Ross and Rachel Swimmer have come to you to get their financial house in order. They've recently been discussing the state of their finances and their good friend Phoebe, your client, referred them to you. "We've got some decisions to make very soon", notes Rachel, "and Phoebe, suggested that you were just the person to help us sort them out."
After some brief conversation you begin to gather the information you're going to require. Ross is a 34 year-old Assistant Project Manager, working with a privately held company with relative stability. He has been with the same company for 4 years, since he received his MBA. He took two years off to complete the MBA program and is still paying off some of the debt from that; his income is $110,000, of which he contributes 2.5% to his pension plan. Reviewing Ross's pension booklet, you note that he has a defined contribution pension plan with a matching provision by the company. Ross's pension is currently worth $26,500; the asset allocation of the portfolio is 50% Equities and 50% Bonds. Ross has also opted for the maximum life insurance allowable through work at 2 times his salary. He currently has his estate as the beneficiary. His LTD coverage is 50% of his gross income and the STD is full coverage for 90 days.
Rachel is a 34-year-old financial analyst with a small brokerage firm, earning $68,000 annually after six years with the firm. She has the standard benefits package through work which includes disability insurance (benefits would equal 66% of net income), life insurance (1 times salary), a basic health policy and a non-contributory defined contribution pension plan which the company contributes 10% of her salary. Rachel has amassed $51,000 within the pension of which all her assets are invested in Bond funds. She is currently enrolled in the CFA program and plans to write the first exam in June 2017, unfortunately her company does not cover any of the cost's. However when she has completed the program she will receive a 15% increase in salary and will be eligible for the guaranteed 25% bonus structure of her new income. "I thought taking the first year would be good while I am on maternity", Rachel explains.
Ross and Rachel rent a condo downtown Toronto with their 2 year old daughter Monica, and Rachel has just given birth to twins Chandler and Julie. "I just started my maternity leave in June and will return to work June 2017, my company does not pay additional any maternity leave income" explains Rachel. Ross adds "we have purchased a new home in Aurora and will be taking possession December 1st. We thought it would be good for the family to live out side of the city; besides Aurora does not have the extra land transfer tax. We bought the house for $655,000 but should have sat down with you before we did this. We would like to keep our mortgage payments close to what our rent was but we are not sure of the how much to put as the down payment or interest rates. Hopefully you can help us with this before we close."
Rachel adds that she has inherited the family cottage when her parents were killed in a car accident. "The cottage is worth about $300,000 and I also inherited $150,000 in cash assets. The cottage and money which is in a dividend mutual fund are held in a testamentary trust and my uncle Joey is the trustee. My parents rented during their retirement so they could travel much easier. I receive 6% of the value of the dividend fund to help pay for the cottage and the trust will go to my children when they are 21. My uncle Joey would like you to mange the cash assets in the trust.
Aside from the house, cottage and their pensions, you see that Ross and Rachel have not amassed any other significant assets. "I've been paying off debt as quickly as I can", suggests Ross. "I have my 2015 Lincoln MKX which I just purchased in December 2015" notes Ross, and it's set for four years; Rachel adds "we also just purchased a Honda CRV in September 2016 and borrowed $30,000 from Honda finance for 60 month's at 2.9%. We have about $4,500 in our joint chequing account. "I've got $55,000 in ING from an inheritance from my grandmother last year", adds Rachel, "and $14,000 in a non-registered equity mutual fund. We were putting $200 a month into this account for five years but had to stop as our expenses were getting out of control. Ross also has $30,000 inherited from his uncle but was considering using some of it to pay off their $18,000 PLC at 8.25% built up from the MBA and the first baby. We are only paying interest on the line of credit" suggests Ross.
Their current monthly expenses are as such: Cottage expenses:
Food: $650 Property taxes: $250/month
Dining out: $300 Property insurance: $60/month
Rent: $2,050 Utilities: $135/month
Condo insurance: $40 Maintenance: $180/month
Utilities: $150
Cable: $60
Internet: $30
Cell phone: $150
Clothing: $350
Gifts: $240
Entertainment: $600
Car lease: $599
Gas: $200
Holidays: $500
Nanny: $1600 (June 1, 2008)
Property Taxes: ??
"Obviously, we need some help", exclaims Ross. "We want education to be a priority for our children, we currently have an RESP worth $4300 for Lindsey which we contribute $150 a month. I'm not sure of all the costs, but we would like you to help us with that. We really need help with the new home purchase and how to factor the new expenses with our current budget. Rachel interjects "I have $32,000 in my RRSP's and Ross has $40,000 in his. I was hoping we could build on these for our retirement as I don't think our pensions will be enough to retire.
"Ross and I have also been talking about getting our wills written" states Rachel. "We've been negligent up until now, but with Lindsey and now the twins, we need to get serious. "Finally," submits Ross, "we want to be able to retire comfortably by the time we're 60 living at least 6 to 9 months a year in Canada and traveling the rest, maybe even buying a property in southern Portugal - and we don't want to reduce our lifestyle at that time either! So, can you help us?"
The comprehensive Financial Plan is to be done in groups of 4 students. Specific recommendations must include the areas of Asset Management, Property Ownership, Taxation, Cash Flow, Retirement Planning, Risk Management and Estate Planning.
The written plan (maximum 15 pages, single-spaced, including appendix) is to be handed in to the Instructor at the beginning of the class specified in the course outline.
Research will be vital to a good plan!