CIFP Case Challenge Sample Case Study:

Dustin Webster and Alison McPherson

CIFP Case Challenge Sample Case Study: Dustin Webster and Alison McPherson

Overview and Family Situation

It is December 31st.

Dustin Webster and Alison McPherson are recent graduates from an Ontario college. They met in school and have been dating for two years.

Alison McPherson

Alison is 22 years old and graduated from a three-year business accounting program in January of this year.

Alison grew up in a modest-income household in Brampton with her parents and two siblings. Her mother has been employed with Canada Post for 27 years; her father is a construction worker whose employment is highly seasonal and involves frequent periods during which he is laid off. The unpredictability of the family income has forced them to lead a cost-conscious lifestyle. Alison's mother, who manages the family finances, has always been careful to avoid incurring debt other than the mortgage on the family home. This emphasis on living within their means and ensuring there was always something set aside for tomorrow, resulted in Alison growing up in a comfortable, but simple home.

Dustin Webster

Dustin is 26 years old. After high school, he was unsure what career path to follow so, he ended up working at various odd jobs in retail and in a restaurant for a few years. Tired of what he was doing, he eventually enrolled in a two-year, electrical engineering diploma program; he graduated in April of this year.

Dustin grew up in an upper-middle class family in Mississauga with three siblings. His father is an accountant and his mother is in middle management with a telecommunications company.

Dustin maintains a close relationship with his family.

Future plans and current living situation

The next few years promise to be an exciting time for the couple. Even though they have only been together for a short while, Dustin and Alison have already discussed a future together. They figure they will get engaged in two years and will get married in four years. They would eventually like to have at least two children however, before they start a family, they want a few years to themselves to travel and to establish themselves in their respective careers.

3660 Hurontario Street, Suite 600, Mississauga, Ontario L5B 3C4

Toll-free: 1-866-635-5526 Fax: (647) 723-6457 CIFP Web site: www.CIFP.ca

1

CIFP Case Challenge Sample Case Study:

Dustin Webster and Alison McPherson

Alison will continue living in her parents' home so that she can build her savings. Now that she is working full-time, her parents will charge her a nominal amount of $250 in rent each month.

Dustin was living rent-free in his parents' home but, he recently chose to move into a furnished, one-bedroom apartment that costs him $850 per month. While his parents understand why he wants to be on his own, they were disappointed to see him leave and felt he is passing up a great opportunity to continue living at home rent-free until he and Alison get married.

Employment

Alison's employment

Alison has her sights set on a career as a financial planner and would like to specialize in private wealth management and estate planning. She took her first step toward this end in April of this year when she began working as a personal advisor at a chartered bank. She earns a salary of

$42,000. Unfortunately, as of this year, the bank no longer offers membership in their defined benefit pension plan for new hires so, Alison was enrolled in the company's defined contribution pension plan in Novemberafter completing her sixth month of service. Her contribution is based on 5% of her pensionable earnings with her employer making a matching contribution.

Alison is committed to furthering her education and has already enrolled in a program leading to the CERTIFIED FINANCIAL PLANNER designation. Her manager has told her that the bank will reimburse 50% of her tuition fees once she attains CFP certification. She would also like to get a professional accounting credential at some point.

Alison's ambition and work ethic has not gone unnoticedin her short time with the bank, she has made an extremely favourable impression. Her manager has already told her that he sees great potential for advancement and salary increases in the years to come.

Dustin's employment

While he survived his term at college, Dustin would be the first to admit that school was never really of interest to him so, he is happy that almost immediately after graduation, he was able to find a job through his college work placement program and is earning a regular paycheque again. At the moment, he is an assistant electrician earning a salary of $37,500. He has been promised an increase to $45,000 once he reaches his one-year anniversary. His company does not sponsor a pension plan for its employees.

3660 Hurontario Street, Suite 600, Mississauga, Ontario L5B 3C4

Toll-free: 1-866-635-5526 Fax: (647) 723-6457 CIFP Web site: www.CIFP.ca

2

CIFP Case Challenge Sample Case Study:

Dustin Webster and Alison McPherson

Financial Management

Alison and Dustin could not have more divergent views with respect to saving and spending.

Alison's view on financial management

For Alison, there was not a lot of money available for anything beyond the basic necessities so, from an early age, she realized that if she wanted something, she was going to have to save for it herself. She has always been more on the practical side and leading an extravagant lifestyle was never part of her thinking.

