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FINANCIAL PLAN

Name

Instructor

Course

Date

Assumptions and key considerations

One of the assumptions in this financial plan is the inflation will remain steady over time.

Inflation is one of the factors that influence one’s investment and retirement corpus. A higher

inflation eats away one’s retirement corpus, thereby lowering their pension. In the last five years,

the highest inflation rate registered in Canada was 2.27% while the lowest was 0.62. Taking an

average of the two, it would be assumed that the average inflation rate would be about 1.5% for

the foreseeable future (Boisclair et al., 2017). Another assumption that will be made in this

financial plan is the rate of return. The average rate of return on long-term fixed-income

investment, for example, is 3%. It is assumed that the rate of turn on investments would remain

positive over time. Lastly, it is assumed in this financial plan that Greg and Ann would live for

35 more years (Swart, 2004). The average life expectancy in Canada is 80 for males and 84 for

females. With Ann 48 and Greg 45, it is assumed that Ann would live up to 83 and Greg 80

years.

One of the key considerations in this financial plan is the current situation of Greg and Ann. This

involves their strengths and weaknesses financially. This will help in using the strengths to
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address the weaknesses. Another consideration is the goals and objectives of Greg and Ann. How

saving or investment should be done depends on what Greg and Ann want to achieve (Boisclair

et al., 2017). Lastly, a key consideration is life expectancy. Both Greg and Ann are expected to

live for 35 more years. Any financial plan should take this in consideration.

Recommendations

One of the recommendations for Greg and Ann is to take up health and property insurance. This

will safeguard them against events that may cripple them financially. Greg and Ann should also

take up IPP. This will increase their retirement income, allowing them to maintain their lifestyle

in retirement (Bardaji and Boyer, 2019). On the other hand, they should save for their children’s

education. Lastly, on selling the business, they should use the share sale option as this will

significantly lower the tax paid on capital gains from the sale.

Financial analysis

Net worth

Item Value ($)

RRSP contributions 525,000
Joint investment account 5,920,000
Corporate account 1,787,408
A lot 400,000
Business 11,000,000
Liabilities 0
Net worth 19,632,408

Greg and Ann have a net worth of 19,632,408. This does not include the side project, with the

assumption being that it will not be patented. For the corporate account, the Canadian dollars
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have been converted to US dollars at the current rate (Van Rooij et al., 2012). However, if the

side project is successfully patented, Greg and Ann’s net worth would be 28,632,408.

Cash flow

By definition, cash flow is the movement of cash in and out of a business. Since it is Greg and

Ann, cash flow in this case involves movement of cash in and out of Greg and Ann’s accounts.

The first aspect of cash flow is revenue from the business. The revenue generated is $5 million

which is a cash inflow (Uppal, 2016). There are also salaries and dividends for Greg and Ann.

The only cash outflow is contributions to RRSP. The following table highlights the cash flow for

Greg and Ann.

Cash flow Amount

Cash inflow:
Revenue 5,000,000
Salaries (total) 225,000
Dividends 60,000
Total cash inflow 5,285,000
Cash outflow:
Contributions to RRSP 525,000
Net cash flow 4,760,000

Greg and Ann have a net cash inflow of 4.76 million annually. This is likely to increase with

increased revenue. However, in the actual net cash flow is probably lower than the calculated

considering that expenses in the business have not been taken into account (Van Rooij et al.,

2012). Normally, expenses take a significant amount of revenue collected. When they are taken

into account, net cash flow changes considerably. Still the net cash flow for Greg and Ann is

significant.

Strategies
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One of the strategies that Greg and Ann should employ, particularly with regard to investment

and saving, is diversification. Assuming that the investment account is solely for buying and

selling stock, bonds, or securities, Greg and Ann should diversify their investment portfolio in

order to manage risks while still focusing on their goals (Merton, 2007). For example, if

currently their investment is focused solely on bonds, then they should diversify to include stock,

exchange traded funds, and securities. In terms of the savings, Greg and Ann should diversify

beyond RRSP and invest in high-yield savings accounts such as money market accounts and tax-

advantaged accounts (Uppal, 2016). Diversification to high-yield savings accounts will increase

earnings for the couple considerably.

Another strategy that Greg and Ann should use is lower carry out financial self-evaluation. They

should examine the assets and liabilities they have. This will help plan well for their finances

(Boisclair et al., 2017). For example, if they find that they creditors a significant amount of

money, they can cut down on their expenditure so that they can be able to settle their debts and

still maintain a healthy financial position.

