements in the property without compromising on the investment and livelihood of the family. Intermediate goals of the couple is to continue to earn significant return from the investment and in the long run the couple should concentrate on consolidating its funds by investing in recurring account.
Recommendations for Short, Intermediate, and Long-Term Goals
The return requirement of the couple is to earn at-least necessary return to fund their retirement after 18 years and finance the education of their two children who will be attending colleges by that time (Blake, Wright & Zhang, 2014).
The reason that it has been suggested to the couple to invest 80% of their annual surplus in recurring account is to eliminate the risk aspect completely from investment. Hence, the risk tolerance level has been assumed to minimum for the coupe as they are saving for their retirement and children education. Thus, emphasis has been given on security and safety over the quantum of return.
Liquidity consideration is not a very huge consideration for the couple as they always had surplus income even after meeting all expenditures, payments and instalments of land and saving in recurring account. The 18 years horizon is the most important aspect here since it is expected that in next 18 years the couple will retire and enjoy life. As already mentioned that with the objective firmly on assured return on investment the couple would not look for any extravagant investment opportunity and hence, decided to invest in recurring account of the bank and keep the rest amount of surplus in hand and banks to ensure there is enough liquidity if needed. 80% of annual surplus shall be invested in recurring account to earn annual return of 1.3% and the balance shall be kept on hand and in savings bank accounts (Tyson, 2018).
The couple also have the option invest in long term bonds and stock but since the couple has decided to minimize the risk of investment hence, no investment in stock shall be made. However, investing in China Government bond 10 year and China Long Term Maturity Bond to earn stable return over a long period of time. However, since it requires significant amount of funds and blocks the funds for 10 years hence, the bond options have been eliminated in the financial plan. China Government Bond 1 year and China Government Bond 3 years are two short and medium term bonds to be used to invest in case necessary.
The couple should take 6% loan in next year to finance the property improvement and repay the entire loan within next 10 years. By investing 80% of net annual surplus in recurring account to earn 1.30% annual rate of interest will help the couple to make provision for children college fees and requirements of the couple after retirement (Boisclair, Lusardi & Michaud, 2017).
|
Particulars
|
Amount ($)
|
Amount ($)
|
|
expected funds to be at hand after 18 years
|
|
Consolidated balance in Recurring account
|
34,951,252.63
|
|
|
Balance in savings bank accounts
|
7,892,591.09
|
|
|
|
|
42,843,843.72
|
|
Less: Requirements after retirement
|
15,000,000.00
|
|
Surplus funds to be used for education and other purpose of the children
|
27,843,843.72
|
References:
Blake, D., Wright, D., & Zhang, Y. (2014). Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners. Journal of Economic Dynamics and Control, 38, 105-124.
Boisclair, D., Lusardi, A., & Michaud, P. C. (2017). Financial literacy and retirement planning in Canada. Journal of Pension Economics & Finance, 16(3), 277-296.
Bushee, B. J., Goodman, T. H., & Sunder, S. V. (2018). Financial Reporting Quality, Investment Horizon, and Institutional Investor Trading Strategies. The Accounting Review.
Lardy, N. R. (2016). China: Toward a consumption-driven growth path. In SEEKING CHANGES: The Economic Development in Contemporary China (pp. 85-111).
Saxena, S., Phadke, A., & Gopal, A. (2014). Understanding the fuel savings potential from deploying hybrid cars in China. Applied Energy, 113, 1127-1133.
Tyson, E. (2018). Personal finance for dummies. For Dummies.
Wu, F. (2015). Planning for growth: Urban and regional planning in China. Routledge.
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