Malcolm and Anna Crowe A Case Study in Retirement Planning

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1 Malcolm and Anna Crowe A Case Study in Retirement Planning Until recently Malcolm Crowe and his wife Anna never really thought about retirement but after turning 45 recently, Malcolm realized it was time to get serious about their financial future. The thought of retiring when Malcolm turns 60 appeals to them but they are not sure what needs to happen between now and then to successfully meet this goal. In the past they did most of their own financial planning which means they really don t have a plan. Malcolm was referred to you by a mutual friend and has asked you to help them plan for their retirement. Personal Information Malcolm and Anna live in Winnipeg, Manitoba with their one child. They have been married for 15 years and enjoy an active lifestyle. Their hobbies include sailing, camping and skiing in the winter. They are also kept busy with the activities of their child, Scott. Scott is on his high school basketball team and hopes to continue to play when he enters university in 4 years. The Crowes have saved a bit for Scott s education but are not sure how paying for his education will impact their own plans. Employment Information Malcolm has been the ad executive at the Sterling Cooper advertising firm for the last 10 years and has been part of the company s defined benefit pension plan since he started. His annual salary is $165,000 and has been keeping pace with inflation for the last few years. As a member of his company s pension plan, Malcolm receives annual updates that estimate his potential pension income. His last statement showed that at his normal retirement age of 65 he would be eligible to receive the equivalent of $48,000 today in pension income. Upon receiving this statement he inquired as to what his pension would be if he decided to retire earlier than 65. His pension administrator informed him that retiring at age 60 would reduce his pension income to $38,400 in today s dollars. His administrator also informed him that there would be a bridge of $7,500 a year from age 60 until 65 in this situation and all of his income is fully indexed to the Consumer Price Index (CPI). Anna returned to her chosen profession of teaching after Scott began school and has been a teacher at Lynnwood Elementary School for 10 years now. Her current salary is $35,000 but has been increasing at a rate of 4% and will continue to do so according to her union representative. However, as a member of a union she does have pay union dues of $500 a year. The school board that she works for has a defined contribution pension and Anna is a member of this plan. Her latest statement indicates that she currently has $16,000 in this account and contributions are made by her employer at a rate of 3% of her salary each month. 1

2 Financial Position The Crowes have been able to provide themselves with all the necessities of life and even managed to splurge on a few luxury items. They estimate that their annual expenses outside of their investment activities and mortgage payments are $80,000. Malcolm and Anna would like to keep this lifestyle in retirement but they are not sure if that is a reasonable expectation. Both Malcolm and Anna are committed to saving for retirement as long as they can maintain their current lifestyle however they find it hard to dedicate time to properly look after their finances. All of their current savings are going into their registered retirement savings plans (RRSPs) and TFSA s and they have both accumulated what they feel is a significant amount of assets. Malcolm started his RRSP account when he first started working but only in the last 10 years has he been able to make significant contributions. He is currently saving $500 each month into his RRSP and has accumulated a current balance of $105,500. Although he has been contributing consistently for the last decade he is still playing catch up and has available contribution room of $24,000 for the upcoming year. Anna s RRSP account balance is currently at $65,000 and she plans on continuing to make her monthly contributions of $200 while she is working. On her last notice of assessment from the CRA it indicated that she had room to make a contribution of $6,000 for the upcoming year. In addition to their registered accounts the Crowes have TFSA s worth $16,000 each, and a joint owned non-registered account that they set up when Malcolm received a small inheritance from his grandmother s estate. The current balance of this account is $50,000. The Crowes currently live in Winnipeg in a house that is worth $350,000. They have been able to build up some equity and currently have a mortgage of $125,500 which costs them $1,300 a month to service. Malcolm is not crazy about the idea of downsizing their house to maintain their desired lifestyle in retirement but would entertain this idea if totally necessary. Risk Profile Malcolm reviews their investments annually and often thinks the performance of their portfolios could be better. They tend not to make many changes to their portfolio year after year simply because they are unsure of what they should be investing in. While doing some research about investment performance on the internet Malcolm and Anna completed a risk profile questionnaire. The result of the questionnaire stated they were moderate investors that could handle investing in growth investments. This questionnaire did not provide any other suggestions and Malcolm is not sure what the results mean in regards to the current mix of their investments. 2

3 Goals and Objectives The Crowes have decided it is time to seek some professional advice about their current financial situation and to find out if they can attain their goals. Their number one goal is to maintain their current lifestyle throughout their retirement years and retire when Malcolm is 60 years of age if possible. If they are not on the right track then they would consider delaying retirement until 65 or downsizing their home if necessary. They have come to you with the financial information below and asked if you can create a financial plan that addresses their goals, solves any current problems that might exist and sets them on the right track to financial security. 3

4 Summary of Information and Additional Details Client Spouse First Name Malcolm Anna Last Name Crowe Crowe Date of Birth 11/06/67 09/02/69 Planned Retirement Age Address 19 Frost Street, Winnipeg, Man. Dependents Scott Dependent s Dates of 09/26/1998 Birth Risk Tolerance RRSP: Moderate Non-reg: Moderate RRSP: Moderate Non-reg: Moderate Lifestyle Needs $80,000 Now and into retirement until age 90. Employment Income $165,000 (Gross) $35,000 (Gross) Include OAS Yes Yes Include CPP Yes at age 60 Yes at age 60 % of Maximum 64% 50% Employment Expenses (Union Dues) N/A $500 (indexed) Non-registered: Joint Current Value ACB Cash $25,000 $25,000 Bonds: CDN $25,000 $20,000 Education Savings Current Value ACB Cash $15,000 $15,000 Education Savings $150 on the 31 st of each month for the next two years. RRSP: Malcolm Current Value Cash $30,000 Bonds: CDN $90,000 Equity: CDN $30,000 Unused Contribution $30,000 including the first year Room RRSP By $500 on the 31 st of each month Malcolm RRSP: Anna Current Value Cash $17,000 Bonds: CDN $51,000 4

5 Equity: CDN $17,000 Unused Contribution $18,000 including the first year Room RRSP By $200 on the 31 st of each month Anna TFSA: Malcolm Cash $16,000 $5000 per year until age 60 TFSA: Anna Cash $16,000 $5,000 per year until age 58 Defined Contribution Current Value Book Value Pension: Anna Cash $6,000 $6,000 Bonds: CDN $10,000 $10,000 Defined Benefit Pension: Malcolm $38,400 in today s dollars indexed at 100% of CPI (i.e. inflation) Principal Residence $350,000 Mortgage Balance 5% as of January 1, 2012 Mortgage Payment $1,300 Monthly Additional details Malcolm s pension benefit bridge is $7,500 from age 60 to 65. University tuition at the school Scott plans on attend is currently $6,000 a year. His parents want to factor in an addition $150 per month for his living expenses. 5