Lastly, Greg and Ann should identify alternative sources. Considering that they expect to live for

more than 3 decades more, they need a significant amount of financial resources to fund their

lifestyle and take care of their children (Merton, 2007). This implies that they may need

additional funds. One potential alternative source of income is the lot they want to develop.

Greg and Ann can turn the lot into a commercial centre so that they earn from it. This will ensure

a constant flow of income.

Insurance coverage
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Insurance coverage is important for Greg and Ann as it would help them recover financially in

case of financially crippling events. It can also help them prepare well for the future. The kinds

of insurance Greg and Ann should have are health insurance and property insurance. In most

provinces and territories, health insurance covers medical care which includes doctor visits and

most hospitalization costs (Marchildon, 2013). However, to ensure they adequately covered, the

couple can take up additional insurance plans. For example, they can also take up the critical

illness insurance plan in case one of them becomes critically ill at one point. A health insurance

plan would ensure they do not spend significantly on health and do not suffer financially should

one of them become critically ill or be forced to spend a significant amount of time in hospital.

Property insurance is also important as it would help Greg and Ann to safeguard their assets

against risks such as theft and fire. One’s home and other property are their biggest investment.

In case of fire or theft, one may not be able to replace everything (Crawford et al., 2013). Since

Greg and Ann own a significant amount of property and also plan to develop the lot they

acquired. Taking property insurance will thereby help safeguard these assets against unexpected

events and prevent Greg and Ann from suffering financially should these events occur.

Retirement

At one point in life, one retires either from their job or even business. There is no retirement age.

One can decide to retire at 40 or others may decide to retire at 80, especially those running a

business. Before one retires, they need to have adequate funds to support themselves for the

remainder of their life because they no longer have a source of income (Jacobs et al., 2014).

Since the couple lives a moderate lifestyle, it implies that they live within the average living

standard. The average cost of living for per person per year without rent is 14,904 Canadian
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dollars. Since this is a family of 5, the cost of living would be 74,520 Canadian dollars.

Converting this amount to US dollars at the current rate, this would be $58,658. Assuming that

the cost of living would not change and the family would be maintained as five for the next 35

years, the amount of money Greg and Ann need in order to maintain their current lifestyle for the

duration if they retire now would be 2,053,030 (Boisclair et al., 2017). However, other factors

are considered such as increase or reduction of the family size and changes in the cost of living

due to inflation, then the cost of living may increase or decrease. For example, Greg and Ann’s

children are likely to start their own lives after attaining adulthood. This would mean Greg and

Ann would be left alone. This would significantly lower their cost of living.

Education

Greg and Ann need to plan for their kids’ education. Assuming that they take their children to

private schools as opposed to public ones, the primary education for each child would cost

around $5,000, considering that Greg and Ann live a modest life. There are 6 years of primary

education. Kids enrol at age 6. Greg and Ann’s children are currently aged 13, 11, and 9. Going

by this age and assuming all children enrolled at 6 years, of age, it would mean the oldest in

grade 7, the second one is grade 5, and the youngest is in grade 3 (Allison et al., 2017). The

second child has one year in elementary primary while the last one has three years more. This is

a total of 4 years in elementary primary. For a cost of $3,000 per year, that would be $12,000.

For the Middle school, there is a total of 5 years for the three children. For the same average cost

of $3,000, the cost would be $15,000. For secondary school, there is a total of 12 years for the

three children. Assuming that the children go to a public high school, Greg and Ann would not

be required to pay anything as this secondary education is free (Fullan and Rincon-Gallardo,

2016). The cost of an undergraduate degree is about $6,463 CAD ($5,092) per year. For four
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years for three children, that would be 5,092×4×3 which totals to $61,104. The total amount for

education that Greg and Ann should set aside for their children should be $88,104. However, this

amount should be higher when you add other expenses such as housing, food, and transportation,

particularly at the university level.

Major purchase

The major purchase Greg and Ann will engage in the material for the development of the lot in

Hawaii. Developing the lot requires a significant amount of resources that the couple needs to

take into account (Van Rooij et al., 2012). The amount involved depends on the extent of

development and what they need to build on it. Greg and Ann should thereby budget for this and

determine if they have the resources for it or come up with a way of raising the resources.

Emergence fund

An emergency fund is important because it helps when one loses a source of income. In the case

of Greg and Ann, the emergency fund is needed when there is an urgent need for cash (Bardaji

and Boyer, 2019). Greg and Ann need to set up an emergency fund depending on the likelihood

of an emergency that requires significant financial outlay arising.

