Purpose: Financial Planning in your Thirties?

Laura Smith, $32$ years old, is a lawyer in the office of the Attorney General Alberta. Her husband, Stephen Smith, $35$ years old, is a car salesperson. They adopted twins, Faith and Gaia, at age one, three years ago. They do not plan to have more children.

Laura earns $$97,000$ per annum $($p$.$a$.)$ with $$58,000$ of that being take$-$home pay. Her deductions provide full family health coverage $($medical$,$ drugs, dentist, optical$)$ with $$100$ deductible per family member each year. She has disability insurance for $70\%$ of her salary and three times her salary in life insurance. Her marginal tax rate is $40\%.$ She is good at her job, and well regarded by her superiors. She already works some long hours, staying late some nights and taking work home on weekends. To move up in the organization, she would have to work even more hours, and she refuses to sacrifice her family.

Stephen$$s commission income is quite variable, ranging from $$35,000$ to $$60,000$ in recent years. Last year he grossed $$60,000($p$.$a$.),$ with a take$-$home pay of $$42,000.$ He has no benefits. Unlike many commission salespersons, he has no significant expenses that are not covered by the dealership. He expects he will make $$55,000$ to $$60,000$ next year. His job is fairly secure as long as the dealership doesn$$t fail. The owners of the dealership are fairly conservative and he thinks they are in good financial shape. Stephen usually works one day on the weekends, and one or two evenings a week, but also takes one weekday off. His marginal tax rate varies, but was $30\%$ last year.

The house is in good repair, and is located in a nice neighborhood in Edmonton, two kilometers from the Government building where Laura works and four kilometers from Stephen$$s job. They just renewed the mortgage for five years fixed at $6\mathrm{.}10\%,$ with a $20-$year amortization. They spent $$4,000$ on taxes and utilities last year, and $$2,000$ on maintenance and insurance.

Other than the items already noted, they used cheques, and cash withdrawals from the chequing account to pay another $$17,000$ last year. Food was the biggest item, but they aren$$t sure what else was included.

They used several other credit cards for a total of $$25,000$ last year. This included clothing, household purchases, furniture, entertainment, life insurance and vacations. They take two or three holidays per year. Last year they spent one vacation in Hawaii $($without children$),$ one week at Whistler ski resort, and a week camping.Stephen has a $$100,000$ term life insurance policy. The securities are a portfolio of oil exploration companies $($listed on the TSX Venture Exchange$).$ They pay no dividends, but they increased in value by $20\%$ last year.

They want to retire around the time they turn $60.$ If Laura stays with the government, she will have a pension in today$$s dollars of $$45,000$ before$-$tax, including both her employer and Canada Pension Plan. Stephen will qualify for the maximum Canada Pension Plan.

They would like to maintain a similar lifestyle in retirement. They are concerned about the possibility that their pension plans will be reduced by government cut$-$backs or tax claw$-$backs. They have read that there is some risk that the government won$$t be able to pay full Canada Pension Plan in the future, because it hasn$$t been sufficiently funded, and the population of retirees is growing rapidly.

They also want to buy a vacation property in a few years, when their current debts are more manageable. They are thinking of something in the Foothills, in the $$250,000$ range. They might retire to it and sell the house in Edmonton, but its too far in the future to be more than an idea.

Laura and Stephen Smith

Balance Sheet December $31,$ Last Year

ASSETS Liabilities

Chequing account $$1,000$ Current Credit card balance $$4,000$

Car savings account $8,000$ Credit card debt at $21\%7,000$

Securities $6,000$ Car loan $15,000$

Two cars, original cost $60,000$ Mortgage on house $260,000$

House, current market $400,000$ EQUITY $189,000$

TOTAL ASSETS $$475,000$ TOTAL LIABILITIES & EQUITY $$475,000$

They have a housekeeper who does the cleaning, a bit of shopping and cooking, and looks after the children. Gaia and Faith will start half$-$day kindergarten next year. The housekeeper lives in a self$-$contained apartment with a separate entrance at the side of the house. Her salary and benefits cost $$20,000$ p$.$a$.$ On the housekeeper$$s tax form $($T$4$ slip$)$ they report a taxable benefit of $$500$ per month for the apartment she occupies. They expect to retain a housekeeper until the children are $12,$ and then switch to a cleaning service for $$150/$week$.$ They can$$t do without her now, because of their inflexible working hours.

They have a lot of trouble saving money. They bought the securities before the twins arrived. Their credit card de bt has increased in each of the last three years. They don$$t keep detailed account of their expenses, but they have sorted them out a bit by using different credit cards and the chequing account for different thPurpose: Financial P Purpose: Financial Planning in your Thirties?

Laura Smith, $32$ years old, is a lawyer in the office of the Attorney General Alberta. Her husband, Stephen Smith, $35$ years old, is a car salesperson. They adopted twins, Faith and Gaia, at age one, three years ago. They do not plan to have more children.

