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Evan Olsthoorn’s Financial Plan Essay Sample

Evan Olsthoorn’s Financial Plan Pages
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This personalized investment plan provides an outline of my investment goals and objectives, including the strategies I will employ to meet my financial needs for retirement .

Personal Goals

Short Term Goals (22-30 Years of Age)

* Lease a vehicle
* Rent an apartment in Cambridge, Ontario, Canada
* Work at Guillevin International as a Management Trainee * Maximize contributions to RRSP and TFSA

Medium Term Goals (30-65 Years of Age)

* Lease Vehicles
* Get married
* Buy a home
* Maximize contributions to RRSP and TFSA
* Furnish my home
* Have 1 Child
* Pay For Child’s Education

Long Term Goals (65-95 Years of Age)

* Retirement
* Lease a Luxury Vehicle
* Move to Florida and buy a place for the remainder of retirement * Leave a legacy

My Retirement Plan Need

* When I retire I would like to have an annual income of $115000 /year before taxes for my 30 year retirement period . I would also like to leave a legacy in the amount of $1.3 Million. (Exhibit #1) * I expect to live until I am 95 years old

* I will need to be very disciplined in my retirement plan to meet the goals I have set out and constant reevaluations of this plan will be needed * I will need to have approximately $2.5 Million in my investment accounts when I retire at the age of 65. (Exhibit #1)

Personal Situation

In April 2013, I will graduate with my HBA from the Richard Ivey School of Business. I will begin working at Guillevin International as a Management Trainee starting in May 2013 with a starting salary of $60,000. I will be living without dependents until I expect to be married and have children at the age of 30.

Current Health and Life Expectancy

I consider myself to be above average in health. My diet is extremely clean and I work out 4-5 times per week. I expect this continue as long as I live. I do not smoke or drink excessively, which also contribute to my above average health. I expect to live to an age of 95 and have shaped my personal financial plan to fit this parameter.

Current Net Worth

I am currently debt free and expect to remain debt free throughout my entire life with the exception of a mortgage. I have $15000 invested in a TFSA, which I invested in through opening an account with TD Canada Trust. Therefore I expect to graduate with a net worth of $15000.

Tidal Forces Of Environment

In recent times, the economy has been very unstable and high returns that were obtainable in the past may not be available in the future. This is extremely important in selecting my expected rates of return above inflation in the future as currently I may be overestimating my expected returns. Due to the compounding effect, a mistake in my expected returns could drastically affect the amount of money I will be left with when I retire at the age of 65. This requires constant reevaluation of my overall retirement plan to meet the retirement goals I have set out.

Investment Knowledge and Sophistication

I consider myself an average investor at this point in my life. I regularly keep up with the markets throughout the week and constantly discuss the markets with peers in the HBA program. I have already taken the Canadian Securities Course and passed. I plan to construct a passive portfolio by investing in equities and bonds with the help of a financial advisor.

I have already opened a chequing and savings account with TD Canada Trust. I have opened a TFSA as explained before and an RRSP through TD Canada Trust as well. I plan to maximize contributions to my TFSA first, then to my RRSP and the remainder of my investment capital available will go into an investment account. I have chosen not to invest in an RESP, but pay for my child’s education in the amount of $80,000 from my TFSA.

My Risk Profile

After completing online and in class risk profile assessments, my investment profile indicates that I am an advanced investor. This profile fits well with my short-term goal of capital growth. I will not let a down market affect my IPS in any stage of my retirement plan, as I am comfortable with and understand volatility in the markets. My financial goals will change throughout my life and my risk exposure will continually decrease as my retirement creeps closer and closer to preserve capital.

Investment Policy Statement Short Term (22-30 Years of Age)

Objective
* My short-term investment goal is growth. Therefore, I will be pursuing higher returns and invest as much as I can to maximize the compounding effect over time. * Take advantage of tax savings and tax free returns in TFSA and RRSP.