It is clear that Alison's attitude towards money management is strongly influenced by the way her mother budgeted and kept a tight rein on spending during Alison's childhood. Other than her Canada Student Loanwhich she views as a necessary investment in her futureAlison has similarly been careful to avoid debt. In her mind, if you can only purchase something through debt, it generally means you are not entitled to that item.

She refuses to apply for a credit card despite being bombarded with offers from financial institutions aware that she has recently entered the workforce. She will reluctantly use a debit card for purchases (as long as transaction fees do not apply) but, overwhelmingly, she buys items with cash. Alison adheres to a strict personal policy of making one withdrawal of $50 a week from her bank account to cover discretionary spending. Rarely does she spend this entire amount unless it is an emergency or a special occasion.

Dustin's view on financial management

Dustin is fortunate in that he grew up enjoying a far more relaxed and comfortable childhood than his girlfriend: his parents would buy him whatever he wanted so he always had the latest consumer products (e.g. video games, mobile phones, trendy clothing, etc.), the family would take a vacation every year and they would dine out at least once a week. On the other

hand, this has also meant that Dustin has grown up without a real understanding of the value of money. For the four years he worked full-time following high school, his parents never required him to pay rent so, he simply spent whatever he earned on maintaining his lifestyle.

Dustin has two credit cards which he uses liberally. While he is diligent about paying his bills (albeit, payments are past due in some months), Dustin doesn't want to compromise his cash flow so, he only pays the minimum payment due on his credit cards each month.

When he begins his life with Alison, Dustin believes he will be able to maintain, and hopefully improve, the lifestyle to which he has become accustomed. He foresees the couple living in a large home in an affluent neighbourhood, taking at least two vacations each year and in general, leading a very comfortable life.

3660 Hurontario Street, Suite 600, Mississauga, Ontario L5B 3C4

Toll-free: 1-866-635-5526 Fax: (647) 723-6457 CIFP Web site: www.CIFP.ca

3

CIFP Case Challenge Sample Case Study:

Dustin Webster and Alison McPherson

Impact of financial management attitudes on their relationship

Dustin and Alison have a strong relationship and are ideally suited to each other. This said, their differing attitudes relating to financial management have been a source of arguments for the couple. Now that they have graduated from school and are embarking on careers, Alison is more determined than ever to start saving for future goals like marriage, a downpayment on a home and even retirement. However, she has found it frustrating not being able to convey this message to Dustin whose priority is buying a new car and taking a vacation as a reward for graduating from school. From Dustin's perspective, there are times when he feels resentful towards Alison because of her insistence to be more conservative and responsible. He believes there is a price to pay for her restraint: missing out on 'living' and enjoying life at a time when they are young and free of responsibilities.

They have agreed to have more meaningful discussions over the next few months about their financial situation realizing that they need to reach some common ground if their objectives are to be realized.

Canada Student Loans

Alison's student loan

Alison was able to partially fund her education through savings from summer part-time work. Her parents also made a small contribution to cover some of her costs. This said, Alison still had to borrow $8,500 through the Canada Student Loans Program to fund her three-year program.

Her Canada Student Loan grace period expired in August and she has been making monthly loan repayments of approximately $110. The loan is based on a 9.5-year term and a floating interest rate of 5.5%. Next year, she intends to increase her payments to discharge the loan within three years.

Dustin's student loan

Although Dustin worked full-time for four years after high school, he had no savings in place when he applied for college. He ended up borrowing $6,000 from the Canada Student Loans Program. His grace period ended in October and he is making monthly payments of approximately $75 based on a floating rate of 5.5%. He doesn't see a need to pay down his debt with any urgency so, he will likely carry the loan to its full 9.5-year term.

Short and Mid-term Objectives

The two most immediate goals Alison and Dustin have are to save for their wedding and honeymoon and to save a downpayment to purchase a home. They want to realize both goals in four years. In the upcoming weeks, the couple will open a joint chequing/savings account to hold their savings for these objectives.

