Discuss about the Factors Influencing Given Investment Choices.
Superannuation plans in Australia define the arrangements to assist the employees to save or accumulate their money for the income after retirement. Their arrangements are placed and conducted by the Government of Australia. It is also partly encouraged by the tax benefits and is partly compulsory for the people living in Australia. The government has also increased the availability of choice of funds to increase the investment by their members. This report describes the factors that are to be considered by employees while making their choice for the investments of their funds (Concord private Health, 2016). The people prefer to make an investment in the plans that may provide the best higher return in comparison to other plans. To make a right choice of the investment plan, the concept of time, value and money are also considered by the individuals and all plans are compared using this concept. After considering the need for this concept, this report also describes the issue that may be occurred at the time of selecting the plan while using this concept. At the end of the report, a conclusion has been drawn on the basis of the entire report to develop a brief understanding of the concept (Lusardi, A. and Mitchell, O.S. 2011).
The tertiary employees need to select one of the plans for their superannuation contribution. One of the plans is defined benefit plan in which an employer-sponsored retirement plan where the employees of the tertiary sector can get the benefit of the specific pension payment. In this plan, the employee will get the lump-sum amount on the retirement that is prearranged by the formula based on the earning of the employee’s history, tenure of service and age (Agmon, Gangopadhyay and Sjogren, 2014). The amount under the defined benefit plan can be calculated with the help of the formula: –
Retirement Benefit = Benefit salary × Length of membership × Lump-sum factor × Average service fraction
On the other hand, the tertiary employees can also select the Investment choice plan. The investment choice is one of the features that are provided by the most superannuation funds. The employees have to decide an investment plan for the future so that they can get the appropriate results for the same (Aren and Aydemir, 2015). The employees in Australia can make the choice for investment from these four strategies: –
There are numerous numbers of factors that affect the decision making of the tertiary employees for their superannuation contribution in the defined benefit plan or the investment choice plan out of which some of them are discussed below. These factors are important to be considered by the employees before making the decision.
The tertiary employees evaluate the returns in the form of an amount that they are going to get in the near future. Every employee in Australia makes a plan for retirement because they want to get an amount after leaving the job. Therefore, the main aim of the tertiary employees is to get the good and affecting returns from the superannuation that is done by them (Shields and North-Samardzic, 2015). This factor affects when the employee makes the choice as they need to decide on defined benefit plan or the investment choice plan. The employees will select that plan in which they are getting maximum returns.
Most of the tertiary employees generally make the investment in the defined benefit plan because they found risk associated with the investment choice plan. The employees will find the risk that is linked to the investment which is done by them and these employees have a risk of the returns. This simply means that if employees make the choice for investment plan they might get the low amount because of any of the uncertainty (Gerrans and Yap, 2014). This risk factor might bring the change in the decision of the employees for their retirement plan.
The income of the employees is one of the major factors that affect the decision making of the employees related to the retirement planning. There are different employees who are working on different income. This might affect their decision as they need to take decision according to their income. If an employee is choosing the defined benefit plan then they will get the amount according to their salary only which means high salary results in high amount and low salary results in low amount. On the hand, if they make the decision for the investment choice plan then they can get the good results after taking the high risk (Gupta and Jithendranathan, 2015). Though, in this decision also the salary of employee’s matters because the investment can only be done if they are able to earn enough amounts which help them in making the investment. This retirement plan needs an investment of huge amount. Therefore, the income of the employees is one of the important factors that is needed be to consider the tertiary employees.
The age at which the tertiary employee get retires affect the amount which is received by the employee as a benefit. This is the fact that 65 years is a usual retirement age of the workers but many of the employees get to retire early due to which they get the benefit of an unreduced pension. Therefore, the age of the retirement is considered while calculating the benefit will be received by the employee. This retirement age is an important factor that needs to be considered because this can affect the decision of the employees for the defined benefit plan (Newnham, 2010).
Most of the employees in the tertiary sector don’t have experience and knowledge related to the investment choices. Novice investors take the guidance from the family, friends or an investment advisor before making the decision related to the investment choice for the retirement plan. Along with this, most of the employees are not able to evaluate the risk that is associated with the investment due to which they don’t get appropriate results and have to bear the losses. In addition, the employees are not able to understand the appropriate outcomes that they are going to get from the investment that has been selected by them (Harbour, 2018). This factor creates an impact on the employees due to which they make a selection of the defined benefit plan instead of the investment choice plan.
The decision related to the investment in retirement plans has to face many issues. Some of the issues are related to the returns while some can be defined as the issues related to availability of plans. Major issue that in decision making of retirement plans are as follows:
Time value of money is the most important notion or concept in the management of various financial institutions, investment banks and insurance entities. The concept indicates that the value of the dollar is today is more than the value of a dollar in future because one can invest in the dollar today to earn interest and thus financial assets can be increased. As each and every approach has its own advantages and disadvantages, this approach to calculate return also has some disadvantages that should also be considered by the people who are going to decide their choice of investment on this basis (Xingyun, 2015). Some of the main disadvantages to following this method are as follows:
The main issues in TVM method are to find and calculate actual cash flows and their timings. As there are always five variables present in this method: Present Value, Number of periods, future value, interest rate and payment amount. In most of the cases, the value of one variable will be equal to zero, so the problem arises to find out the one main factor.
