You have been approached by Ryan and Michelle Irving, to review their financial situation. The couple is

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Question:

You have been approached by Ryan and Michelle Irving, to review their financial situation. The couple is concerned about their financial future as they are having difficulty making ends meet each month. The following summaries are based on your recent meeting with the Irving's and the questionnaire they completed.

Personal Information
Ryan is 43 years old. He suffered a heart attack three years ago and must follow a rigorous exercise program as well as take medication. He is able to work. Michelle is 35 and is in excellent health. They have a four-year old daughter, Becky, who attends junior kindergarten. Michelle's mom takes care of Becky after school until they get home from work.

Employment

Ryan is employed in the planning department of a real estate development company, which he joined a decade ago. Ryan's base salary is $40,000 per year. He hopes the company will pay a bonus of 5% of his base salary before year-end; however, it is not guaranteed. His income has not changed in the last three years and he has gotten the bonus in each of those years.

Michelle is employed as a secretary at a local school. She earns $26,500 annually.

Ryan's employer provides basic dental, drug and supplementary health insurance coverage. He has $80,000 of term life insurance under the group policy. He also has short- and long-term disability coverage under the group plan. The amount insured is 60% of his base salary. The company offers a group RRSP plan. The company matches the employees' contributions up to a maximum of 9% of his salary based on the previous year's salary. Last year he contributed $3,600 to his Group RRSP.
Michelle's employer also provides basic dental, drug and supplementary health insurance coverage. She has $53,000 of term life insurance under a group policy. She also has short- and long-term disability coverage under her plan. The amount insured is 65% of her base salary.
Michelle joined her employer's pension plan 11 years ago at age 24, two years after she started her employment. The plan is a contributory best-earnings defined benefit plan with a contribution rate of 7%. The normal retirement age allotted for the plan is 65. The plan provides for early retirement with an unreduced pension in the 10 years prior to the normal retirement age based on a qualifying factor of 85. A factor of 2% is used to calculate the annual pension benefit. Michelle has received a
salary increase each year and her average salary over the most recent 5 years (her best 5 years) using the current year and previous 4 years is $25,000. Her pension plan benefits are not indexed to inflation.
Financial Position
The Irving's major asset is their home, purchased almost five-years ago for $225,000, which is now valued at $250,000. They had saved $50,000 for the down payment and borrowed an additional $15,000 from Ryan's RRSP under the Home Buyer's Plan. They took out a $160,000 five-year mortgage at a 5%, compounded semi-annually and amortized over 25 years. Their mortgage payments are $931 per month. They also have mortgage life insurance on this loan that costs them $60 per month.
The Irving's property taxes are $208 per month. Heating costs are $125 per month on average. Their water, electricity and telephone bill average a total of $175 per month.
The Irving's lease a car for $288 per month, including applicable taxes. The lease expires in 2 years. They pay $125 per month for their car insurance and it costs them $200 per month to operate the vehicle.
In addition, the Irving's owe $3,000 in total on several credit cards. The interest charged on these cards is 18%. They pay $300 per month towards this debt.
Their largest expense each month is their income taxes, CPP and EI. Ryan's employer withholds $689 per month and Michelle's withholds $325 per month.
They also have additional monthly expenses, which include their home insurance of $100, food of $600, clothing of $200, personal care of $100 and entertainment/ vacations of $500.
Other Assets
They have $1,978 in a joint chequing account and the contents of their home including furniture, electronics and clothing are worth $25,000.
RRSPs
Ryan has invested his Group RRSP contributions into a balance portfolio of mutual funds. The value of his plan is $76,000. Michelle is named as his beneficiary on the plan. With his health history, Ryan is very concerned about protecting the value of his RRSP assets. At the same time, he says he would be dissatisfied with a long-term rate of return of less than 6%. He anticipates that interest rates will be level for the next several years.
It is apparent from your discussions with the couple that they both have growth as their long-term objective.

Ryan had unused RRSP contribution room from years prior to joining his group RRSP. He used this room to contribute $4,000 to a spousal RRSP for Michelle. He put a $1,000 in the spousal RRSP last year when he received his bonus. The balance of Michelle's spousal RRSP account is $6,011. Ryan has $6,000 of unused RRSP contribution room and Michelle has $8,000.

TFSA
The Irving's do not really understand what a TFSA is and as a result, they have avoided investing in them.
Retirement
Ryan and Michelle would like to retire in 20 years; they think that they will need a total joint income of $40,000 each year after tax. They ask you if that will be sufficient. They say that they would like to maintain their same standard of living in retirement, but they would like to be able to travel a little more each year and they estimate that this travel will cost them an additional $5,000. They also would like to become members at a local golf course, which they anticipate will cost them $12,000 per year.
Ryan and Michelle are skeptical that the OAS and CPP will be available in 20 years when they retire. They want to ensure that they can fund their retirement without the help of OAS and CPP.
Children
The Irving's have told you that they would like to start saving for their daughter's education as soon as possible because they are worried about the cost. They would like to contribute $200 per month towards Becky's education.
Other Assumptions
Inflation is 2%
Rate of return on their registered assets is 6%, compounded annually (as desired)
They were born in Canada and have always lived here
Maximum CPP benefit $1000 per month
Maximum OAS benefit $500 per month
They do not plan on taking their CPP and OAS until age 65
Life Expectancy is 90 years old for both Ryan and Michelle
MTR in retirement for both is 22%
Note: You may need to make other assumptions. Please make sure that these are all stated in your work. So, this is your task:
1) Prepare the Irving's current net worth statement as at April 3, 2019. Make sure that your statement has separate columns for Ryan and Michelle and then a 3^rd 'Total' column. (5 marks)
2) Prepare the Irving's current cash flow statement - same instructions as in Q. 1 above for income calculations. Calculate both monthly and annual amounts.
3) Look at the Irving's current cash flow and evaluate what will change in retirement. Prepare their retirement cash flow statement. Will their estimated income for retirement be sufficient? (Caution: Think about what items will cease versus what new items may be required.)
4) Based on your answer in Question 3, determine what the Irving's will need to have saved by the time they retire in 20 years.
5) Determine the value (at retirement) of all income sources that this couple will have available to them.
6) Will Ryan and Michelle have enough money at retirement to retire and maintain their current standard of living?
7) What recommendations would you give to Michelle and Ryan? Provide one benefit and drawback to each recommendation.
Bonus: If they were to factor in CPP and OAS would they have enough money to retire?