3660 Hurontario Street, Suite 600, Mississauga, Ontario L5B 3C4

Toll-free: 1-866-635-5526 Fax: (647) 723-6457 CIFP Web site: www.CIFP.ca

4

CIFP Case Challenge Sample Case Study:

Dustin Webster and Alison McPherson

Wedding and honeymoon

Alison envisions a modest wedding with between 50 and 75 guests. She projects a cost of approximately $10,000 for the event with another $3,000 needed for a one-week honeymoon. Alison is also open to the idea of a destination wedding as it would be a more cost-effective way to celebrate their special day. Not surprisingly, Dustin would like to do things on a bigger scale seeing a wedding of approximately 100 guests and a bill closer to $20,000. He would like a three-week honeymoon in Europe which will cost approximately $10,000. Dustin doesn't mind going into debt to make their wedding day more memorable. In fact, he already anticipates having to borrow about $15,000 to buy Alison's ring in a couple of years.

Home purchase

Dustin and Alison also have a different vision when it comes to the home they plan to buy. Alison sees starting off in a two-bedroom condominium with a purchase price of approximately

$300,000 to $350,000. After a couple of years of marriage, when the prospect of having children becomes more realistic, they can then think about buying a house. Dustin would prefer to move into a house right away, settle in and live there for many years. He is eyeing a detached house in a developed suburb with a list price of approximately $500,000.

Retirement Objectives

Alison's retirement objectives

Although only 22 years of age, Alison has already given considerable thought to retirement. Barring an unforeseen circumstance, she can realistically see herself working to at least age 65. She can also envision working beyond this agenot out of necessity but, out of a desire to stay active.

Alison is fully aware that a lot of eventsboth positive and negativeleading up to her and Dustin's retirement can alter her projection so, she is smart enough not to get too attached to any numbers however, based on a rough calculation, she believes that if the couple can generate an after-tax income during retirement from all sources that is equivalent to their current pre-tax earnings, they will be heading in the right direction.

Based on this, she recently started bi-weekly contributions of $200 to her RRSP that are automatically deducted from her pay. According to her calculations, through this savings alone (i.e. excluding pension benefits from her employer, CPP retirement and OAS benefits for her and Dustin and any retirement income from Dustin) from now until age 65 based on a conservative investment return of 5%, she will achieve her goal. Alison is still learning how to do these types of calculations so, she intends to talk to her manager to verify the numbers.

3660 Hurontario Street, Suite 600, Mississauga, Ontario L5B 3C4

Toll-free: 1-866-635-5526 Fax: (647) 723-6457 CIFP Web site: www.CIFP.ca

5

CIFP Case Challenge Sample Case Study:

Dustin Webster and Alison McPherson

Dustin's retirement objectives

Having just entered the work force, retirement is not something to which Dustin has given any consideration beyond a conversation with Alison early in their relationship, when he mentioned he would like to be able to live half of the year in Florida or Mexico during retirement.

Assumptions

Alison has a combined marginal tax rate of 24.15%

Dustin has a combined marginal tax rate of 20.05%

minimum monthly payment on Dustin's credit cards is based on the greater of 2.1% of the outstanding balance and $10

3660 Hurontario Street, Suite 600, Mississauga, Ontario L5B 3C4

Toll-free: 1-866-635-5526 Fax: (647) 723-6457 CIFP Web site: www.CIFP.ca

6

CIFP Case Challenge Sample Case Study:

Dustin Webster and Alison McPherson

Statement of Net Worth for Dustin and Alison As at December 31st Assets

Dustin

Alison

Total

Non-Registered Assets

Chequing/savings account

$ 1,100

$4,400

$ 5,500

Total Non-Registered Assets

$ 1,100

$4,400

$ 5,500

Registered Assets

TFSA

$0

$0

$0

RRSP

$0

$ 810

$ 810

Total Registered Assets

$0

$ 810

$ 810

Personal Assets

Home

$0

$0

$0

Personal effects

$35,000

$ 7,500

$42,500

Automobile

$0

$0

$0

Total Personal Assets

$35,000

$ 7,500

$42,500

TOTAL ASSETS

$36,100

$12,710

$48,810

Liabilities

Mortgage

$0

$0

$0

Credit cards

$ 5,500

$0

$ 5,500

Canada Student Loan

$ 5,952

$ 8,214

$14,166

TOTAL LIABILITIES

$11,452

$ 8,214

$19,666

NET WORTH

$24,648

$ 4,496

$29,144

QUESION: based on the information from the case study will alison reach her goal to retire at age 65 and generate an after-tax income during retirement from all sources that is equivalent to their (alison and dustin) current pre-tax earnings? SHOW YOUR CALCULATIONS