Retirement-seggregated funds and annuities

Paul and Michelle are both healthy and debt-free. Paul is 50 years old and Michelle is 47. Michelle is a stay-at-home Mom who looks after 3 teenage children. Paul has worked as a marketing manager with Intact Insurance company for the past 10 years. Paul earns a good salary, about $120,000, and has received salary increases consistent with inflation, about 2%. He feels secure in his job and is confident that these raises will continue in the future. Paul is also a member of his employers defined benefit plan, and he can count on a retirement benefit of 1.25% of his salary for each year of service until retirement, or $26,400 annually. Michelle and Paul have worked hard over the years and would like to retire at age 65 to be able to finally have some free time to spend with their family and friends. Their analysis suggests they would need about $84,000 of their current income to maintain their lifestyle in retirement. They think that they may be able to count largely on Pauls pension income to provide them with the income they need for retirement. However, just in case, Paul opened an RRSP, where he has been saving 5% of his salary, and will continue to do so in the future. Due to the fact that he is the sole earner in the family, much of his income has gone to supporting his children and paying the mortgage, but, combined with savings made earlier in his life, he has nevertheless managed to accumulate a respectable $190,000. The RRSP account statements they have provided you indicate a long-term annualized portfolio return is 6.6%, and they wonder if they should be more aggressive with their investments in order to increase their returns. However, the couple is not very comfortable with investing and have difficulty withstanding the ups and downs of the stock market. They realize that they need to take some risk to grow their assets, but they are not very knowledgeable about investments and capital preservation is their greatest concern. Their current assets are invested in a combination of equities, fixed income and cash . The couple would like you to assess their situation to let them know if they are on the right track to meeting their retirement objectives, or if they should be considering changes.

Assume the following: The couples retirement will last until age 100 and they do not wish to leave any money to their beneficiaries when they die. Together, the couple will qualify for benefits already appearing in the QPP/CPP and OAS fields of the calculator at age 65. DO NOT ADJUST THEM. In your initial analysis of the couples situation, assume they will earn a 6% return on their investments during retirement and that inflation will remain at 3% indefinitely. Remember to limit the rounding of your calculation results to one decimal place.

Paul and Michelles Portfolio Holdings Value

High Yield Bonds $40,000

Guaranteed Investment Certificate (GIC) $9,500

Savings Account $9,500

Canadian Equity Blue Chip Fund $19,000

Treasury Bills $9,500

Canadian Equity - Growth $19,000

Investment Grade Bonds $30,000

Government Bonds $44,000

Guaranteed Funds $5,500

Cash $4,000

Total Portfolio: $190,000

Total Equity: $38,000

Total Fixed Income: $114,000

Total Short-Term $38,000

Historical Rates of Return Category Return (%)

Canadian Equity 9.6

U.S. Equity 11.4

International Equity 8.3

Fixed Income 6.3

Cash and Short-term investments 4.5

Questions

Describe your clients vision of retirement. (2 Points)

How would you describe their current financial situation? Why? (4 Points) Using the current data provided by your client and the retirement calculator, determine how much they will have accumulated by the time they retire. Are they currently on track to reach their retirement objectives? If not, when will they run out of money? Copy and paste an image of the calculator showing your calculations. (12 Points)

What is the investor profile suggested by the current data provided by your client? Why?(3 Points)

Make a new recommendation that will allow your clients to meet their retirement objective. Indicate, if applicable, the new asset allocation, expected return, savings perecentage and other assumptions. Be sure to show how your new expected return was calculated. (6 Points)

Copy and paste an image of the calculator showing your new recommendation. (12 Points)