1

General Instructions

Read the case below about Preston and Marisa Walters. You will be asked to answer questions about preparing parts of a financial plan for the couple. The financial plan touches on all components of their financial planning, and reflects a life-changing event.

Format

When developing a financial plan for Preston and Marisa Walters, follow the basic financial plan structure

shown below, which includes the following major components:

1. Review of Current Situation and Objectives

Family Demographics

Financial Goals

Overview of Current Finances

Investor Profile

Other Pertinent Financial Data

Potential Gaps

Advisors Value Proposition

2. Financial Management Analysis

3. Retirement Planning Analysis

4. Risk Planning/Management Analysis

5. Tax Planning Analysis

6. Asset Management Analysis

7. Estate Planning Analysis

8. Recommendations and Implementation Strategies

Summary of Recommendation

Next Steps

APPLIED FINANCIAL PLANNING CERTIFICATION EXAMINATION

Case Scenario: Preston and Marisa Walters

2

Case Scenario: Preston and Marisa Walters

Background Preston Walters is a long-time client of financial advisor Megan Chu. Preston calls Megan to inform her that he has just lost his job. Preston reports that the job loss was due to the company's financial difficulties. Several other people in different departments lost their jobs on that day as well.

Preston received a severance package and wants to discuss it with Megan. Megan asks Preston to fax the details of the package to her office so that she can review it before they meet. In the meantime, Megan tells Preston that she will go over the last financial plan they completed together. They agree to meet in two days. Before the meeting, Megan reviews Preston and Marisa's last financial plan to refresh her memory, and recalls the following information:

Preston is 54 years old. He has been married to Marisa for 25 years. They have one child, a 14-year-old boy named Dillon. Marisa is 54 years old and has not worked outside of the home since Dillon was born. Before Dillon was born, she was a salaried employee for over 20 years. Preston and Marisa are planning for Dillons university education. They would like to save some money for that purpose, but are wondering how much they should have in savings today to fund the cost of Dillons future education.

Marisas mother, Brenda, is 81 years old and lives with Preston and Marisa. Brenda is in early stages of Alzheimers disease. She can still function, but is beginning to forget things. Marisas father, Henry, died last year from heart disease at age 84. Brenda receives Henrys indexed pension of $25,000 per year. The pension increases by 1% per year. In addition, Brenda receives medical and dental benefits. Brenda sold the family home last year for $400,000. She invested the funds in a 4-year laddered GIC earning 3% in year 1, 3.50% in year 2, 4.00% in year 3 and 4.50% in year 4. Brenda has no other assets. Marisa is an only child and Brendas sole beneficiary. Marisa receives the maturing segments of the GIC with interest in full every year, as requested by Brenda, and reinvests them into a GIC at 5%, until retirement in six years.

Prestons parents, Jack and Gail, died in an automobile accident six months ago. There was no inheritance.

For the past eight years, Preston was a senior manager of a large technology firm. He earned a salary of $120,000 and last year received a year-end bonus of $30,000. His employer did not provide a company pension, but his benefits included medical and dental coverage (90% paid by the company) and life insurance equal to the full amount of his salary (100% paid by the company). Through Prestons company group plan, Marisa had a life insurance policy for $50,000 (premiums paid by Preston). Preston also received short- and long-term disability coverage (premiums paid by the company).

Preston and Marisa prepared their wills 14 years ago, when Dillon was born. They are executor for each other. In the event of both their deaths, Marisas parents were named contingent executors. The will leaves everything to each spouse. In the event that they both die, everything is left to Dillon, in trust. If they die after Dillon turns 18 years old, he will receive the proceeds of the estate.

3

Financial Details from Previous Financial Plan: Preston and Marisa Walters The following information is extracted from Preston and Marisas financial plan, completed two months prior to Prestons job loss. Details from Prestons recent severance package have been added to the plan.

Preston and Marisas Financial Goals

1. Save for university education for Dillon for 3 years, costing $15,000/year.

2. Pay off the mortgage within the next two years. The current balance is $20,000 and the interest rate is 2.5%.

3. Retire at age 60 with a net after tax income of $40,000 in todays dollars. At age 60, Preston will have been with the company for 25 years. He has also $100,000 in RRSP savings.