IPP

Greg and Ann need to have an individual pension plan (IPP) in addition to the RRSP. Since the

two earn from the business, they can have an IPP from their earnings. Both are qualified for an

IPP as they are 45 or more and their earnings are over 75,000 (Kesselman, 2010). The main

advantage of IPP is tax-deductible, meaning the couple will pay less tax on their income.

Estate analysis and discussion

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Greg and Ann’s estate comprises of their home, business premises and home that they are going

to inherit from Greg’s uncle. Greg and Ann’s estate will expand further when they build the lot

in Hawaii. The main focus for Greg and Ann should be the tax liability on their estate. While

there are no direct taxes one estate, there are potential taxes associated with it that Greg and Ann

should consider (Kopczuk, 2010). These are income tax due to deemed disposition. After Greg

and Ann, their children may be required to fill a terminal tax return on estate. Here it is assumed

that the estate was sold immediately before the death of the owner. This is even the case where

the estate is inherited by the children (Kopczuk, 2010). Greg and Ann should thereby analyse the

value of the estate and determine the tax payable at their time of death so that they can

adequately prepare for it.

Selling the business

Greg and Ann can earn up to 20 million for selling the business. However, since this is income

earned, it is taxable.

Tax planning for selling the business

Income earned from selling a business attracts a significant amount of tax, in some cases, up to

half of the amount earned. However, with proper planning, the amount of tax paid on sold can be

reduced considerably (Steingold, 2017). The best option Greg and Ann can use is the share sale

option. In this case, they will have to incorporate the business and sell shares to the buyer. The

capital gain in such as a sale is only 50% taxable, implying that the tax payable will reduce

considerably (Steingold, 2017). In addition, if the shares qualify as QSBC shares, the couple can

claim a lifetime capital gains exemption, implying that they can shelter a significant amount, if

not all, of the gain from tax.

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How Greg and Ann should invest their money

Greg and Ann should invest their money in such a way they would receive a significant amount

of returns and with limited risk of loss. One way they should thereby invest their money is in

high-yield savings accounts. Although an investment in a technical sense, savings accounts

provide considerable return on one’s investment. The high-yield savings accounts provide even

more returns than normal savings accounts (Deuflhard et al., 2019). The reason Greg and Ann

should invest in these accounts is they will never lose money. In addition, most of these accounts

are insured by the government, implying that if in the case a financial institution fails, one can

still be compensated.

References

Allison, D.J., Pelt, D.N.V., Hasan, S. and Bosetti, L., 2017. Private Schools in Canada and the

USA: Contrasts and Commonalities. Journal of Applied Business and Economics, 19(12),

pp.68-84.

Bardaji, M. and Boyer, M., 2019. Determinants of Financial Literacy and Financial Planning in

Canada. Miscellaneous Agency.

Boisclair, D., Lusardi, A. and Michaud, P.C., 2017. Financial literacy and retirement planning in

Canada. Journal of Pension Economics & Finance, 16(3), pp.277-296.

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Crawford, A., Meh, C. and Zhou, J., 2013. The residential mortgage market in Canada: a

primer. Financial System Review, 3(53), p.13.

Deuflhard, F., Georgarakos, D. and Inderst, R., 2019. Financial literacy and savings account

returns. Journal of the European Economic Association, 17(1), pp.131-164.

Fullan, M. and Rincon-Gallardo, S., 2016. Developing high-quality public education in

Canada. How privatization and public investment influence educational outcomes,

pp.169-193.

Jacobs, J.C., Laporte, A., Van Houtven, C.H. and Coyte, P.C., 2014. Caregiving intensity and

retirement status in Canada. Social science & medicine, 102, pp.74-82.

Kesselman, J.R., 2010. Expanding Canada pension plan retirement benefits: Assessing big CPP

proposals. The School of Public Policy Publications, 3(6).

Kopczuk, W., 2010. Economics of estate taxation: A brief review of theory and

evidence. National Bureau of Economic Research Working Paper Series, (w15741).

Marchildon, G.P., 2013. Health systems in transition: Canada (Vol. 1). University of Toronto

Press.

Merton, R.C., 2007. The future of retirement planning. The future of life-cycle saving and

investing, pp.5-14.

Steingold, F.S., 2017. The complete guide to selling a business. Nolo.

Swart, N., 2004. Personal financial management. Juta and Company Ltd.

Uppal, S., 2016. Financial literacy and retirement planning. Statistics Canada.

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Van Rooij, M.C., Lusardi, A. and Alessie, R.J., 2012. Financial literacy, retirement planning and

household wealth. The Economic Journal, 122(560), pp.449-478.