Create a mutual fund investment plan for Roger MacMillan based on his cash flow surplus and available investments (Cash flow Analysis and Financial Profile provided).
This plan should be typed and include a cover page, engagement letter (assume you are mutual fund licensed and prepare a letter that explains the services you will be providing and how you will get paid for your services (fees and/or commissions), an introduction (providing a brief overview of what the investment plan will entail), analysis and recommendations section (address each objective in the order below by analyzing what the client wants to achieve followed by specific mutual fund recommendations within the context of his financial profile), conclusion (this will summarize the investment plan and prepare the client for the next step of implementation).
Make sure that your analysis and recommendations are consistent with Robert’s objectives and investor profile based on the “Know your client” suitability requirements.
Part 1: Wealth accumulation age 30 to 69
Investment Growth Objectives:
i. Robert recently sold a rental property and he received $50,000 net after taxes and real estate commission. He wants to invest the proceeds in a safe, liquid account with the goal of generating some interest income until he decides what to do with the funds (likely within 6 months). Recommend a specific mutual fund for this objective and explain why the fund is suitable. (3 marks)
ii. He wants to invest $500 per month into his RRSP. He hopes to defer withdrawing on these funds until his age 70. If he earns 7% annual compound returns in this plan what will the future value be at his age 70? Recommend a specific mutual fund(s) for this objective and explain the reasons for your recommendation. (3 marks)
iii. Robert also wants to set up a non-registered account for an “around the world” holiday in five years time. He wants to have $30,000 saved for this adventure and he expects to earn annual compound returns of 5% per year on this investment. What is the monthly amount he needs to set aside in order to achieve this goal? Also recommend a specific mutual fund for this objective and explain the reasons for this recommendation. (3 marks)
iv. He would also like to take advantage of a tax free savings account (TFSA) and he wants to know how to invest on a monthly basis to maximize the annual amount? What type of mutual fund will provide the greatest tax savings? Recommend a specific fund and explain the reasons for your recommendation. ( 3 marks)
v. Robert may want to take advantage of the lifelong learning plan at some point to go back to school for a graduate degree. What is the maximum amount he can withdraw from his RRSP with this plan and how do these funds get repaid? (3 marks)
Part II: Retirement and income generation age 70 to death
Retirement income objectives:
i. If Robert retires at age 70, how much will he have saved for retirement inside both his RRSP and RPP? Assume he stops working at age 65 but continues to add to his RRSP until his age 69 through funds generated from part time work as a consultant. His monthly contribution at this time will decline from $500 to $250 per month. ( 8 marks)
ii. How much gross income could Robert expect from his RRSP and RPP if he starts taking an income at his age 70 and bases the withdrawal on a fixed period to his age 100? Assume that the funds are conservatively invested to earn 5% annual compound returns and the withdrawals will deplete his funds to zero at age 100. What would be an appropriate asset mix for this retirement portfolio and why? ( 4 marks)
iii. How much total gross annual retirement income would Robert receive at his age 70 if you include his RRSP and pension income based on the fixed period withdrawal indicated above and include his OAS (assume maximum at age 65) and CPP which he defers to age 70? You can assume he would have been eligible for the maximum amount of CPP at age 65. ( 4 marks)
iv. If Robert dies at age 85 what will be the value of his RRSP and pension plan assuming a fixed period withdrawal that started at his age 70? How much tax will his estate (designated beneficiary) need to pay on these lump sum amounts assuming a tax rate of 45%? He also invested in a non-registered account that has a deferred capital gain of $150,000 at his age 85. How much tax will be owed on this amount using the same tax rate above? (4 marks).
Be sure to include in your analysis and recommendations the following:
1. The specific mutual funds you are recommending (name and type of fund) and reasons to support the recommendation. Also include print out of these funds as an “appendix” at the back of the investment plan. You can print the “fund facts” for the funds you are recommending.
2. How you plan to use these funds to satisfy the clients objectives (lump sum or monthly purchases, withdrawal schedule, etc).
3. Expected rates of return on these funds.
4. A summary of main types of risk the client will be exposed to using these funds. This must not be copied from the fund prospectus and must be in your own words.
5. What it will cost the client to invest in these mutual funds both directly and indirectly. These costs will be based on your fee and/or commission and also the MER of the fund. Be specific and provide a redemption schedule if selling funds on a DSC basis. The planner client engagement letter should reference these costs as they apply to mutual fund investments.
6. Clearly state any assumptions you have with respect to expected rates of return, the client’s income, RRSP contribution limits, etc.
Age: Robert is currently 30 years old
Income: $80,000 gross; $55,000 net after taxes
Risk Tolerance: He is currently a 6 on the 1-10 low to high risk scale and he considers himself a medium risk investor. Your assessment of his risk shows that he can tolerate a maximum decline of 20% in any given year and his primary investment objective is income and growth.
Occupation: Robert is a computer analyst at a large software company.
Investment Knowledge: Low as he has never taken an investment course or done much investing.
Registered Pension Plan: Robert belongs to a defined contribution pension plan where his employer contributes 5% of his gross income and Robert contributes 5% through monthly payroll deductions. Assume that this combined contribution amount remains the same until Robert stops working at his age 65.
Engagement Letter (clearly stating the fees you will be charging) 5
Analysis and recommendations relating to the case objectives 35
Overall format and presentation of the plan 5
Total Marks 50
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