Last Years Statement of Net Worth

Assets Liabilities

Bank Account (jointly held) $33,800

Credit Cards (28% interest rate) $30,000

RRSP Preston (Cdn balanced fund, 5% before retirement) 100,000

Home (jointly held) 600,000 Closed Mortgage 20,000

U.S. Condo (jointly held) 100,000

Two New Cars 40,000

Total Assets $873,800 Total Liabilities $50,000

Total Net Worth $823,800

4

Last Years Monthly and Annual Cash Flow

$ / Month $ / Year Income

Prestons Salary 10,000 120,000

Prestons Bonus 2,500 30,000

Total Gross Income (A) 12,500 150,000

Less Source Deductions

Income Tax 5,750 69,000

CPP 177 2,119

EI Premiums 61 732

Group Insurance Premiums 20 240

Total Source Deductions (B) 6,008 72,091

Total Net Income (A B) 6,492 77,909

Expenses

Home

Mortgage 1,100 13,200

Property taxes 400 4,800

Utilities 600 7,200

Maintenance 400 4,800

Food 500 6,000

Vehicle Fuel, Maintenance, Insurance 400 4,800

Personal and Clothing 1,000 12,000

U.S. Condo Fees 300 3,600

Entertainment & Vacation 500 6,000

Credit Card Expense 700 8,400

Total Expenses (C) 5,900 70,800

Net Available for Savings 592 7,109

Savings, RESP -400 -4,800

Total Surplus Cash 192 2,309

5

Details of Prestons Severance Package 1. Preston's salary continuance of 18 months includes benefits, except short- and

long-term disability plans. Salary continuance stops if Preston finds a new job. If self-employed, Preston is allowed earnings up to $60,000. Otherwise, salary continuance will stop.

2. Salary and benefits stop after 18 months if Preston does not find a job.

3. All legal fees for Prestons dismissal will be paid by the firm.

4. Vacation accrual ceases immediately.

5. A lump sum bonus of $30,000 is payable immediately as one cash payment less applicable withholding taxes.

Meeting Between Preston and Megan Preston and his advisor Megan meet to discuss a financial plan. Their discussion covers the information detailed below.

Preston informs Megan that his wife, Marisa, has been diagnosed with cancer. It is too early for a prognosis, but Preston is worried about being able to afford medical bills if he cant find a job.

He has not yet met with a lawyer to review his severance package because he wanted to speak with Megan first. A co-worker has informed him that he was replaced by someone younger the day after he left. Although the job title was changed, the duties remained very similar.

Preston reveals that he is tired of corporate life and would like to try self-employment. He has been offered a number of contract opportunities and feels that he can earn $60,000 a year. He states that he would be willing to make some sacrifices. He asks Megan to revise the financial plan, and offer some advice on how feasible this new plan would be. Taking care of Marisa is Preston's first priority. Preston intends not to work during his severance period, and will consider self-employment thereafter.

Preston plans to rent out a U.S. condo he owns, which is valued at $100,000. He has been advised by a U.S. tax expert that he could earn a net rental income after taxes of $10,000 per year. The condo is expected to increase in value by 4% each year. Preston and Marisa intend to sell their home in six years, when they plan to retire, downsize and invest the difference. Preston feels that he can sell the house for $600,000, buy a $350,000 home and have $250,000 remaining to invest.

Megans immediate response is to encourage Preston to focus on Marisas health. She reminds him that he has health coverage for at least 18 months. Megan also advises Preston to see a lawyer immediately to ensure that his severance package is acceptable, particularly in light of the information his former colleague has shared.

Finally, Megan tells Preston that a discussion about self-employment is definitely warranted, but probably premature at this time, given more immediate health and legal issues.

Preston commits to seeking advice from an employment lawyer about his severance package as soon as possible.

6

Megan suggests that the next time they meet, they should discuss the following information:

The impact of Preston's job loss on cash flow, retirement plans and insurance needs

Appropriate tax planning to make the best use of the severance package

Pros and cons of self-employment, and the various types of business structures to consider

Preston confirms the next appointment. He tells Megan that he intends to attend the next appointment alone, even though Marisa has come to meetings in the past.

Assumptions As you prepare a financial plan for Preston and Marisa, following a job loss, carefully consider how you will articulate your advice, and remember the following assumptions:

1. Preston will save $10,000 per year for six years, using the most tax efficient methods.

2. The family tax rate is 46% before retirement and 25% after retirement.

3. Prestons RRSP room is over $100,000.

4. The inflation rate is a simple rate of 3%.

5. Use the conservative rate of return at retirement of 4%.

6. The rate of return on investments prior to retirement is a simple rate of 5%.

9. Source deductions for CPP are $2,119 annually.

10. Source deductions for EI are $732 annually.

11. Both Preston and Marisa are university educated, they were born in Canada and English is their first

language.

12. Assume that mortgage and credit cards balances have been paid off using Preston's bonus and funds from a savings account.