Time Horizon
* 43 Years
* My time horizon is 43 years at this point indicating I can handle volatility and can ride out down markets.

Return
* Advanced Investor (Age 22-35)
* I can tolerate a high level of volatility due to my long time horizon of 43 years. * I am looking for long-term capital growth to maximize cumulative returns over time. * 40% Canadian Equities, 30% US Equities, 30% Global Equities * Expected Return is 7.5% above inflation per annum with a 1% fee for a financial advisor included

* Free cash flows will be used to first maximize my TFSA contributions, then RRSP Contributions, and then the remainder will go into my investment account. This is very important in maximizing my tax savings to maximize the amount of retirement savings at the age of 65. * I will avoid mutual funds to avoid management fees and will hire a financial advisor to do trades for me due to the fact that I am a knowledgeable investor.

Liquidity
* I will keep 10% of my current salary at the time in an emergency fund * I have allocated a leisure fund in my budget for fun, entertainment, clothing, etc * I have very low liquidity requirements as I want to maximize cumulative returns for the future and have a 43-year time horizon.

Risk
* The high-risk strategy that I will employ in my early years will produce high volatility and high returns, but this is not too concerning due to the fact that my time horizon is 43 years long.

Benchmark

* The Benchmark will be a weighted average of the asset allocation set up in my current portfolio. * Fixed Income- DEX Universe Bond Index
* US Equity- S&P 500
* Canadian Equities- S&P/TSX Composite
* Global Equities- MSCI World Gross TRI

Rebalancing

* Rebalancing will occur when warranted, but I will be meeting with my financial advisor quarterly to discuss these issues. * I will also rebalance when either of the asset classes are +/- 5% of its allocated amount depending on what stage of my retirement plan I am in.

Constraints

* I will be constrained by the amount of capital that is free to invest. * I will also be constrained by time, so I will not have time to properly manage my portfolio and will therefore need to hire a financial advisor. * I will not invest in equities that I do not understand, so my advisor and I will have to agree on stock selections made. * No investment will exceed 20% of the portfolio in one companies and no more than 40% in 1 industry

Investment Policy Statement Medium Term (30-65 Years of Age)

Objective

* My medium-term investment goal is growth with increasing emphasis on capital preservation as the years go by. Therefore, I will be pursuing higher returns and invest as much as I can to maximize the compounding effect over time. * Take advantage of tax savings in TFSA and RRSP.

Time Horizon

* 35 Years
* My time horizon is 35 years at this point indicating I can handle volatility but as my age gets closer to 65 my equity exposure will be decreased to limit volatility.

Return

* Growth Investor (Age 35-45)
* I can still tolerate a relatively high level of volatility, however I would like to put a little more emphasis on capital preservation. * 15% Fixed Income, 37% Canadian Equities, 24 % US Equities, 24 % Global Equities * Expected Return is 6.5% per annum above inflation with a 1% fee for a financial advisor included

* Balanced Investor Equity Bias (Age 45-55)
* I am still looking for long term capital growth but have put even more emphasis on capital preservations. * Volatility can still be tolerated, but I want to limit my exposure. * 34% Canadian Equities, 18% US equities, 18% Global Equities, 30% Fixed Income * Expected Return is 5.5% per annum above inflation with a 1% fee for a financial advisor included

* Balanced Investor Income Bias (Age 55-65)
* My retirement date is drawing near and preserving my capital at this point is important and my tolerance for volatility is low and capital is preserved. * 30% Canadian Equities, 10% US Equities, 10% US equities and 50% Fixed Income * Expected average return is 5% above inflation with a 1% fee for a financial advisor included

* Free cash flows will be used to first maximize my TFSA contributions, then RRSP contributions , then the remainder will go into my investment account. This is very important in maximizing my tax savings to maximize the amount of retirement savings at the age of 65. * I will avoid mutual funds to avoid management fees and will hire a financial advisor to do trades for me due to the fact that I am a knowledgeable investor.

