You have recently been awarded the CFP designation after having worked for Francesca as an assistant planner for four years. Francesca has decided you are ready to work independently and has given you your first assignment: John and Rachel Whitney.

 

Background Information

John Whitney (age 49) and his wife, Rachel (age 42), have been married for 14 years. They live in Waterloo, Ontario. This is John's second marriage and Rachel's first marriage. John's daughter, Marianne (age 20),is in her third year at university. John and Rachel have two children, Mark (age 11) and Virginia (age 8). The Whitney's come to see you in early January 2021 and provide you with the following information.

 

Employment Information

John has worked as a planner for the city of Waterloo for six years. His gross annual salary for 2020 was

$112,000, payable bi-weekly. John expects his salary to remain the same in real terms until retirement. He and his employer each contribute 7.0% of his salary each pay period to an indexed defined contribution pension plan (DCPP).

 

Rachel works as an administrative assistant for a small firm in Waterloo's twin city, Kitchener. Her gross annual salary for 2020 was $60,000, payable bi-weekly. She also expects her salary to remain unchanged in real terms until retirement. Her employer does provide a group RRSP (GRRSP). Each pay period, Rachel contributes 6.5% of her salary to the GRRSP and her employer matches her contribution to a maximum of 6.5% of her salary.

 

Tax-Free Savings Accounts (TFSAs)

The Whitney's deposit some of their excess funds in TFSA accounts. The funds are invested in a Balanced Mutual Fund, which is projected to earn an annual return of 4.0%. As of December 31, 2020, each of their TFSA accounts has a balance of $53,135. Furthermore, starting in 2022, they will each contribute $500 per month until they retire. They plan on using this money for retirement.

 

1. John's Registered Pension Plans (RPPs)
2. John belongs to 2 pension plans: a defined contribution pension plan (DCPP) with his current employer and a defined benefit plan (DBPP) with his former employer. The DCPP is valued at $72,500 and is invested in funds that, despite the recent market turmoil, are expected to return 6.0% per year, on average, when inflation is expected to be about 1.2% a year. John was a member of a DBPP with a former employer for 12 years. When he left the company and moved to his present employer, he elected to leave the funds with this previous employer and take a pension at retirement. He will receive non-indexed defined benefit pension income of $867per month beginning at age 65. If he dies before Rachel, Rachel will receive 60% of John's pension.
3.  
4. John's RRSP Investment Assets
5. John currently has $30,400 in his personals, which is invested in a Canadian equity fund. He has a pre- authorized purchase plan (PPP) and contributes the maximum possible each year based on his income. He makes his contribution on a monthly basis and, for the upcoming year, his total contribution will be $4,480. He is fairly knowledgeable about investing, and the score from his investor profile questionnaire categorizes him as an "aggressive growth" investor. Until the downturn in the market a few years ago, John was earning double-digit real returns. He has revised his expectations and now aims to earn an average of 6.0% per year instead.
6.  
7. Rachel's RRSP Investment Assets
8. Rachel considers herself a relatively conservative investor, and the score on her investor profile questionnaire categorizes her as an "income and moderate growth" investor. She has $47,200 in her group RRSP (GRRSP), which is invested in a Canadian dividend fund earning 3.5% a year. In addition, she has $18,400 in her personal RRSP, which also earns 3.5% a year. She also has a PPP and makes the maximum possible monthly contribution she can towards her personal RRSP. Her total contribution for the upcoming year will be $3,000.
9.  
10. According to their Revenue Canada Notices of Assessments received in May 2020, neither one has unused RRSP contribution room.
11.  
12. Additional Retirement Planning Information
13. Rachel and John hope to retire when John turns 65 and Rachel 58. They have read in the "Report on Business" in The Globe and Mail that financial advisors estimate a couple will need 60 to 70% of their current gross annual salaries during retirement to meet their retirement expenses on a before-tax basis.
14.  
15. Government Pensions
16. John expects to receive the maximum CPP retirement benefit at age 65. However, Rachel earns less than John, and worked part-time when the children were very young, and will collect the CPP at age 60. They estimate she will receive about 85% of the maximum amount anyone can collect at age 60 (i.e., she will collect 85% of 64% = 54.4% of the full amount at age 65). Rachel and John will each be eligible to receive an OAS pension. However, to be conservative, the couple only wants to include about $3,850 each for OAS benefits in their retirement plan.
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18. Other Retirement Planning Assumptions
19. The Whitney's estimate their tax rate in retirement to be about 30%.
20.  They expect inflation to be 1.2% p.a. for the entire planning period. Since John is a more aggressive investor than Rachel, before retirement, he expects his investments will earn 6.0% while Rachel expects to earn3.5%. During retirement, John will drop his expectations to 4.5% while Rachel's returns will drop to an estimated 2.5%. They intend to remain in their present home during retirement and hope to leave the house as an inheritance for their children. Rachel thinks she would probably move into a condominium if John dies first. As such, their monthly retirement income need while John and Rachel are both alive will be $5,750 after-tax. Rachel will only require $3,750 after-tax p.a. once John dies.
21. John has expressed concern about Rachel having enough to live on after he dies. His concerns based on several factors:
22. John is seven years older than Rachel.
23. Women's life expectancy is several years longer than men's.
24. John's grandparents died in their 70s. His parents, now in their late 70s, are not in good health. John thinks it is reasonable that he will not live past his 85^th birthday.
25. Rachel's grandparents died in their mid-80s. Her parents, now in their late 60s, are in excellent health and are very active. Rachel and John agree that they should plan on Rachel living to her 95th birthday.
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27. Assignment
28. This is Rachel and John's first look at a retirement plan. You have been asked by Francesca to determine whether or not John and Rachel Whitney will have saved enough to meet their retirement objective or do they need to revisit some of their assumptions and plans? If they do not have enough saved, make some recommendations on what they might do to reach their retirement objective.
29.  

Answer rating: 100% (QA)

After analyzing John and Rachels current financial situation it is apparent that they do not have enough saved to meet their retirement objective With ... View the full answer