ABC FINANCIAL CORP. Retirement Plan. sample. Prepared for: John and Rachel Smith Prepared by: Justin Stanfield, RRC 2/1/2016

Transcription

1 ABC FINANCIAL CORP. Retirement Plan sample Prepared for: John and Rachel Smith Prepared by: Justin Stanfield, RRC 2/1/2016

2 Dear John and Rachel Smith: Choosing to hire a professional to helping you realize your retirement goals can be a very difficult decision and we thank you for your decision to work with us. We hope to present you with a clear and concise plan on how to you meet your retirement goals and objectives. There are many factors to take into consideration when creating a retirement plan. Our job is to walk you through this lengthy process, consider all aspects of your lives, and construct a customized plan that will be most suitable for you and your family s financial goals. This retirement plan was prepared based upon the information you provided to us during our meeting in October Using that information as well as some basic assumptions, we have enclosed the following detailed retirement plan for your review. Financial, employment and lifestyle positions will change over time and for that we recommend meeting with you every year to review your current situation and update the plan accordingly. We appreciate the opportunity to assist you in meeting your retirement goals and objectives. Should you have any questions, please do not hesitate to contact me. Yours truly, Justin Stanfield, RRC 1 P age

3 Retirement Objectives: To summarize, the short and long term goals and objectives discussed during our initial meeting include: Paying off your automobile lease Paying off your VISA Balance Paying off mortgage on your house before retirement Saving for your children s education Securing your retirement by saving up enough money and maximizing your pension plans Protecting your family from any preventable unforeseen events Summary of Recommendations: Based on our cash flow analysis, you will have sufficient funds to pay of your automobile lease, VISA Balance and mortgage before retirement from your annual cash flow. There is a gap in life insurance coverage and starting in 2014, another policy should be purchased to close the gap. You will need to increase contributions to Mark and Virginia s RESPs to maximize the return and government grants. This will help you meet your education goal for the children. You will meet all of the goals listed above and will have more than enough money to live comfortably in retirement. We have determined that you are both a Balanced investor and should have a more diversified investment portfolio. You will have an excess amount of money each year starting in 2015 to put into balanced mutual funds. This will provide you with extra income upon retirement. You currently do not have Wills or Powers of Attorney. Therefore, we suggest that you have these documents professionally drafted to reflect your wishes. 2 P age

4 Current Statement of Financial Position Based on all the data provided you are off to a great start in building your financial assets. It is great to see that you are maintaining emergency savings, utilizing your TFSA and are planning for your children s education using the RESP program. Your total family net worth is approximately $370,000 and that number will continue to grow over time as your assets increase and liabilities decrease. 3 P age

5 Current Cash Flow Situation Based on your current statement of cash flows, it is clearly evident that you and your family are in an overall positive financial position and are able to enjoy life. You currently live a comfortable lifestyle and are able to contribute to your primary goals such as saving for your children s education and making sure you have money upon retirement. Your 2013 Statement of Cash Flow shows a negative $ balance however that will be corrected for 2014 and starting in 2015, Marianne s tuition costs will be gone resulting in a positive cash flow into retirement. Taking into account your family s financial health, there are no current lifestyle changes that we feel are necessary at this time. If the need ever arose in the future to cut back on expenses, we would recommend exploring less expensive child care for the children or shopping around for cheaper car and house insurance rates. We would be happy to recommend a licensed Ontario insurance agent for you if necessary. 4 P age

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7 Mortgage You have been living in your current house since It was originally purchased for $150,000 and you put 25% of that as a down payment ($37,500). Your mortgage amount of $112,500 was amortized over 25 years at a rate of 7% interest. Your current semi monthly payment on the mortgage is approximately $ and barring any unforeseen circumstances, you are estimated to have the mortgage paid off by June 30, P age

8 Car Lease In 2012, John signed a 3 year lease on his car. His current lease payments are $ per month and the lease is expected to be paid off on March 31, John is planning to buyout his car once the lease is through at a cost of $ P age

9 RRSP Contributions After reviewing your current RRSP contributions and contribution room, we recommend that Rachel continues to contribute $ per year to her RRSP s while John contributes his maximum allowable which is $ , both until retirement. 8 P age

10 Emergency Savings Your monthly expenditures are currently $ This means that your current emergency savings are enough to cover your family s expenses for 4 months and we feel that this amount is sufficient, for example in case of short term job loss or temporary illness. 9 P age

11 Disability Insurance John currently has disability insurance that will cover 66.66% of his salary should he not be able to work. Rachel does not currently have disability insurance through work however, we would recommend looking into purchasing some third party coverage in the event she was disabled or unable to work. There will be room in the budget for 2014 to accommodate this premium expenditure if you so choose. 10 P age

