QUESTION 1 (20 marks)

Ali Firas is a Managing Director at Best Paint Company in Johor Bahru while Aisyah Sofea is a manager at one of the local bank in Malaysia. His monthly income is RM20,000.00 with 2 months of bonus while Aisyah Sofeas income is RM7,000.00 with 3 months bonus. Ali Firas is 36 years old. His wife, Aisyah Sofea, is 35 years old while his son, Omar Fateh is 3 years old.

The family of Ali Firas stays in a house in Johor Bahru which they bought 5 years ago for RM950,000.00. They took a loan of RM750,000.00 for 20 years from a bank with an interest of 5.5% per annum. The housing installment per month is paid by Ali Firas. The current value of the house is estimated at RM1,090,000.00.

Ali Firas drives a one year old car with a current value of RM140,000.00. He still has 4 more years of loan outstanding and he has no intention to sell the car in the near future. The car was purchased new for RM180,000.00 with a loan of RM150,000.00. Interest paid for the loan was 5%. His wife, Aisyah Sofea used a car provided by her employer.

Ali Firas believes in life insurance and the details of his policies are as follows:

1. Whole life with bonus policy with the sum assured of RM150,000.00 and the annual premium is RM5,260.00. This policy was purchased many years ago and covers death, total permanent disability and major sickness. The projected cash values at age 36, his present age is RM19,800.00. He would like to surrender the policy when he retires and use the cash values to provide for his retirement needs.
2. An-Investment linked policy with the sum assured of RM200,000.00 which was purchased three years ago with an annual premium of RM4,650.00. This policy provides protection against death and total and permanent disability. Now, this policy has an investment value of RM16,200.00.

Ali Firass current assets are as follows:

House	RM1090,000.00
Car	RM140,000.00
Joint-Fixed Deposit Account with Aisyah Sofea	RM46,000.00
Joint-saving account with Aisyah Sofea	RM25,000.00
Unit trust	RM30,000.00
Equity shares	RM40,000.00
EPF Retirement (Ali Firas)	RM230,000.00

Ali Firas would like to use the money in his Fixed Deposit and Joint Saving accounts for his childs university education, while his unit trusts, shares and whole life with bonus policy and the Investment linked policy are for his own future retirement.

Ali Firas would like to retire at the age of 60. He believes that Aisyah Sofea would also retire at the same age as him. He would like to provide an annual sum that is equivalent to 80% of his last drawn salary and bonus when he retires.

Some assumptions agreed by Ali Firas are:

Inflation rate	3.0%
Saving interest rate	2.0%
Fixed deposit rate	2.5%
Insurance cash value	5.0%
Investment linked rate of return	8.0%
Private Retirement Scheme rate of return	8.0%
Unit trust rate of return	9.0%
Shares rate of return	10.0%
Housing loan interest rate	5.5%
Car loan interest rate	5.0%
Salary increase	4.0%
Education costs increases	5.0%
Employee retirement fund rate of return	5.5%
Employer contribution to retirement fund	12.0%
Employee contribution to retirement fund	11.0%
Post retirement rate of return	7.0%
University entry age	18 years old
Number of years in university	4
Life expectancy	Male 80; female 83

REQUIRED:

1. Calculate the total capital required to generate the annual income needed for Ali Firas when he retires, if he utilizes the capital liquidation approach.

[5 marks]

2. Calculate the total retirement gap if Ali Firas decided to utilize the unit trust, equity shares, employee retirement fund and cash value of his 2 life insurance policies to assist to fund his retirement. He wishes to remain to stay in the same house when he retires.

[10 marks]

3. After determining Ali Firas retirement gap, advice Ali Firas on the following. How much does he needs to set aside (i) monthly and (ii) yearly to achieve his retirement needs if he invested in the Private Retirement Scheme.

[3 marks]

4. Calculate the total lump sum investment value that Ali Firas needs to set aside starting from today to fulfil his retirement gap if he invests in the unit trust funds that gives a return of 9%.

[2 marks]