Financial planning Case 2: Planning for wealth, retirement and the great beyond : After a distinguished career in financ

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Financial planning
Case 2: Planning for wealth, retirement and the greatbeyond :
After a distinguished career in finance you are fine-tuning yourportfolio and thinking about retirement. You plan to retire in 10years at the age of 65, and your plans are based on the followingcircumstances:
• Your after-tax family income is $120,000 per annum, annualliving expenses including mortgage repayments are currently$90,000. Your salary and expenses are expected to increase in linewith inflation;
• You have three adult children, aged 27, 26 and 19. Youryoungest daughter will complete university in three years, theothers have completed education and are employed;
• The market value of your home is $900,000; you expect itsvalue will only keep up with inflation. It is a three bedroom,three bathroom rancher in a desirable neighbourhood and it will notrequire substantial renovations for the next 30 years;
• The mortgage on your house (currently $120,000) will be paidoff in eight years, you have no other significant debt;
• Your youngest daughter will have a student loan of $80,000which you expect she will be able to repay from employment once shegraduates;
• 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 andyour spouse have $150,000 in unused RRSP contribution. This RRSP isin your name and is a self-administered RRSP funded by youremployer’s defined- contribution pension plan. Your employercontributes 12% of your salary to this plan, you contribute 6%;
• Your spouse has a defined benefit plan that will pay 24/80thsof final salary (currently $35,000, rising with inflation) from age65. Your spouse will also retire in 10 years;
• Your plans for retirement include part time charity work, anannual three week overseas holiday and purchasing a recreationalproperty in the Gulf Islands;
• Both you and your spouse are in good health and expect tooutlive forecasts of average mortality;
• You may make any reasonable assumptions necessary to completethis scenario.
You are required to provide the following:
Part 1: Managing your investment portfolio,transitioning from peak earning years to nearretirement:
You need to provide a plan for the next ten years leading up toretirement. This plan will need to:
➢ Consider the minimum level of funding that you need toretire;
➢ It must also specify the level of contributions needed and theexpected rates of return.
➢ In order to calculate this you will have to specify aportfolio of investments that balances risk and return. Asretirement gets closer you will probably have to rebalance thatportfolio; you will need to provide an annual breakdown of yourretirement portfolio’s estimated value, annual rate of return andrisk rating for the next ten years. You don’t have to specifyindividual stocks, bonds, savings instruments or other investments,but the class and type of investment should be specified;
Part 2. Budgeting for retirement: Income andexpenses:
Part of your retirement preparation will require a forecastbudget that incorporates your personal plans and forecastresources, as well some contingency for unforeseen events. You willneed to produce:
➢ Realistic estimates of income and expenses based on theinformation at the beginning of the case as well as any assumptionsthat you specify. Your forecast should include all sources ofincome including:
o CPP, OAP, etc.;
o Non-RRSP savings;
o RRSP contributionsconverted into some form of annuity: a RRIF is recommended;
o Income from property,etc.
➢ Be careful to fully explain the terms of any annuitiespurchased; ➢ Sources of funding like CPP, OAP should be clearlyexplained and documented.
➢ Tax calculations need not be exact, but they should berealistic. Don’t forget that pensioners pay income tax too; Explainwhy your strategy is tax efficient.
Part 3. Wills and succession planning – Planning for theend game
In the spirit of planning ahead, and preparing for the worst,you have decided to prepare a will. In preparation for this, youneed to identify the principal assets, responsibilities, mainclauses and considerations, executor and beneficiaries to the will.It is not necessary to produce the full text of the will, but youmust cover these issues and clearly explain your choices