Liquidity

* I will keep 10% of my current salary at the time in an emergency fund * I have allocated a leisure fund in my budget for fun, entertainment, clothing, etc * I have very low liquidity requirements, as I want to maximize cumulative returns for the future and have a 30-year time horizon.

Risk

* At the beginning of my medium term plan my risk tolerance is high for capital growth and then decreases continuously to low/moderate by the time I am 65 years old to preserve capital.

Benchmark

* The Benchmark will be a weighted average of the asset allocation set up in my current portfolio. * Fixed Income- DEX Universe Bond Index
* US Equity- S&P 500
* Canadian Equities- S&P/TSX Composite
* Global Equities- MSCI World Gross TRI

Rebalancing

* Rebalancing will occur when warranted, but I will be meeting with my financial advisor quarterly to discuss these issues. * I will also rebalance when assets are +/- 5% of its original allocated amount depending on what stage of my retirement plan I am in.

Constraints

* I will not remove money from my TFSA and RRSP until retirement unless it is for big-ticket purchases as seen in my short and medium term budgets. (Exhibit 2&3) * I will not invest in equities that I do not understand.

Investment Policy Statement Long Term (65-95 Years of Age)

Objective

* My Long-Term investment goal is capital preservation as I will beginning drawing from my TFSA, RRSP and Investment Accounts. * It is important that my capital is maintained because I would no longer be employed and I also must make enough return to combat inflation, draw $115,000 per year and leave a legacy in the amount of $1,300,000. (Exhibit #1)

Time Horizon

* 65-95 years of age- 30 Years or until death
* Although my time horizon is long, it is imperative my capital is preserved so that I will receive annuities until I die. I will not have a job to recuperate huge losses and therefore cannot take too much risk. Return

* Conservative Investor
* My main goal is to preserve capital and to make returns marginally above inflation to ensure that my retirement savings are not devalued. * I have low tolerance for volatility and will focus on capital preservation * 5% Canadian Equities, 2.5% US Equities, 2.5% Global Equities, 90% Fixed Income * Expected Average Return above inflation is 4% with a 1% fee for a financial advisor included

Liquidity

* I will keep 10% of my current salary at the time in an emergency fund * I have liquidity requirements as I will have to draw from my TFSA, RRSP and Investment Accounts at this time to support myself through retirement.

Risk

* My long-term plan will have low risk and will focus on preserving capital as volatility is something that needs to be limited at this stage of my retirement plan.

Benchmark

* The Benchmark will be a weighted average of the asset allocation set up in my current portfolio. * Fixed Income- DEX Universe Bond Index
* US Equity- S&P 500
* Canadian Equities- S&P/TSX Composite
* Global Equities- MSCI World Gross TRI

Rebalancing

* Rebalancing will occur when warranted, but I will be meeting with my financial advisor quarterly to discuss these issues. * I will also rebalance when either of the asset classes are +/- 5% of its allocated amount depending on what stage of my retirement plan I am in. * Constraints

* I will not invest in equities that I do not understand
* I will be continually reducing the amount of funds available in my investment accounts until I die, only leaving the legacy of $1.3 Million.

Investment Guidelines

Invest Early

Every single dollar that I invest right now will be worth more no due to the compounding of interest. I plan to invest all of my extra funds after expenses in TFSA, RRSP and my investment account to maximize the ending value of my retirement savings . I also plan to reinvest all of my tax returns from my RRSP. I will take on more risk when I am young and less as I grow closer to retirement as outlined in my IPS for each stage of my retirement plan. This will make it much more likely that I will achieve my retirement goals.

Underperformance

If I am underperforming my benchmarks that I have set out for 3 consecutive years I will be changing financial advisors in an effort to make returns above my benchmark and realize the benefits of hiring an effective financial planner.

Inflation

I predicted inflation to be 3% for the purpose of my financial plan and hope to make greater returns so that my savings are not devalued over time. I have incorporated inflation into the returns I expect in the future as outlined in my IPSs.

