Reference no: EM133189135

Client Scenario: Damon and Karen Friesen

Karen's (48) Manager of Straight Line Construction-Ste. Anne, Manitoba ($78,000 per year) 

Damon's (45) Assistant Controller at Straight Line Construction ($43,000 per year)

Assets: 2011 Toyota Camry; $22,000, loan $15,000 @8%, payment $400 monthly until next January 15th

Home: $250,000 (Ste. Anne MB) mortgage outstanding: $125,000, 5% interest $821.41 monthly, with no life insurance coverage

Bank Accounts Chequing $4,800, Savings $8,000

Investments: Karen: $115,000 in short term GIC RRSP's Steinbach CU (Ave 2%)

Damon $40,000 RRSP's: CIBC Precious Metals Fund (Ave 1%), Karen: nonregistered: $120,000 - from Autopac settlement (Sun Life Income fund (high MER, Net return 2.75%) (All returns are over last 5 years)

Family: Karen's twin daughters, Megan and Melissa, age 16

• Karen and Damon are relatively new clients, and you recently met with them to discuss their financial situation. Karen and Damon live in Ste. Anne, Manitoba. They met 12 years ago, when Karen was "on her own" with the young twins, after going through a messy divorce with the girls' father. While he paid support for the twins in the beginning, he refused to pay support once Karen remarried. Damon and Karen have been married 10 years. Lately, however, their cash flow has improved and soon all debts will be paid off, except for their mortgage, which they hope to pay off before retirement. They estimate their after-tax income is approximately $6,000 per month, and their expenses total about $4,500 per month.
• Karen and Damon live close to Karen's parents, who provided invaluable support to Karen when her former spouse walked out on her when the twins were barely out of diapers. Now, it is Karen who is helping her parents, as her father(70) suffered a heart attack last year, and her mother's (68) mobility has gotten worse since her arthritis has advanced quickly in the last two years. Karen's dad has a small pension, and since he is taking multiple medications, they find cash flow somewhat restricted. Karen's mother never worked outside the home, so has no pension other than government pensions. Karen and Damon want to provide assistance to her parents, and have just had plans drawn to add a 600 square foot addition to their home to incorporate a separate suite for her parents. They know that eventually her parents will need a nursing home but for the foreseeable future they want them close to their family. They expect these home improvements will cost approximately $80,000, and they are uncertain if they should borrow, or use some of Karen's non registered funds that she received from an Autopac settlement for injuries she suffered from a car accident she had five years ago.
• Damon and Karen love living in a small town, and supporting their church, as well as the Heart and Stroke Foundation, is an important aspect of their lives. They hope that in the future, they may be able to provide more financial support for these worthy causes.
• Retirement Lifestyle: Karen and Damon hope to retire together when Karen is 63 and plan to live a modest lifestyle, doing volunteer work, spending time with children and grandchildren. During retirement, they plan to travel extensively, do mission work in Paraguay for 2 years and volunteer at an orphanage in Tibet for at least 6 months. Once they are unable to travel as much, they will continue to make large charitable donations to causes that are important to them.
• Retirement Income: They would like to have an annual income of $90,000 with Karen eligible to receive $31,000 annually in defined benefit pension at age 63, and Damon will receive $19,000 at age 60. As money was "tight" in their early years together, they were not able to contribute fully to their RRSP's, so Karen and Damon have unused RRSP contribution room of $30,000 and $32,000, respectively. They are each currently contributing $200 per month to their individual RRSP's. Once retired, Karen expects to be eligible for close the maximum CPP benefits, which combined with her Old Age Security (OAS) will total $1800 per month at age 65. Damon expects to receive a total of $1200 per month; OAS and CPP combined at age 65 . They consider only about one half of Karen's non-registered funds as retirement assets, as they plan to use the remainder for future car purchases for the girls. They ask you to plan for 25 years of retirement.

They would rather NOT reduce their retirement income they have identified and it is a VERY high priority to retire at the ages they have indicated. They are hoping you can help them so they do not have to "settle" for less than their expectations.

• Additional Investment Information: Damon's Precious Metals fund has not performed well since he has owned it, but it has rebounded over the last few months. It has a high MER and has had an average rate of return of 1% over the last 5 years. While Damon and Karen have moderate investment knowledge from their university educations, the girls and Karen's parents take up a lot of time and they have little time to monitor their investments.
• Karen and Damon currently set aside $200 per month for the girls' education, and currently have a total of $14,000 in the TD Asia Growth mutual fund for the girls, which has been losing money the last few years (Current Rate of return 1.1%). Megan plans to train as a Physiotherapist, while Melissa would like to become a Chartered Professional Accountant. Both programs are available at the local university, so they can live at home to keep costs down. Karen hopes to be able to help the girls (who plan to work at summer jobs while in university) with their tuition expenses, which they expect to be $5,000 per child per year for 5 years. They wonder if their current rate of savings will allow them to pay the tuition expenses. The girls will start university at 18 years old.
• Damon's best man from their wedding was killed last year in a work related accident, and his widow is currently struggling to juggle expenses for herself and their three children, while dealing with the emotional issues that face her family. After seeing her struggles, Karen and Damon are concerned that they may not be adequately covered, as Karen has $50,000 in a whole life policy, as well as $150,000 in her group policy through work, and Damon has $86,000 through his work group life insurance. Both Karen and Damon have disability insurance and group medical insurance through their group policy at work. Damon does not have a will, and Karen's has not been updated since her divorce, and this has been "one of those things" that their busy lives has not allowed time for, but they know is important.

Although Damon & Karen want advice on retirement consider the key areas of Financial Planning.

Retirement

Investments

Cash Flow

Estate Planning

Insurance

Taxation.

1. Assess the six areas to determine how they are doing.  Give your assessment and why.
2. Do you have enough information to create a retirement plan?  Use CONQUEST if you can.   If you can't then project using your calculator.
3. What about the kids Education?  Will there be enough money to meet their goals?
4. Prioritize their/your action plan and how to roll it out.

Just need some advice on how to tackle these questions.