You just only need to answer 1 question only: Mary Spencer’s current financial situation
Microsoft Word - 9b12N012.docx S w 9B12N012 MARY SPENCER’S PERSONAL FINANCIAL PLAN Chuck Grace wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail
[email protected]. Copyright © 2012, Richard Ivey School of Business Foundation Version: 2012-07-31 Mary Spencer was putting the final touches to her personal financial plan before graduating from the Richard Ivey School of Business HBA program in the spring of 2012. In general, Mary was happy with her plan. Her goals, investment policy statement and financial budget all made perfect sense to her. Even so, she kept going back to one number — a 43 per cent tax rate! It didn’t seem fair that just when Spencer started to make some serious income, she would have to give 43 per cent of it to the government. During one of her courses, Spencer had spent some time learning about tax strategies available to Canadians. They all seemed to involve three and four letter acronyms — TSFA, RSP, RHOSP, etc.— but she wondered which ones would have the optimal impact on her tax situation. What combination of three or four would work best together? OVERVIEW This personal investment plan provides my general investment goals and objectives following graduation from the Richard Ivey School of Business in April 2012. The investment plan describes the strategies I will employ to meet my financial needs and achieve my personal goals in life. Personal Goals My personal goals include the following in no particular order: 1. Pay off student debt. 2. Rent an apartment. 3. Buy a car. 4. Get married. 5. Buy a home. 6. Have children. 7. Pay for the children’s education. 8. Buy a cottage home and boat. Page 2 9B12N012 9. Retirement. Short-term goals (age 22-30) − Pay off student debt. − Rent an apartment in downtown Vancouver, British Columbia, Canada. − Work at Lloyds International, a commercial real-estate company. − Purchase a vehicle. Medium-term goals (age 30-60) − Get married. − Buy a home. − Have three children. − Pay for children’s education. − Buy a cottage home and boat. Long-term goals (age 60+) − Semi-retirement. − Retirement. I ultimately would like to full-fill my deluxe retirement vision, which is: − Semi-retirement at age 60, full-retirement by age 65. − Large house or luxury condo. − Two high-end cars. − Regular exotic travel. − Fine dining. − Upscale golf or boating club membership. − Original art and high-end entertainment system. − Large gifts for kids, grandkids and charity. I expect: − My annual cost in retirement will be $110,000 +. − I will need to have saved $2,500,000 + by my 65th birthday. − I expect to live until I am 86 years old. Personal Situation At the end of April, 2011, I will be finishing my undergraduate degree from the Richard Ivey School of Business at the University of Western Ontario. I will be living without any dependents. Although I don’t currently have a job, I do expect to be working by September 2012. Current Health I consider myself to be above average in health. I do realize I am putting my body under pressure with the university lifestyle of high stress and lack of sleep. I expect to continue this trend into the foreseeable future and this could lead to increased medical costs. Furthermore, I have played rugby for the majority of my high school and university years. This has already taken its toll on my body and I expect to undergo surgeries and physiotherapy treatments as I age. Page 3 9B12N012 Life Expectancy I expect my lifespan to be 86 years of age. Current Net Worth I currently have $37,000 of student debt. My parents intend to pay for my first degree. They planned for me to take on student debt because it’s cheaper to take out a student loan compared to borrowing money from a bank. I plan to graduate with $0 of student debt. I have $2,751.61 invested in a Tax Free Savings Account (TFSA), which I opened through ABC Management. Overall, by the time I graduate, I expect my net worth to be $2751.61. Investment Knowledge and sophistication I consider myself to be an average investor. I have taken several classes at business school about investing and portfolio management. I plan on furthering my investment knowledge by taking the Canadian Securities course during the summer of 2012. I will also try to keep up with the markets by reading the financial sector in the newspaper. I have already opened a chequing and savings account with the Bank of Montreal. I have also opened a Tax Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) though ABC Management. Both of my parents have been investing with ABC Management for several years and are happy with the company. As mentioned before, I currently have $2751.61 investment through my TFSA and $0 allocated towards my RRSP. The amount in my TFSA is currently invested in several Canadian stocks on the Toronto Stock Exchange (TSX). I started to invest on my own simply for the learning experience. I have found it to be a very valuable experience so far as I discover the realities of investing and experiencing, hands-on, market volatility and the risks associated with investing my real money. My Risk Profile After completing several online risk profile assessments, my investment profile indicates I am currently classified as an “advanced investor.” I find this profile to be congruent with my current investment goal, of capital growth and wealth appreciation. However, this is a short-term strategy. My risk profile will change over the course of my life to meet my various goals. I plan to have my risk continually lowered, as I grow older. Risk Profile: Short Term: Advanced Investor (age 22-30) ‐ 80% Equity/20% Fixed Income Medium Term: Growth Investor (age 30-40) ‐ 70% Equity/30% Fixed Income Balanced Investor (age 40-50) ‐ 60% Equity/40% Fixed Income Moderate Investor (age 50-60) ‐ 45% Equity/55% Fixed Income Page 4 9B12N012 Long Term: Conservative Investor (age 60-70) ‐ 20% Equity/80% Fixed Income Preservative Investor (age 70+) ‐ 100% Fixed income Summary of Risk Profile: Advanced: I can tolerate volatility and significant fluctuations in the value of my investment because I realize that historically, equities perform better than other types of investments. I’m looking for long-term capital growth and am less concerned with shorter-term volatility. Growth: I can tolerate relatively high volatility. I realize over time, equity markets usually outperform other investments. However, I’m not comfortable having all my investments in equities. I’m looking for long-term capital growth with some income. Balanced: I’m looking for long-term capital growth and a stream of regular income. I’m seeking relatively stable returns, but will accept some volatility. I understand that I can’t achieve capital growth without some element of risk. Moderate: I seek a regular flow of income and stability, while generating some capital growth over time. My tolerance for volatility is moderate and my primary goal is capital preservation with some income. Conservative/Preservative: This is the lowest risk profile. I have a need for a predictable flow of income and have a relatively short investment horizon. My tolerance for volatility is low and my primary goal is capital preservation. Asset Allocation The creation of a portfolio, or an asset allocation approach, allows me to diversify and reduce risk to a suitable level. As an aggressive investor to start, I will have a higher amount invested in equities as they are riskier in nature and will yield higher returns in the long run. I am comfortable taking on high risk in the equity markets at an early age because it is clear that equities over the long term have performed tremendously well. Even though there have been many dips and recessions, such as the experiences of 2008, in time there has been a market correction and overall markets have grown. Given my long time horizon, I am comfortable riding out market slumps. Investment Policy Statements Please refer to Exhibits 5, 6 and 7 for my Investment Policy Statements. Page 5 9B12N012 INVESTMENT GUIDELINE Debt Before I start investing, I want to be completely debt free. I will begin debt free thanks to my parents, however, if I do accumulate debt I will want to pay off my highest interest rate debt first before investing. Lingering debt will only accumulate and become a burden later in life if it is not addressed early. Invest Early Every dollar I save now is worth more