12 Life Insurance We have reviewed your current insurance policies and coverage and the following will include comments on existing coverage as well as other potential coverage you may want to consider purchasing. Available through and paid for by his employer, John currently has life insurance, short term disability, as well as extended health care benefit for the entire family. John pays $659 per year in long term disability insurance premiums and also has a $200,000 private life insurance policy which costs $420 per year. Rachel does not currently have group benefits available through her employer and currently has private life insurance coverage for $100,000 at a cost of $185 per year. After a thorough review, it has been determined that there is a gap in life insurance coverage that should be addressed. While you have done a good job of making sure there is some life insurance coverage available in the event of a sudden death, increasing that amount so that your family can enjoy the same standard of living would be recommended. It has been estimated that your family s current life insurance needs based upon the present value of your combined gross salaries for the next 16 years is $1,132, While that number may look daunting, your current insurance coverage is worth $486,000 bringing the shortfall to a more manageable $646, At the premium rates of your current life insurance contracts, the additional cost per year for coverage of the $646, shortfall is estimated to be $ P age

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14 Education Fund for Mark and Virginia As Mark and Virginia are three years apart, they will begin attending University at different times. The goal is to have $80,000 saved up through RESP s by the time Virginia is starting her final year of University in order to be able to finance all eight combined years of University tuition. This $80,000 figure is based upon an estimated cost of $10,000 needed per year per child for the 4 years of schooling Starting in 2014, you will begin maxing out your RESP contributions in order to take full advantage of the RESP grant from the government. This money will be available due to the fact that the VISA card will be paid off in early 2014 and the appliance and furniture amount for 2014 will be $1200 instead of the $6200 it was in The amount was $6200 due to the furnace replacement and if something similar comes up in future years, emergency savings can be used to offset those costs. 13 P age

15 Retirement Analysis Value of Income at Retirement Age Before tax rate of return: Retirement Planning Period During Retirement Inflation 1.50 % 1.50 % John k nominal, before tax 7.00 % 5.50 % John k real, before tax 5.42 % 3.94 % Rachel k nominal, before tax 4.50 % 3.00 % Rachel k real, before tax 2.96 % 1.48 % Current Year Retirement Start Date 20 years into retirement The next 17 years John age Rachel age * This retirement planning assumes that John lifespan ends at the age of 85 while Rachel s at 95 Present Value of all retirement income Type of Retirement Income Value at Retirement Date (65,58) Assumption RRSP John $ 193, Withdrawal begins at 65 RRSP Rachel 94, Withdrawal begins at 58 CPP John 166, CPP taken at the age of 65 CPP Rachel 132, CPP taken at the age 60, hence it is reduced income OAS John 46, Begins at 65 OAS Rachel 49, Begins at 65 GRRSP Rachel 209, DBPP John 131, Non indexed pension income DCPP John 541, Indexed pension income PV of all Retirement Income 1,564, P age

16 Calculations: RRSP John PV=30,400 n=16 i=7.00 PMT=3,720 FV=193, RRSP Rachel PV=18,400 n=16 i=4.50 PMT=2,520 FV=94, CPP John PMT=11,500 n=20 i=3.00 CPP Rachel PMT=0.64*11,500=7,360 n=30 i=3.00 PV=144, FV=144, i=3.00 n=2 PMT=0 OAS John PMT=3,200 n=20 i=3.00 OAS Rachel PMT=3,200 n=30 i=3.00 PV=62, PMT=0 n=7 i=3.00 FV=62, GRRSP Rachel PV=47,200 n=16 i=4.50 PMT=5040(12% of Salary) FV=209, Balanced Mutual Funds DBPP John PV=0 n=14, i=6.5% PMY=26000 PMT=10,400 n=20 i=5.50 FV=379, DCPP John PMT=13,020(14% of Salary) n=16 i= PV=72,500 FV=541, P age

17 Estimate of DCPP annual indexed income: 541, = PMT (PVIFA20, %) + 0.6PMT(PVIFA17, %)(PVIF20, %) (PVIFA20, %) n=20 i= PMT=1 FV=0 PV= (PVIFA17, %) n=17 i= PMT=1 FV=0 PV= (PVIF20, %) n=20 i= PMT=0 FV=1 PV= , = PMT* PMT*0.6* * , = PMT* , / = PMT 31, = PMT 16 P age

18 Estimate of John and Rachel s Retirement Spending Below is retirement budget for both the next 20 years and the next 17 years after John s death. Retirement Planning Budget Budget n John age Rachel age Revenue John RRSP John CPP *will not take CPP until age 65 John OAS John DCPP John DBPP Rachel RRSP Rachel CPP *will not take CPP until age 65 Rachel OAS Rachel GRRSP Total Shelter Hydro, Gas, etc. 3, , *Stays in the house after John s death House Insurance Property Tax 2, , Maintenance 1, , Total 7, , P age

