COR167e Managing Your Personal Finances (TMA 01 )

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WEALTH GROUNDING - FOUNDATIONAL PART

Mr T noticed that the term “emergency fund” is frequently mentioned in various articles in the local newspapers. Mr T mentioned that his monthly expenses total about $5,750 and he has the following:

WEALTH PROTECTION – TAX PLANNING

Mr T has been operating a small consultancy business as a sole proprietor for the past 2 years. He has been deriving profits but has not paid any tax on this income. He estimates the income tax payable for the 2 years of assessment to be $5,000 and $6,000 respectively.

Mr T, a Singaporean, is employed as a finance director. He is given an annual leave passage allowance of $9,000 and his annual salary is $120,000.

Mr T’s employer decided to provide Mr T with 2 return passages to UK costing $11,000 instead of annual leave passage allowance of $9,000.

Mr T wrote a book for which he received a Royalty income in 2017. A breakdown of Royalty income and expenses is shown below:

Mr T has 2 other properties in his name, which have been rented out. Property 2 was vacant for 3 months. The details of the properties are as follows:

Mr T was given an Option to purchase 100,000 shares at S$2.30 each of his company under the Staff Share Option Scheme. He exercised the option and later sold the shares. The details of the share prices and the relevant dates are given below:

WEALTH ACCUMULATION - RETIREMENT PLANNING

Mr T wants to retire in 15 years at age 65. He has determined that he will need a capital sum of $2,354,000 at that time to provide his retirement income. He presently has a retirement plan with a current amount of $350,000 to which he will add $26,000 per year. Mr T assumes that his pre- retirement and post-retirement rates of return will be 8%, and that inflation will average 3%. He expects to live to at least age 80 but wants to use age 95 for all calculations.

Question 1: WEALTH GROUNDING - FOUNDATIONAL PART (34 marks)

(a)(i) Explain why Mr T should monitor his budget. (5 marks)

(a)(ii) Explain what Mr T’s Personal Balance Sheet represents. How might a series of successive balances be used in evaluating his financial situation? (5 marks)

(b)(i) Write “TRUE” or “FALSE” for the following statements with regard to a Personal Balance Sheet or Cash Flow Statement.

__________ A person’s investment assets to net worth ratio should logically decrease, as he/she grows older.

__________ Cash management helps you to manage your cash on a day-to-day basis; hence, it has no relation with long-term financial goals.

__________ The rule of “72” says that, at 10% interest, it takes a little more than 7 years to double your money.

__________ Liabilities are normally reported at their current fair market value.

__________ If you can cut your spending by 5% that would be equivalent to getting a 5% raise.

__________ When budgeting monthly income, you should exclude one-off items such as a 3-month year-end bonus.

__________ When a person’s cash-flow statement shows a surplus, this means that funds are ready to be used.

__________ No one financial ratio tells the whole story; hence, we need to look at a few ratios to get an overall picture of an individual’s financial health. (8 marks)

(b)(ii) Demonstrate how Mr T is able to check if he has adequate emergency funds. (8 marks)

(c) Name the TWO primary ratios that are used to help determine the appropriate level of Mr T’s debt. For these two primary ratios, what are the ratio levels that indicate acceptable levels of debt? (8 marks)

Question 2: WEALTH PROTECTION – TAX PLANNING (34 marks)

(a) Describe to Mr T the relevant tax requirements and the possible penalties that the Comptroller of Income Tax can impose on him. Advise him whether he has any recourse. (4 marks)

(b)(i) Calculate for Mr T’s Section 10(1)(b) income based on annual leave passage of $9,000. (4 marks)

(b)(ii) Calculate Mr T’s new Section 10(1)(b) income based on 2 return passage to UK of $11,000. (6 marks)

(c)(i) Compute Mr T’s tax liabilities for the Royalty income. (6 marks)

(c)(ii) Determine Mr T’s income from the two properties for the Year of Assessment 2017. (8 marks)

(d) Calculate the amount of Share Option benefit assessable on Mr T. (6 marks)

Question 3: WEALTH ACCUMULATION – RETIREMENT PLANNING (32 marks)

(a) Select the CORRECT answer for the following statements: (8 marks)

1. When additional savings are needed to meet one’s retirement objectives, the additional aggregate amount needed for one’s retirement fund should be based on which of the following?

A The present value at retirement of inflation-adjusted additional savings.

B The future value of inflation-adjusted additional savings.

C The present value of tax-adjusted additional savings.

D Available disposable income not otherwise committed.

2. The amount that must be saved annually for retirement would logically be reduced by

A The dissipation of savings and investment prior to retirement.

B A return on one’s investments greater than anticipated.

C An increase in the rate of inflation.

D An increase in one’s expected lifestyle upon retirement.

3. To calculate the future value of income-producing investments in the retirement planning calculations, the most CORRECT interest factor to use is the

A Marginal tax rate.

B Rate of return.

C Expected rate of inflation.

D Modified interest rate.

4. Which of the following statements concerning inflation is/are CORRECT?

I. Inflation affects the dollar amount of a person’s assets available at retirement.

II. Some retirement plans adjust benefits to take inflation into consideration.

A I only.

B II only.

C Both I and II.

D Neither I and II.

5. Which of the following are features of Supplementary Retirement Scheme?

I. It offers flexibility in the contribution amount and timing with tax deduction for contributions made.

II. Investment gains accumulated are tax-free but dividends earned are taxable at personal tax rate.

III. Contributions to SRS are not revocable and any premature withdrawal of SRS savings is subjected to penalty and loss of tax benefits.

A I only

B I and II only.

C I and III only.

D All of the above.

6. The following statement(s) on the CPF is/are correct EXCEPT:

I. Self-employed persons with net trade income exceeding $6,000 are required to contribute to their Medisave accounts only.

II. To enhance employability for older workers, the compulsory employers’ contribution for workers aged above 50 will be lower.

III. There is no limit to the amount of contribution, both compulsory and voluntarily, that can be paid to a member’s CPF account.

A I only.

B II only.

C I and II only.

D I and III only.

7. Which of the following statement(s) about Eldershield and IDAPE is (are) TRUE?

I. IDAPE is an alternative premium paying plan to Eldershield for those age 70 and above during the first launch.

II. Singaporeans between age 40 and 69 at the time of launch of Eldershield can apply for IDAPE if they suffer from only two existing ADLs.

III. IDAPE is a government scheme and it is free for those who qualify.

A I only.

B I and III only.

C III only.

D II and III only.

8. When considering taking on an insurance policy for retirement purposes, which of the following factors is most applicable?

A Regular premium Endowment is more suitable for pre-retirement than retirement.

B Whole life is for indefinite coverage and useful for estate costs.

C Ageing population may lead to an increase in demand for major medical and long-term care insurance.

D All the above.

Using the information given in the case study above, answer questions 3b(i) and 3b(ii).

(b)(i) Demonstrate how close Mr T will come to his goal of a capital sum of $2,354,000. (12 marks)

(b)(ii) Calculate the amount of retirement income Mr T can expect to receive when he retires at age 65. (4 marks)

(c) If inflation was at a higher value, how will this affect Mr T and why?

List FOUR (4) possible impacts (assume investment returns cannot be safely improved). (8 marks)

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