Jim Smith and Jane Smith have come to you to talk about going through some planning together. They have been thinking about it for some time and have heard about you through a friend who is also a client if yours. They feel that they need some guidance from a professional planer. They want to know if they are on track and can achieve their short-term, medium term, and long-term goals. Jim (born Jan/25/1977) works as a Heavy-duty mechanic earning $105K (employment income) a year with a defined contribution plan at work. It is currently valued at $300K. He does not know much about investing, often relying on tips from his co-workers, and been told by a colleague that "you cannot beat GIC rates these days" where he then elected a GIC ladder in his pension plan after many years where he did well in a targe date investment. Jane (born March/27/1977) works for the city of Vancouver as a city planner and makes around $100k income (employment income). She knows that she has a defined benefit plan from work. This DB plan will guarantee a monthly income of ~ $3000 (in today's dollar terms) for her from the age of 65 and indexed for 1% inflation. She feels lucky that she does not have to risk her capital. Together they have 2 children (Harry and Nelson). Harry was born in 2011, and he is currently in grade 8. He likes mathematics. Tom was born in 2010, and he is currently in grade 9. He is fascinated by AI and would like to become a computer programmer. They have good grades at school. Jim and Jane feel grateful that their children are smart. However, they want to know how they can fund their post- secondary education. They would like to leave some inheritances for their children. They own a townhouse in Vancouver currently appraised at $1.65M. Their mortgage is partially paid off since Jim got inheritance from his father last year. They are left over with a mortgage of $650K. In addition, they bought a vacation home in Sunshine Coast 5 years ago for $300K. It is valued around $450K with a small mortgage of $100K outstanding. Health is something they both take seriously. Jane's mother passed away 20 years ago due to cancer and her father has been suffering from diabetes and lives in a long-term care facility. Both of Jim's parents passed away in their 80s and were relatively healthy when they were alive. You held a preliminary meeting with them at your office. You have uncovered some insights into their financial situation. Jim has a life insurance policy through work covered $100K while Jane has an insurance coverage of $150K through work. Jim's employer provides him with a disability insurance plan for 50% after tax income. Jane's employer also provides her with a disability insurance for 65% after tax income. In addition, Jim has $35K in his TSFA account with RBC (Appendix), and it is sitting in a high-interest- saving account. Jane has a TFSA with $40K all in stocks that Jane has been suggested through his "college investment council". They both value their work extended medical and dental plan a lot. They want to have some coverage after retirement. They have not been tracking their daily expenses as they have not incurred any debts.
When you dig into their risk tolerance you have uncovered the following concerns from Jane and Jim. Jim thinks that given the wars, inflation, and ongoing COVID, it is safe for him to hide in GIC. He still remembers what happened to his portfolio during the 2008/2009 financial crisis, and he does not want the same experience to repeat. In addition, he told you that he only wants to invest in large Canadian companies if he ever gets back to the stock market again. A retired co-worker told him that he invested all his savings in Telus and TD bank and has been collecting great dividends. However, Jane is open to other investment recommendations if required. She owns a stock portfolio in her TSFA account, consisted of recommendations by her co-workers. She told you that the portfolio is not doing too well. Despite goods news from the companies, her portfolio has been doing poorly even the S&P500 Index is having a great year. She does not want to sell her stocks since she does not want to crystalize her losses. She would like to know why her portfolio is not doing well. You also noted the following information from the meeting. She mentioned to you that her work pension takes up a lot of her RRSP contribution room and her last's year tax return indicates that her RRSP contribution limit is $8000. They both indicated to you that if it is necessary, they can cut some of their current discretionary expenses to fund their future needs. Retirement Goals They want to retire in the year both turn 65. They hope they can collect around 70% of their pre- retirement after tax income during retirement. They love travelling abroad. They told you a recent trip to China and Japan. They would like to do two trips every year after retirement. They think each trip would cost them $6K in today's dollars. They plan to travel until 80 depending on their health conditions. Jane's father is under long-term care, which costs the family ~$40K a year. Therefore, she does not expect more inheritance from her father's estate. They would like to plan ahead and do not want to be a financial burden for each other and their family.