19 Discretionary Appliances/Furniture 1, Total 1, Car Lease payments Insurance 2, Public transit , Rachel sells the car and takes taxi Gas/oil 1, Maintenance and Licence 1, Total 5, , Food Expenses 6, , Rachel will purchase less food Other Books, newspaper Clothes 4, , Computer misc Dogs and Cats 1, , Donations 1, , Entertainment 6, , When John dies, entertainment will be less Garden Spend less time on the garden Gifts 1, , Misc. Medical Expenses 6, , Dental, prescriptions, vitamins etc. Telephone, Internet 1, , Only one cellular phone required Total 23, , Total Cash Out 43, , Net Cash Flow P age

20 From the retirement budget we can estimate that for the first 20 years an approximate combined after tax amount of $43,900 will be needed to live comfortably with your expenses covered. In addition to that for the next 17 years after the assumed death of John, Rachel will only require $28,300 of after tax income. There will be a surplus of $ per year in the first 20 years of retirement and then a surplus of $ in Rachel s final 17 years of retirement. These surpluses can be used to offset any unexpected expenses each year. Average Tax Rate in Retirement First 20 Years of Retirement Next 17 Years of Retirement Taxable Income 58, , Federal Income 15 % on the first 39, , , % on the next 39, , % on the next 48, % over 127, Total federal tax 9, , NRTxCr 15 % of 10, , , Basic Federal Tax (BFT) 8, , Provincial Tax 8 % on the first 38, , , % on the next 38, , % over 76, Total provincial tax 5, , NRTxCr 8 % of 9, Basic Provincial Tax (BPT) 4, , Total Tax 13, , Net Income 44, , Average Tax Rate 19.07% 13.59% Total Combined Income 44, , P age

21 With the Present Value of your retirement income at age 65 (John) being $1,564,203.49, you should have more than enough money saved for a comfortable and fulfilling retirement. If John does pass away at age 85, Rachel will receive part of his DBPP and will also have enough to live comfortably as her expenses will decrease. With John and Rachel making $58,000 before tax in retirement, they will be able to income split that total in order to lower their tax bill in retirement. The goal will be to have each making $29,000 thus lowering their overall tax bill. 20 P age

22 Investment Planning After analyzing your current investments, we have decide to make three changes to your investment strategy that we feel will benefit you and your family s long term future. First, we will be focusing on moving 50% of available investible funds into T bills. We feel this strategy is a safe way to go in order to keep these investments relatively liquid in case of emergencies. While you will not receive the highest possible rate of return on the market, we feel the trade off in safety and security is well worth it. The second strategy will be investing 40% into fixed income products such as government and corporate bonds. This strategy will allow us to somewhat avoid global issues that may arise such as high inflation and currency swings. Again, the return will not be as high as it could be with riskier investments however with John being 16 years from retirement we would not want to risk losing all or part of his retirement savings for the sake of a few percentage point. We believe that this falls in line with John s revised expectations since the downturn in the economy in The third strategy will be putting 10% of investible funds into equities such as common and preferred shares of corporations. Betting on the stock market is a risky gamble no matter who you are and while the returns can be unlimited, so is the risk. Only investing 10% in equities provides a nice trade off between risk and return which we feel will benefit your portfolio in the long run. While we are financial advisors, we are not stock brokers. In order to put this investment strategy into place, we can recommend a trusted broker that many of our clients have used for years. 21 P age

23 Contingency Plans Certain contingency plans have been evaluated for possible best case and worst case scenarios leading up to and during retirement. A brief list has been compiled below: If one spouse loses his or her job, they will have to re evaluate their financial goals and cut back on discretionary spending such as food, wine, personal care and entertainment until they are gainfully employed. The emergency fund will help cover day to day expenses for at least 4 months while the job search is on, but any job loss stretching beyond that would require a change in discretionary spending and a change to this plan. In the unfortunate circumstance that either John or Rachel becomes disabled during their working life, disability coverage will alleviate the burden of income loss and should offset the gap in employment. We would recommend that Rachel explore adding private disability coverage for this very reason. If not then discretionary spending must be cut back. Similarly, if one spouse should perish, the increase in life insurance premiums should provide a sufficient benefit to the surviving spouse to retain his or her current lifestyle. If additional life insurance is not purchased, the other spouse would have to decrease their standard of living. In addition if John were to perish before Rachel, 60% of John s DBPP would go to Rachel for the remainder of her life also alleviating some financial burden. 22 P age

24 Action Plan: Action Target Date Rachel continue to contribute $ per year to her RRSP s. By March 1 st of each year John contribute his maximum RRSP allowable which is $ By March 1 st of each year Speak with an investment broker to align your investment By April 1 st, 2016 portfolio with your investor profile. Speak with an insurance professional to make changes to your By April 1 st, 2016 insurance coverage Speak with a Lawyer to have your Wills and Powers of Attorney professionally drafted to reflect your wishes. By April 1 st, P age

25 Appendix One: Statement of Financial Position for P age

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28 Appendix Two: Statement of Cash Flows for P age

29 Appendix Three: Current Tax Situation 28 P age