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STUDIES
Week 1 Lecture 1C
Calculating Superannuation Balances
The aim is to answer the question;
If I put $C into an account at the end of each year,
and the account earns interest at i p.a, how much
will I have at the end of n years ?
We can do these calculations
1.
2.
Using a spreadsheet
a,
ar, ar , ar , ar , ar
and so
on ....
Note that the nth term in the sequence is arn-1
Examples:
2, 4, 8, 16, 32..
(a = 2 and r = 2)
(a = -3 and r = -3)
n-1
(eqn 1)
Sn
r Sn
________________________________
(1-r) Sn = a - arn
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a (1 r n )
Sn
1 r
or alternatively you can write
a (r n 1)
Sn
r 1
Either formula will give the same answer.
Example:
(a) Find the sum of the first 8 terms of the
sequence 2, 4, 8, 16, 32...
(b) Find the sum of the first 40 terms of the
sequence 100, 100*1.05, 100*1.052...
Answer (a)
a = 2, r = 2, n = 8
2(28 1)
Sn
2*(256 1) 510
2 1
Answer (b)
a = 100, r = 1.05, n = 40
100(1.0540 1)
S 40
12079.98
1.05 1
a(r n 1)
Sn
r 1
to prove that
Regular Savings
Lets suppose that you are going to save $C every
year. (C = Contribution to Superannuation Fund)
At the end of each year you will put $C into a bank
account, and you will do this for n years.
[Note that when compulsory superannuation was first introduced in 1992, employers were required to make
contributions annually within a few weeks of the end of the financial year. In practice most employers make
contributions monthly. In ACST101 you will learn how to adjust for monthly contributions]
10
C (1+i)t
t=o
(1+i)n 1
C
(1+i)1
(1+i) 1
C
i
11
100(1.0540 1)
1.05 1
=
= 12,079.98
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An Alternative Approach
It is often helpful to think of each separate payment
accumulating in a separate account, for n years.
Find the accumulated value of each payment at time n years, and
then add them together.
The first payment of $C is made at time t = 1 and
earns interest for n-1 years
Accumulated value of first payment = C (1+i)
n-1
n-
And so on.
The last-but-one payment is made at time t = n-1
and earns interest for one year
Accumulated value of last-but-one payment = C
(1+i) 1
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sn
sn
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[(1 i ) n 1]
i
Examples:
Find the values of the following
(a) $50 per annum payable in arrears for 20 years at
the rate of interest 10% per annum
(b) $200 per annum payable in arrears for 60 years at
1% per annum
Answer (a)
50s20
(1.1020 1)
at 10% 50*
0.10
2863.75
Answer (b)
200 s60
16
(1.0160 1)
at 1% 200*
0.01
16,333.93
REASONABLENESS CHECKS
Everyone makes mistakes from time to time.
Therefore, whenever you do a calculation, it is
important to look at the answer and say:
Does this answer look reasonable ?
Or is it obviously wrong?
If you were earning NO interest, then the accumulated
value would be just the sum of n payments of $R,
i.e. n * R.
If you are earning a positive rate of interest, then the
accumulation should be HIGHER than n*R.
So whenever you do an accumulation calculation,
accumulating n payments of R each, check to make
sure that your answer is higher than n * R.
Example: $200 for 60 years at 0%
would be 200*60 = 12,000
Our answer of 16,333.93 was larger - OK
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SUPERANNUATION ACCUMULATIONS
Theoretically, we could use the above formulae to
estimate the accumulated value of our superannuation
savings at retirement age (say age 65).
Lets suppose that your employer is complying with
Australian law and paying 9% of your salary into a
superannuation fund earning 8% per annum interest.
Your salary is $50,000 per annum, so this means that
the contribution is $4500.
Assume payments are made at the end of each year.
Using the formula for the accumulated value of
regular payments, after 40 years you will have
4,500
s40
at 8% = 1,165,754.33
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COMPLICATIONS
Unfortunately real life is more complicated !!!
We must allow for :
1.
Taxes on contributions
2.
3.
4.
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5.
Salary increases
6.
1. TAX ON CONTRIBUTIONS
The first problem is tax on contributions.
The government charges a tax of 15% on each
contribution made by the employer into a super fund.
(NB In reality there are different tax rules for different
types of contribution, but we will ignore this at
present this is a simplified model)
Tax = 15% * 4500 = 675
Net Contribution after deducting tax
= 4,500 - 675 = 3,825
Accumulated value of net contributions
= 3825
s40
at 8%
= $ 990,891.18
So you wont be a millionaire, but it still looks okay.
20
22
4500
675
50
Less insurance
150
Net Contribution
3,625
s40
at 8% = 939,079.88
23
24
= 8.00
= 1.20
25
s40
at 6.8% = $ 687,402.88
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s40
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Next week:
Allowing for salary increases
Allowing for inflation
Allowing for variations in the investment income
earned by the fund each year
Superannuation Calculator
Over the next two weeks you will be building your
own superannuation calculator.
Tute exercise: Look at ASICs superannuation
calculator
Homework: Start learning EXCEL skills.
Watch the EXCEL demo on iLearn in the week 1
folder and build your own version of the spreadsheet.
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