Hints: 1. When you select mutual funds or ETFs to help them achieve their goals, make sure you state your return objectives based on the FP Canada 2023 guidelines and the fund's asset allocations. https://www.fpcanada.ca/docs/default-source/standards/2023-pag---english.pdf? sfvrsn=911e63c0_3 2. They can rent out their vocational home to subsize their retirement income. Alternatively, they are open to sell the vacation home if required. 3. Make sure your fund selections are matched with their objectives and risk tolerance
Evaluate the information and prepare a written financial plan of 6 pages following based on the contents as outlined below. You should give a background summary at the beginning of your paper. 1. Please look at Jane's statement for her TFSA account and suggest what the shortcomings of her portfolio are. 2. You are required to make assumptions about their careers, employment income, and Jim's workplace pension annual contributions. 3. You also need to make assumptions about their monthly expenses. This includes mortgage payments, car payments, and other variable and fixed expenses. 4. Make reasonable assumptions about their tax rates before and after retirement. 5. Do they have sufficient emergency fund. If not, how much you would suggest? 6. Prepare net worth and cash flow statements prior to retirement based on your assumptions from part 3. 7. Please determine if Jim and Jane possess any behavioral bias? How would you educate them? 8. Using the information provided in the case and make reasonable assumptions about their risk tolerance. 9. State their objectives and goals (education and retirement goals). 10. Build a strategy to fund their children education costs. You are required to do your own research for the projected costs of post-secondary education and make appropriate assumptions. 11. Estimate their funding gap during retirement and develop a saving and investment strategy to help them close this funding gap. You should show a few alternatives: 1) sell their vacation home before retirement, 2) increase annual saving before retirement, and 3) lower their retirement spending expectation. You need to identify pros and cons and risk associated with each alternative.
12. Please suggest any tax or income splitting strategies post-retirement and before retirement for the couple. 13. Research into some funds (ETF or mutual funds) to help them achieve their goals. You need to prepare a paragraph or two to explain your picks. Your decision should be based on a combination of qualitative or quantitate reasons. 14. State the factors and bad behaviors that could negatively affect their goals. 15. Do they have sufficient insurance coverage? If not, how much, and what type of insurance you would recommend? 16. Estate analysis and discussions should be included to demonstrate your knowledge. 17. They also would like to know if they could leave a small inheritance to their charity. They are unsure about the tax consequences associated with donations. Please prepare a statement to explain the tax benefits of donations.
Appendix Jane's TSFA Statement ($40K) and her portfolio consisted of 6 stocks. She bought them in different times in the last 5 years. 1. Alibaba market value at $15K with a book cost $30K 2. TELUS. Communications market value at $12K with a book cost $14K 3. BlackBerry Limited market value at $5K with a book cost $10K 4. Suncor energy market value at $8K with a book cost $7K. 5. Air Canada market value at $4 with a book cost $8K. 6. TD Bank market value at $6K with a book cost $4K. You can pick the funds from the followings links: 1. https://www.mawer.com/funds/performance/ 2. Investment Funds | BlackRock 3. https://www.vanguard.ca/en/investor/products/products-group/all-products? tab=overview&productType=etf 4. https://www.fidelity.ca/en/investments/mutual-funds/ If you want to construct your own portfolio with individual funds, please state the reasons otherwise the following portfolios should be sufficient. In order to achieve diversification, you should not construct your portfolio based on individual stocks and bonds. For active managed mutual funds: Fidelity Global Balanced Portfolio fund code FID2604 or Mawer Balanced Portfolio MAW104 Fidelity Global Growth Portfolio FID 2602 Fidelity Global Income Portfolio FID 2602 Fidelity Global Equity Portfolio FID7604 or Mawer Global Equity Fund Maw120 For passive managed ETF portfolios: Vanguard Balanced Portfolio ETF VBAL Vanguard Growth ETF Portfolio VGRO Vanguard All-Equity ETF Portfolio VEQT Vanguard Retirement Income ETF Portfolio VRIF For short-term money: Scotia High Interest Saving Account or you can pick any accounts in any Canadian Financial Institutions
Uploaded by JudgeWallaby3248 on coursehero.com