You have completed your first meeting with Harper and Riley Evans. You are confident that you now have most of the information you will need to prepare a comprehensive financial plan for them. Beyond what they shared in the meeting, they had emailed most of the documents you requested in advance of the meeting. Riley and Harper, both 38 years old, shared a lot about their 8-year-old daughter Drew. It is a clear priority of the Evans’ is to do whatever they can to provide Drew all the opportunities available. Drew attends a private school which is renowned for their swim program. Before classes start each day, she goes to swim practice. Drew loves swimming. She would like to participate in the provincial championships next year and her coach is confident that she could qualify. To continue to develop the skill competitively, Drew’s coach told Riley that he should expect to spend about $4,000 a year in swim fees. The Evans’ insist that this be budgeted for as part of their plan until Drew goes to university. Beyond swim expenses, the Evan’s pay school tuition in semi annual installments of $5,500 each. Harper receives the tax deduction for the tuition. As it comes from their bank account, Riley questions why Harper claims it. They have some savings for Drew’s post secondary education. A friend had told Riley he should buy some mutual funds in an "In-Trust" account and put it under Drew's Social Insurance Number (SIN). The income would be taxed in Drew’s hands. Riley set up the account and contributes $500 a month to a fixed income mutual fund. As of the last investment statement, the mutual fund was valued at $13,650. Riley chose a fixed income mutual fund as it seemed easy to set up and he was told it wasn’t as volatile as stocks. The return on the fund since inception has been 4.5%. The Evans expect Drew to go to a prestigious US university and wants to be able to have $25,000 US (or $31,000 CDN) in today's dollars to give to Drew for each of the expected four years she will attend university. Although inflation has been running in the 1.5 % to 2.5% range, Riley has heard that education costs have been escalating at about 4% and would like you to use that rate in calculating whether they are saving enough. Beyond providing for Drew, why the Evans came to see you was a $50,000 inheritance that Harper had just received from a great aunt's estate. Harper did not know that she was included in her aunt's will so was very surprised with this inheritance. They have asked you what alternatives are available for investment including the pros and cons of each alternative. Harper mentioned that she had heard that in Ontario, it is best to keep the funds separate because they would not be included in the net family property value calculation. She would like options for this inheritance where the funds would not be co-mingled with funds from Riley. During the one and a half hour meeting, you also found out that Riley is a national sales manager at a specialty electronics company. His annual salary is $91,000 plus a benefits package. The package (completely funded by the employer except the pension) includes group health coverage, group life insurance equal to two times his salary, dental coverage with an annual maximum of $1,000, 100% short- term (3-months) and 50% long-term disability insurance coverage of his salary and a pension plan. Neither of the Evans have any other life or disability insurance. They want their family to have the same lifestyle and standard of living in case of premature death of either of them. They have heard a friend talk about critical illness protection and wanted to know if Riley needs such protection. Riley and his employer contribute to a pension plan. Riley does not understand exactly how his pension plan works. The pension plan documentation does not state what his final pension will be even though he knows exactly how much he is contributing each year. Ultimately, he is not overly concerned since he doesn’t think he will work with the same company until he retires at age 62. Based on his industry, he expects to work with two more companies at least before retirement. He provided you with a copy of his most recent pension statement. He and his employer each contributed $1,000 to the plan annually into a balanced mutual fund selected by Riley. The fund has had an average rate of return of 5.5% (before fees and inflation). The current value of the vested benefits is $15,500. Harper wants to know what “vested” means. Harper is a Vice President of Marketing at a medium-size venture capital corporation. She hopes to retire at the same time as Riley. Her base annual salary is $84,000. She also receives an annual bonus that varies each year. The minimum annual bonus amount she expects is $14,000. She feels this would be a safe projection to use in the financial plan. She is registered as a spouse on Riley's benefit package at his work and she has no