Risk

When I am young I can take high volatility due to the fact that my time horizon is about 43 years. This will allow me to get through difficult market conditions, which seem inevitable in the future. As I age, I plan to structurally reduce my risk by moving a higher proportion of funds into fixed income and reduce my equity exposure as seen earlier in the report under my risk profile.

Investment Vehicles Selected

Equities

I have decided to invest in Canadian Equities, Small Cap Equities and Foreign Equities. I have chosen this asset mix to maximize returns and minimize risk through diversification. Depending on what stage of my retirement plan I am in, the allocations to these three types of equities will vary as shown above in my IPSs. I am planning to keep up with the markets and hire a financial advisor to do trades for me and monitor my portfolio since I will be too busy at work to do this effectively myself.

Fixed Income

I have decided to invest in a wide range of corporate and government bonds with varying maturities for diversification to gain an optimal risk/return profile in this part of my portfolio. I will rely on this part of my portfolio for capital preservation and will increase its allocation as I progress through my retirement. I will also have hired a financial advisor to look after this part of my portfolio.

TFSA

A TFSA allows you to contribute $5000 tax free per year, which makes tax-free returns that can be withdrawn in the future untaxed as well. Contribution Room is carried forward and if money is withdrawn I have the right to replace the full amount in the future. I will withdraw money from this account to pay for my wedding, furniture and child’s education and replace the money withdrawn as soon as possible. I plan to maximize my contribution to my TFSA account every single year until I retire at the age of 65 to maximize the minimization of taxes. I will open this account with TD Canada Trust.

RRSP

An RRSP is not a great tool to save money on taxes and grow capital through tax-free returns. I plan to maximize my contributions every year after I maximize my contribution to my TFSA. This account will allow me to make tax-free returns as well and the compounding effect will be much greater in this account because of this. An investor also has the option to use a RRSP Home Buyers Plan to withdraw a maximum of $50000 if the individual has a spouse for the purchase of a home. This amount must be paid back in the next 15 years otherwise it will be added to the 16th year income. I plan to replace the full $50,000 in the following 15 years. I will open this account with TD Canada Trust.

RESP

An RESP is designed to allow people to save for their child’s education after the age of 18 years. The lifetime contribution limit is $50,000. The government also contributes 20% of the funds invested up to a maximum of $500 per year. However, I will pay for my child’s education out of my TFSA because my retirement savings at 65 will be higher this way.

Emergency Fund

With an uncertain economy nowadays, job security is something that can be never taken for granted. This is why I would like to keep 10% of my salary as a buffer in case I go through a period of time where I am unemployed. This fund will be kept in a high interest savings account at TD Canada Trust and the interest rate will be 1.1%.

Financial Advisor

All of my investment decisions will go through my financial advisor and he/she will look after rebalancing and meeting required returns in the long run. I have incorporated the payment of this financial advisor into my overall returns as seen in my IPSs. I will also replace my financial advisor if there are 3 consecutive years of underperforming the benchmark that I have set out in my IPS.

Legacy and Estate

I want to leave a legacy for my child and his/her children. If the $115,000 annuity is not enough to satisfy my retirement needs this can act as a buffer for me as well. This capital will be held in my TFSA and Investment Accounts with a conservative approach similar to the strategy found in my long term IPS. The money will be distributed to my child when I die in the amount of 50% and funds will be set up for my child’s children, where they will be able to access the funds when they are 18 years old. The fees will be paid from the investment account to the financial advisor that takes care of the legacy account. If all goes according to plan this legacy account will be valued at around $1.3 Million and will continue to gain interest in the future for my child’s children. When I die my child will receive my house in Florida as well.

