2. The Effects of Taxation

3. When you earn interest – it is seen as income. Therefore it is subject to normal income tax regulations. If you are setting up an allocated pension by using an annuity – then the rules change and there are many ways in which you can actually minimise the tax payable. We will investigate basic scenarios.

4. Bob saves $2000 per month and deposits this into an annuity that pays 7.2% p.a compounding monthly. If his tax rate is 42% demonstrate how much tax Bob will have to pay each year. N = I% = PV = Pmt = FV = P/Y = C/Y = 1 x 12 7.2 0 -2000 ? 12 After 1 yr he has saved : $24808.06 But he must pay tax on the interest earnt : 24808.06 – (12 x 2000) = 808.06 So : 808.06 x 0.42 = $399.38 So Bob needs to take into account that he really will only have : 24808.06 – 399.38 = $24408.68 saved

5. Superannuation

6. Superannuation is money that you are able to spend when you retire. There are many regulations on when you can spend the money – but basically you can’t use it until you retire. There are many tax advantages in super. The money is meant to last you for the rest of your life. By law – your employer has to put in 9% of your wage. You will need to add more yourself if you want to have enough money to retire on.

7. A super question starts as a Future Value question – as the lump sum of money exists in the future – you are saving up for money when you retire. Then, when you do retire – it turns into a Present Value question – as the lump sum of money exists now and you will draw money out at regular intervals to live on. Be sure that you READ the question carefully and answer in the correct manner. Use the flow chart.

10. How Much Do You Need? Food Travel Car Bills Petrol Spending $5200 $10,000 $7500 $2600 $5000 $ 3 3 5 8 p e r m o n t h

11. So assume that you retire at 60 and expect to live for another 25 years. You want monthly payments and the rate you can get is 3.4% p.a. compounding monthly what Lump Sum do you need now? $678005.14 If inflation averages out for this time at 4% per year – what should you be getting each month? $8951.88 So, how much do you need to have saved? $1,807,451.08

12. Assumptions Rates stay the same Inflation is steady Bank fees and charges Tax Dual incomes Owning everything when you retire – no debt. Health