Laura earns $$97,000$ per annum $($p$.$a$.)$ with $$58,000$ of that being take$-$home pay. Her deductions provide full family health coverage $($medical$,$ drugs, dentist, optical$)$ with $$100$ deductible per family member each year. She has disability insurance for $70\%$ of her salary and three times her salary in life insurance. Her marginal tax rate is $40\%.$ She is good at her job, and well regarded by her superiors. She already works some long hours, staying late some nights and taking work home on weekends. To move up in the organization, she would have to work even more hours, and she refuses to sacrifice her family.

Stephen$$s commission income is quite variable, ranging from $$35,000$ to $$60,000$ in recent years. Last year he grossed $$60,000($p$.$a$.),$ with a take$-$home pay of $$42,000.$ He has no benefits. Unlike many commission salespersons, he has no significant expenses that are not covered by the dealership. He expects he will make $$55,000$ to $$60,000$ next year. His job is fairly secure as long as the dealership doesn$$t fail. The owners of the dealership are fairly conservative and he thinks they are in good financial shape. Stephen usually works one day on the weekends, and one or two evenings a week, but also takes one weekday off. His marginal tax rate varies, but was $30\%$ last year.

The house is in good repair, and is located in a nice neighborhood in Edmonton, two kilometers from the Government building where Laura works and four kilometers from Stephen$$s job. They just renewed the mortgage for five years fixed at $6\mathrm{.}10\%,$ with a $20-$year amortization. They spent $$4,000$ on taxes and utilities last year, and $$2,000$ on maintenance and insurance.

Other than the items already noted, they used cheques, and cash withdrawals from the chequing account to pay another $$17,000$ last year. Food was the biggest item, but they aren$$t sure what else was included.

They used several other credit cards for a total of $$25,000$ last year. This included clothing, household purchases, furniture, entertainment, life insurance and vacations. They take two or three holidays per year. Last year they spent one vacation in Hawaii $($without children$),$ one week at Whistler ski resort, and a week camping.

Stephen has a $$100,000$ term life insurance policy. The securities are a portfolio of oil exploration companies $($listed on the TSX Venture Exchange$).$ They pay no dividends, but they increased in value by $20\%$ last year.

They want to retire around the time they turn $60.$ If Laura stays with the government, she will have a pension in today$$s dollars of $$45,000$ before$-$tax, including both her employer and Canada Pension Plan. Stephen will qualify for the maximum Canada Pension Plan.

They would like to maintain a similar lifestyle in retirement. They are concerned about the possibility that their pension plans will be reduced by government cut$-$backs or tax claw$-$backs. They have read that there is some risk that the government won$$t be able to pay full Canada Pension Plan in the future, because it hasn$$t been sufficiently funded, and the population of retirees is growing rapidly.

They also want to buy a vacation property in a few years, when their current debts are more manageable. They are thinking of something in the Foothills, in the $$250,000$ range. They might retire to it and sell the house in Edmonton, but its too far in the future to be more than an idea.

Laura and Stephen Smith

Balance Sheet December $31,$ Last Year

ASSETS Liabilities

Chequing account $$1,000$ Current Credit card balance $$4,000$

Car savings account $8,000$ Credit card debt at $21\%7,000$

Securities $6,000$ Car loan $15,000$

Two cars, original cost $60,000$ Mortgage on house $260,000$

House, current market $400,000$ EQUITY $189,000$

TOTAL ASSETS $$475,000$ TOTAL LIABILITIES & EQUITY $$475,000$

They have a housekeeper who does the cleaning, a bit of shopping and cooking, and looks after the children. Gaia and Faith will start half$-$day kindergarten next year. The housekeeper lives in a self$-$contained apartment with a separate entrance at the side of the house. Her salary and benefits cost $$20,000$ p$.$a$.$ On the housekeeper$$s tax form $($T$4$ slip$)$ they report a taxable benefit of $$500$ per month for the apartment she occupies. They expect to retain a housekeeper until the children are $12,$ and then switch to a cleaning service for $$150/$week$.$ They can$$t do without her now, because of their inflexible working hours.

They have a lot of trouble saving money. They bought the securities before the twins arrived. Their credit card debt has increased in each of the last three years. They don$$t keep detailed account of their expenses, but they have sorted them out a bit by using different credit cars and the chequing account for different things.

The car loan has two years left, at $0\mathrm{.}75\%$ per month. The balance shown is the current amount owing. They spent $$8000$ last year on gas, maintenance, insurance and licenses for the cars, a;; charged on one credit card. Laura has a two year old van that will last for five more years. Stephen drives a old Cadillac loaded with all extras. He got it for only $$30,000$ becausehe works for a Gm dealer. He expects to replace it with another wone within two years. Their insuarnce covers $$1$ million liability and has $$50$ deductible for collision.

Question: Act as an advisor to Laura and Stephen

$1.$ Create a Net worth Statement and a Cash Flow Statements for the Smiths.

Evaluate current situation for the Smith's and provide recommendations

$2.$ Examine current investment portfolio and make recommendations

$3.$ Select approprate tax strategies and make recommendations