Security Products Chosen

Life Insurance

I will be investing in life insurance depending on my income level. If I have enough assets to take care of my funeral and take care of my family after my death then I do not see a need for life insurance. I will be investing in life insurance if I need it when my child is born and will take out a policy that will cover 80% of my income in the form of annuities. Life insurance could be very important to my family in the future if I happen to die and do not have sufficient funds to finance my family and funeral.

Health and Disability Insurance

Health and Disability Insurance has been included in the benefits package provided by Guillevin International where I will be working in May 2013. This is very important because life is unpredictable and if something happens where I am no longer to work it is very important that I still have an income to support my dependents and myself.

Home Insurance

I will invest in home insurance in case of floods or other freak damages to my house that would be far too costly to pay out of pocket. The average homeowners insurance is the value of your house divided by $1000 then multiplied by $3.50. Since the cost of my home will be $250,000 my premium will be between $700-$1000.

Auto Insurance

Since auto insurance in Ontario is illegal not to have I will continue to pay my auto insurance premium of $1400/year.

Action Plan

Personal Budget (Exhibits 2,3,4)

* Inflation was taken into account at 3% in the expected returns as well as the financial advisor fees. * In the investment account the capital gains tax of 17.5% is incorporated into the returns and the ending balance is after tax. (Exhibit #5) * The Leisure Expense was estimated at 10% of annual income before tax for the short and medium term. * In the Long Term, the leisure expense is a plug. I will spend all remaining money from my annuities of $115,000 to spoil my grandchildren, to go on vacations, giving to charities, etc. * Food expenses were expected to be $500 a month because that’s what they are currently. That comes to $6000 per year food expenditure. * The car leases cost between $2000 and $3000 a year. I want to be able to drive a variety of cars, which is my reasoning behind leasing cars. When I retire, I will be leasing higher end cars so my lease expense goes up to $5000 per year. * The rent and utilities were assumed to be $1300 per month or $15600 per year for an apartment in Cambridge where I will be employed in the short term.

* The cost of my children was calculated to be approximately $20000 annually and will continue throughout the 18 years I will support my child. (Exhibit 6) * I will put my child through university by budgeting $20000 per year that will be taken out of my TFSA account. (Exhibit 7) I have decided not to use an RESP because the value of my retirement funds will be higher if I don’t use an RESP. * I have budgeted to spend $25000 on my wedding between the ages of 30-35 and this is when I expect to have my child as well. * I have budgeted to put a $50000 down payment on a $250000 house depending on where I happen to settle down between the ages of 30-35. The mortgage will be for $200,000 and will be paid down over a 25-year amortization schedule with annual payments of $12237. (Exhibit 8) I will withdraw this money from my RRSP through the RRSP Home Buyers Plan for the down payment. The maintenance costs of the home will be approximately 1% of the purchase price or $2500 and this includes utilities, property tax and home insurance.

I also expect to spend about $25,000 on furniture that will also be withdrawn from my TFSA account. * The House and Boat in Florida has a budget of approximately $750000. I will most likely spend $650000 on a condo in Fort Lauderdale and $100000 on a boat. This will be drawn from my open investment account at the age of 65, where I will move down to Florida and sell my house for a price of $250,000. * My Emergency Fund was topped up first, then TFSA contribution was maxed, then RRSP, then Investment account. I will replace the amounts withdrawn from my TFSA and RRSP for the big-ticket items purchased throughout my budget with the maximization of my TFSA having priority over my RRSP.

Monitoring

* If my portfolio at any point during my retirement plan has 3 consecutive years of below market returns, I will look to switch financial advisors. * I will not have a sell discipline in my portfolio and will decide with my financial advisor if I should cut my losses or realize gains. * I will rebalance when asset allocations assigned at the given time change by more than +/- 5%. * I will continue to modify my financial plan as my yearly salaries change and have a better idea of exactly all my expenses will be per year.

Constant Reviews and Revisions of My Financial Plan

I will constantly be revising my financial plan over the years as more information about my future becomes available. This is very important in order to provide myself with the necessary funds to live a financially comfortable retirement.

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