benefits at work other than a Group RRSP. She contributes $500 a month to the Group RRSP (invested in a short-term bond fund) which is matched by $250 from her employer. She only started contributing to the Group RRSP last month and it is currently worth $750. She had hesitated starting contributions to the plan because she does not understand the difference between her Group RRSP, Riley's pension plan, and the type of plan her sister has through her employer. Her sister Brittany has a Registered Pension Plan (RPP) to which only her employer contributes. Brittany will receive 2% for each year she works with her employer times the average of her final three year's salary. You make a mental note to include a discussion on the various options in the retirement planning section of the financial plan. From the Evans' tax returns, you note that they each paid the required Canada Pension Plan (CPP) premiums and Employment Insurance premiums. Riley paid approximately $27,000 in income taxes and Harper paid $37,000 in taxes. When Drew was born, they updated their wills with a lawyer. Harper thinks now it might be time to review their wills again and has asked you to provide a list of any special clauses that should be included in their wills. They do not have powers of attorney (POA) and the Evans do not seem to understand the importance of these documents. While talking about estate planning, Harper indicated that they are very active in their church, and she donates $3,000 annually to the causes the church supports. She would also like to bequest $100,000 to the church upon her death. She asked you for recommendations on how this can be accomplished. Riley and Harper feel it is safe to assume a life expectancy of 90 years old. When they do pass away, they believe that their estates will be sufficiently large enough to handle the bequest to the church and leave their cottage for Drew. They are not concerned about leaving any specific amount (except the cottage itself) to Drew on the assumption that she will be self-sufficient by then. The Evans have never analyzed their investments before. In the past, they have invested mainly with advice from friends. They have a mix of various investments. Riley bought $5,000 worth of gold mining stocks two years ago from a broker who called him at home one night. Riley is not sure of its value today. He believes it might be worth $2,000. Harper invested $8,000 in a money market mutual fund under a non-registered account that now has a market value of $8,350. In addition to the inheritance money in Harper's savings account, there is $22,000 in their joint bank account. Their joint investment account at the bank's discount brokerage has $87,000 in it comprised of $23,000 in money market mutual funds, $5,500 cash from non-invested distributions, $10,000 of a Latin American Mutual Fund (original cost $17,500), $40,000 CDN in a US Index Mutual Fund (original cost $28,000 CDN) and $8,500 of a (LSVCC) Labour Sponsored Venture Capital Corporation (original cost $8,500). Harper is wondering if they should sell these investments to pay down some of the mortgage. She is concerned about the tax consequences involved in this type of strategy. When Riley and Harper last visited their bank branch, they were encouraged to open a $20,000 unsecured personal line of credit (PLC) with an interest rate of prime + 4%. With prime rate at 4.5%, the current interest rate on the PLC is 8.5%. They were told that it was important for all homeowners to have a line of credit in case of emergencies. Riley has found it convenient to use the line of credit to purchase items when the credit card limit is reached. Riley stated that his credit card limit of $7,000 was fully utilized and he had used $2,500 of the line of credit. Harper simply shook her head and commented that they usually payoff only 10% of the outstanding balance on the credit cards and all the interest accrues on the line of credit each month. The Evans own a cottage that Riley inherited from his aunt. Riley estimates that the cottage is currently worth about $335,000 which is about what it was worth when he inherited it. He believes that due to the demand that aging baby boomers will put on recreation properties, the cottage will escalate in value at a rate of at least 12% per year. Both parents want Drew to inherit the cottage. Riley provided you these estimates of the cost of maintaining the cottage: Cottage Maintenance: Property taxes - $173/month Insurance - $550/year Utilities - $750/year Repairs & maintenance - $1,400/year Miscellaneous cottage expenses - $700/year Other expenses that Harper and Riley have include the following: Lifestyle Expenses: Food - $4,900/year Dry cleaning - $63/month Auto insurance - $1,900/year Typical line of credit payment - $75/month Gas - $183/month Auto repairs & maintenance - $63/month Cable TV - $45/month Property Taxes - $3,750/year Home Phone - $75/month Cell Phones - $125/month House repairs, maintenance & landscaping - $1,500/year Personal care - $160/month Entertainment - $325/month Gifts - $2000/year Typical credit card payment - $500/month Utilities (house) - $225/month Clothing - $5,000/year The Evans family like to take a vacation together once a year. Last year they went to China for two weeks. They feel it is a good way to carve out quality time together. They also like to do bigger trips as they chose not to travel for the first few years after Drew's birth. The average cost for the annual trips for the three of them is $11,000. Riley's marriage to Harper is his second one. He has 12-year-old twins boys with his first wife, Lily. Lily is the primary parent of the boys. Riley does have the boys every other weekend and during summer vacation. Riley pays $1,000 a month for child support ($500 per child). The support is to continue until they reach 22 years of age. Riley believes Lily's parents will be paying for their grandchildren’s post secondary education. Neither Riley or Harper believe they will receive any benefits in retirement such as CPP and OAS. Based on how the government is currently spending, they do not expect that any government social safety net will be left for them. They would prefer not having retirement benefits such as Canada Pension Plan (CPP) and Old Age Security (OAS) included in their retirement forecasts (but you convinced them that it is always a good idea to look at it both with and without such benefits). The cars the Evans own are always new since they trade the vehicles in every three or four years. They tend to trade them in as the new car warranty is about to expire which is typically at 100,000 km. The vehicle which Riley usually drives is a Range Rover sport utility truck which cost $75,000 two years ago and is now worth about $50,000 today. The second vehicle which Harper drives is a three-year-old Acura TL worth about $27,000 today. The outstanding loan on the truck at 5% is $22,000 and the loan on the Acura TL is $6,000 at 6%. The monthly loan payments on the truck are $800 and $500 on the car. Riley said that both the vehicles had collision and all perils coverage with $100 deductibles. If possible, he would like you to discuss strategies that may reduce their car insurance costs which he feels is high.

The Evans family is happy in their home that they purchased a little over two years ago. It is registered in both of their names. They estimate that the house is worth $650,000 now. The outstanding balance on their bank mortgage is approximately $200,000 with monthly payments of $1,187. (5.2%, 5-year term, 25-year amortization). The Evans are not sure that the mortgage rate on their current home is reasonable and are concerned what the mortgage rate will be upon renewal. They do not want to see their interest rate increase. Harper would prefer to see it decrease if possible. The bank also insisted they have mortgage insurance on the house before the mortgage received approval.They purchased the insurance but are unsure of what coverage they have and how much they are paying for it.

During the meeting, it seems that Harper is more risk averse than Riley. Harper appears to be moderate, or even conservative, in her willingness to seek risk. You know that you will have to conduct a risk profile analysis to determine if the Evans have the capacity for risk, regardless of their willingness. Riley believes they can earn an 8% return on their RRSPs and 6% on their non-RRSP investments. You believe a discussion concerning current returns is necessary given that the Evans’s expectations may be unrealistic. Despite that they likely have different risk profiles, Harper and Riley are similarly invested in their RRSPs. This is because they are usually in a hurry to purchase RRSPs before the contribution deadline. Not a lot of thought goes into choosing the investment. Currently their RRSP holdings are: RRSP – GICs - $8,000 (Riley), $4,500 (Harper) RRSP – Bond mutual Funds - $5,000 (Riley), $9,500 (Harper) When a friend of Riley’s asked if he and Harper “maximize” their RRSP contributions each year, Riley said yes. He is uncertain. He is not sure what is the maximum. Riley has asked that you explain to him how to calculate their annual maximum RRSP contribution limit, so he knows if he and Harper are “maximizing”. As it relates to planning assumptions, Harper and Riley agreed with your suggestion that any projections or calculations are based on a 2.1% inflation rate (as per the FP Canada 2022 Guidelines).

Question 1: The Evan’s mortgage is renewing in 12 months. The Evan’s agree that they could change their payment frequency to accelerated weekly. How many years it will take now to pay-off their mortgage. How much would they potentially save them in interest on the TERM of the mortgage? How would this impact their cash flow and amortization? (Note: You do not have to calculate EFFECTIVE weekly rate)