Financial planning

Case 2: Planning for wealth, retirement and the great beyond :

After a distinguished career in finance you are fine-tuning your portfolio and thinking about retirement. You plan to retire in 10 years at the age of 65, and your plans are based on the following circumstances:

Your after-tax family income is $120,000 per annum, annual living expenses including mortgage repayments are currently $90,000. Your salary and expenses are expected to increase in line with inflation;

You have three adult children, aged 27, 26 and 19. Your youngest daughter will complete university in three years, the others have completed education and are employed;

The market value of your home is $900,000; you expect its value will only keep up with inflation. It is a three bedroom, three bathroom rancher in a desirable neighbourhood and it will not require substantial renovations for the next 30 years;

The mortgage on your house (currently $120,000) will be paid off in eight years, you have no other significant debt;

Your youngest daughter will have a student loan of $80,000 which you expect she will be able to repay from employment once she graduates;

The net value of all family non-real estate investments is $1.2 million. Of this, $650,000 is invested in an RRSP and you and your spouse have $150,000 in unused RRSP contribution. This RRSP is in your name and is a self-administered RRSP funded by your employers defined- contribution pension plan. Your employer contributes 12% of your salary to this plan, you contribute 6%;

Your spouse has a defined benefit plan that will pay 24/80ths of final salary (currently $35,000, rising with inflation) from age 65. Your spouse will also retire in 10 years;

Your plans for retirement include part time charity work, an annual three week overseas holiday and purchasing a recreational property in the Gulf Islands;

Both you and your spouse are in good health and expect to outlive forecasts of average mortality;

You may make any reasonable assumptions necessary to complete this scenario.

You are required to provide the following:

Part 1: Managing your investment portfolio, transitioning from peak earning years to near retirement:

You need to provide a plan for the next ten years leading up to retirement. This plan will need to:

Consider the minimum level of funding that you need to retire;

It must also specify the level of contributions needed and the expected rates of return.

In order to calculate this you will have to specify a portfolio of investments that balances risk and return. As retirement gets closer you will probably have to rebalance that portfolio; you will need to provide an annual breakdown of your retirement portfolios estimated value, annual rate of return and risk rating for the next ten years. You dont have to specify individual stocks, bonds, savings instruments or other investments, but the class and type of investment should be specified;

Part 2. Budgeting for retirement: Income and expenses:

Part of your retirement preparation will require a forecast budget that incorporates your personal plans and forecast resources, as well some contingency for unforeseen events. You will need to produce:

Realistic estimates of income and expenses based on the information at the beginning of the case as well as any assumptions that you specify. Your forecast should include all sources of income including:

o CPP, OAP, etc.;

o Non-RRSP savings;

o RRSP contributions converted into some form of annuity: a RRIF is recommended;

o Income from property, etc.

Be careful to fully explain the terms of any annuities purchased; Sources of funding like CPP, OAP should be clearly explained and documented.

Tax calculations need not be exact, but they should be realistic. Dont forget that pensioners pay income tax too; Explain why your strategy is tax efficient.

Part 3. Wills and succession planning Planning for the end game

In the spirit of planning ahead, and preparing for the worst, you have decided to prepare a will. In preparation for this, you need to identify the principal assets, responsibilities, main clauses and considerations, executor and beneficiaries to the will. It is not necessary to produce the full text of the will, but you must cover these issues and clearly explain your choices