By making the use of TVM method, it is difficult to calculate the return the fluctuation market conditions, because it may be possible to change in the prices of the dollar in future.
Selection of the superannuation plans is more complicated as there are various stages in the life cycle of a person. It results in imagination and assumptions for irregular cash outflows and inflows. These type of problem often requires one than more computation to know the features and drawbacks of the available plans. This is not possible using TVM method and thus it is somehow not suitable for the selection of Superannuation Plan.
Taxes are the main issues that are related to the decision making for superannuation plans. In the decision making of retirement plan, one should always assume that income tax bill would get low in retirement because there will be no more income sources. But the situation cannot same with all the people (Lewis, 2018). Distribution among retirement benefits is the major consideration and issue that may impose more taxes burden when the total sum of money is received by an individual. Almost with all the retirement accounts, there is a tax deduction and assets benefit from income tax during the accumulation time. It is also to be considered that tax is charged using the ordinary tax rates (Stiglitz, and Rosengard, 2015). In addition to this, it is also to be noted that prior to the specified age, in case of withdrawing of the amount, a penalty is charged on the top of total tax liability. As retirement plans are fully taxable, it is required to maintain a balance between the assets of retirement plans. In order deal with this issue, one should consult to his or her tax planner or advisor in order to make right choices. A person should also consider the present tax rate and tax system because it is ultimately going to affects his investment and returns (Hanna and Kim, 2017).
Inflation also affects the cost of goods in the near future. It reduces the purchasing power of income sources that are fixed to an employee like fixed annuities, pensions and long-term policies that cannot be affected by inflation riders (Goda, Ramnath, Shoven, and Slavov, 2017). A budget is required for maintaining the regularly increasing expenses thus it is difficult to decide and estimate the number of changes. Sometimes the even minimum rate of inflation may have a lot of impact on the financial well-being of an individual. Due to inflation, the purchasing power of people may also be decreased due to which they may face a difficulty regarding the options available for investment. This ultimately affects the future returns on their savings and causes them to financial loss (Manoli, and Weber, 2016).
Conclusion
In the end, it can be concluded that there are numerous numbers important factors which is need to be considered by the tertiary employees before making the decision between the defined benefit plan and the investment choice plan. These two plans are considered as important plans for the employees while making the decision for their superannuation. The decision making for the employees is very important due to which they need to consider few of the concepts and issues that are associated with the concept. Time value of money is required to be considered because this highlight the issues due to which the employees might not be able to earn high return due to change in market conditions. On the other hand, the taxes and inflation impact due to which the purchasing power of employees reduce and they won’t be able to make an investment. Therefore, the report includes the concepts like time value of money, taxes, and inflation along with the issues associated with this concept.
References
Agmon, T., Gangopadhyay, S. and Sjogren, S. (2014) 7 Savings and innovation in the United States capital market: defined benefit plans and venture capital funds. Perspectives on Financing Innovation, p.212.
Aren, S. and Aydemir, S.D. (2015) The factors influencing given investment choices of individuals. Procedia-Social and Behavioral Sciences, 210(1), pp.126-135.
Concord private Health (2016) Superannuation [Online]. Available from: https://concordwealth.com.au/financial-services/superannuation/ [Accessed on 23rd May 2018].
Gerrans, P. and Yap, G. (2014) Retirement savings investment choices: Sophisticated or naive?. Pacific-Basin Finance Journal, 30, pp.233-250.
Goda, G.S., Ramnath, S., Shoven, J.B. and Slavov, S.N. (2017) The financial feasibility of delaying Social Security: evidence from administrative tax data. Journal of Pension Economics & Finance, pp.1-18.
Gupta, R. and Jithendranathan, T. (2015) The impact of superannuation fund choice legislation and the global financial crisis on Australian retail fund flows. Financial Services Review, 24(3), p.217.
Hanna, S.D. and Kim, K.T. (2017) Treatment of Inflation in Retirement Planning Calculations: An Improved Method. Journal of Financial Planning, 30(1), pp.44-53.
Harbour, S. (2018) What Are Factors Affecting Individual Choices for Investing Money? [Online]. Available from: https://budgeting.thenest.com/factors-affecting-individual-choices-investing-money-25067.html [Accessed on 23rd May 2018]
Lewis, M. (2018) 7 Factors That May Affect When You Retire – Reasons to Work Past Age 65 [Online]. Available from: https://www.moneycrashers.com/factors-affect-when-retire/ [Accessed on 23rd May 2018]
Lusardi, A. and Mitchell, O.S. (2011) Financial literacy and retirement planning in the United States. Journal of Pension Economics & Finance, 10(4), pp.509-525.
Manoli, D. and Weber, A. (2016) Nonparametric evidence on the effects of financial incentives on retirement decisions. American Economic Journal: Economic Policy, 8(4), pp.160-82.
Newnham (2010) Superannuation can affect age pension payments [Online]. Available from: https://www.smh.com.au/business/superannuation-can-affect-age-pension-payments-20100218-oj1n.html [Accessed on 23rd May 2018]
Shields, J. and North-Samardzic, A. (2015) 10 Employee benefits. Managing Employee Performance and Reward: Concepts, Practices, Strategies, p.218.
Stiglitz, J.E. and Rosengard, J.K. (2015) Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.
Xingyun, P.E.N.G. (2015) Time Value of Money. World Scientific Book Chapters, pp.49-70.
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