**For illustration purposes only**

As was discussed during the first meeting, a “fact-finding” meeting was arranged with Steve Ambeault and Mitchel MacDonald so that the Smith’s circumstances and goals could be understood and a financial plan prepared.

During this meeting Steve enquired about the Smith’s desired retirement age (55), lifestyle spending goals, estate goals, their dependents (twins 10yrs old), past CPP contributions, current investments, pensions plans, real estate holdings, and debt levels.

In addition to gathering information, we discussed which financial planning scenarios the Smith’s would like to consider.

Given that the Smiths were set on retiring at age 55, it was decided that the first scenario would use some conservative economic and investment return assumptions to see if the Smiths could meet their retirement and spending goals even if the planets didn’t align. Assuming they were able to meet their goals in the first scenario with some room to spare, the second scenario would consider what their maximum lifestyle spending could be if they were able to draw down their investments to exactly zero at life expectancy. Finally, the third scenario would consider how much their lifestyle spending could increase during retirement if the economic and investment return assumptions were a little more favourable.

Steve and Mitchel took the information from this meeting and put together a 32-page financial plan that provided the Smiths with Grades for each of their goals (A for meeting a goal with room to spare, and F for falling fall short of a goals, with B, C, D for something in between).

Steve and Mitchel followed up with the Smiths to review the financial plan together so that the Smiths could see and understand all the information that the plan provided.

Satisfied with the results, Steve and Mitchel would be providing annual report cards to evaluate how well the Smiths are able to stick to their plan. These report cards would be reviewed when the Smiths come in to discuss their investment performance with Mike.

**For illustration purposes only**

After completing a financial plan for Alice and Adam Smith (both 40yrs old), we saw that there may be a need for some insurance planning. With two small children (twins) and a mortgage, there were plenty of future financial obligations that the Smith’s wanted to protect.

The key question the Smith’s had was how much, and what type of insurance was needed. There were so many choices: Term, whole life, universal life, critical illness, long-term disability, long-term care.

Our process started by going through a needs analysis process where we gathered information about the Smith’s particular circumstances and goals so that we could calculate the financial impact of various risks such as death and disability. Given that a financial plan was already in place, most of this information had already been discussed.

Neither Alice nor Adam currently had life insurance or critical illness insurance, however Alice had a good long-term disability plan through work. Adam, being self-employed, did not have disability insurance.

**For illustration purposes only**

With Alice’s recent promotion, and the twins in school full-time, negating the need for childcare, the Smith’s found they were able to increase their monthly retirement savings by $200.

The question they had was, “where should they direct their savings, given the many choices available. Along with an RRSP, TFSA, and non-registered account, there were also other options such as an RESP, corporation, trust, or a permanent insurance policy.”

To fully appreciate the various tax and cash flow implications of these choices we have built a model that allows us to compare and contrast different strategies. This model shows how an initial $1,000 investment in each of the above options grows over time, and how much it is worth when the funds are withdrawn and the taxes are paid.

By putting all the results into a “heatmap” as pictured below, we were able to show the Smiths how the various options compare as time goes on. With this technique we can also look at potential estate implications so that the risks of taxation at life expectancy can also be considered.

In the graphic below, we compared the virtues of an RRSP, TFSA, and non-registered account for Alice. In her circumstances, the RRSP is the clear winner (greenest option for every year), with the TFSA placing a close second place (green in some years, but light red in others), while the non-registered account placed third (red in most years). Because Alice is in a high tax bracket right now, but expects to be in a lower tax bracket in retirement, it makes sense that an RRSP is a good place to contribute retirement savings, assuming the money won’t need to be accessed in the short-term.

Knowing the financial outcomes meant that we could also focus the discussion on the qualitative characteristics of the various choices, such as when Alice would need to access the savings, especially in the case of an unexpected lump sum expense. We were also able to consider how much would be available to beneficiaries after any remaining tax bill is paid.

**For illustration purposes only**

This case study continues with the story of Adam and Alice Smith. Please see the “Discretionary Portfolio Management” case study to read about the Smiths from the start.

With a financial plan, insurance, investment strategy and savings plan in place, the team at Clear Sky Private Wealth encouraged the Smiths to consider their estate planning needs.

The Smiths hadn’t had a chance to update their wills since the twins were born, and although they had heard about personal directives and powers of attorney, they didn’t have anything in place. The Smiths also hoped to leave something for their children and grandchildren, but weren’t sure how to factor that into their current plans, especially since the tax impacts of their savings and real-estate holdings at the time of their deaths was so confusing.

A meeting was arranged with Steve Ambeault to discuss the goals Adam and Alice had for their estate, and to ensure that they understood what documents were required to make sure that the wishes were clear for their trustee. Steve was able to provide a referral to a lawyer to help the Smiths update their wills and personal directives.

Referring to the financial plan, Steve was able to point out how much would be left to the twins in the event that something happened to the Smiths prior to and at life expectancy. Lastly, Steve helped the Smith understand how taxes would impact the ultimate amount that would be left to their beneficiaries. The Smiths were surprised to learn just how much tax would be owing, and enquired as to whether there was a way to preserve the value of their estate.

Steve discussed the ways in which taxes could be minimized during retirement, and also provided information on permanent insurance policy options that would help make up for the bite that taxes might take from the Smith’s estate.

With the twins off to post-secondary, and as the Smith’s approached retirement, they started to wonder how they would start to access their accumulated savings. In particular, they found it could be confusing to determine which of their investment accounts should be drawn down first, and had heard that it might make sense to take some lump-sum withdrawals from their RRSP just as they retired, to avoid potential taxes in the future when they both died and the RRSP’s become taxable.

To fully appreciate the various tax and cash flow implications of these choices we have built a model that allows us to compare and contrast different strategies.

By putting all the results into a “heat map” as pictured below, it is easy to see how the various strategies compare as time goes on. With this technique we can also look at potential estate implications so that the risks of taxation at life expectancy can also be considered.

In the graphic below, we compared a standard withdrawal strategy (Strategy #1) to a lump-sum withdrawal from an RRSP in year 1 (Strategy #2). Although there is a lot of information contained in the graphic below, the key was to examine the far right column marked “PV” to see if Strategy #2 makes sense. In this case, Strategy #2 is about even with Strategy #1 in Year 1 (colored yellow), but in many subsequent years, Strategy #2 is superior (marked green), however later in life Strategy #2 turns out to be inferior (dark orange coloring).

It turns out that many withdrawal strategies follow a similar pattern of being favourable in certain years, but unfavourable in other years. As in this case, a strategy might make sense in the early years, but later in life end up costing you money. Other strategies follow the opposite pattern.

With our model we were able to quickly compare various strategies, and the heat map allowed us to work with the Smith’s to see which strategy suited their circumstances, risk tolerances, and financial goals. In particular, the Smith’s decided to take a long-term approach, counting on a lengthy and healthy retirement, in which case it made more sense for them to leave their funds in the RRSP for now, and not take a lump-sum withdrawal.