Case Study: Marcus & Karla Nagi
Background
You met Marcus and Karla through a mutual friend. They are a young
couple and they have never worked with a financial adviser before. As a
result, they have never had a financial plan prepared for them. It is March
2, 2019 today.
During 2018, Marcus and Karla had their first child, Peter. Now that they
are parents, they tell you they think that the time has come for them to get
their finances in order. The friend who referred them to you said that
Marcus and Karla have quite a few questions about home ownership,
education savings plans, and life insurance. Up until this point, they have
relied on informal financial advice from friends and family members despite
none of them having a financial education or designation. They tell you they
have also read a couple of personal finance books. Because they have
relatively little in the way of assets at the moment, they tell you they
believed that no adviser would be prepared to see them. Their first
questions to you were about how you are paid and the sort of fees you
charge as a Certified Financial Planner. You explain to them that you
charge a flat fee for a financial plan that includes all the steps of the
financial planning process as defined by the Financial Planning Standards
Council and you only sell no-load mutual funds. You also tell them that you
are licensed to sell life insurance products to help support their risk
management needs.
Personal Information
Marcus (age 31) and Karla (age 30) are both elementary teachers at a
small private school in Edmonton, Alberta. Karla just finished her graduate
degree in English and they both just started their jobs last September.
Karla teaches history and Marcus is the school music teacher. They have
been married for two years, and are both in excellent health and enjoy a
healthy lifestyle. Peter was born last year.
At the moment, they are living in a house located on campus and owned by
the school. They say they only have to pay $350 a month in rent, including
all utilities. They are very happy with the arrangement since a comparable
apartment in the city would cost them at least $600 more a month. They
are able to eat their meals in the dining hall for free. Both Marcus and Karla
come from relatively large families; he has three brothers and one sister,
while she has two brothers and two sisters. Because of this, they have
been (and still are) extremely reluctant to ask their parents for financial
assistance.
Employment Information
Details of Marcus and Karla’s Employment
Marcus earns $65,000 a year. Karla has a graduate degree, and is
therefore higher on the provincial pay grid, earning $75,000 a year. Last
year, Marcus also started to supplement his income by teaching piano to
local children and young adults three nights a week during the school year.
He earns $1,200 a month from this extra work through all 12 months of the
year. Both Marcus and Karla are members of the Alberta private school
teacher’s defined benefit pension plan, and have health, dental and
disability benefits through their employer. They tell you that their pension
plan is currently in a surplus position, and they expect to be on “contribution
holiday" for the next two years. This will provide each of them-with an extra
$300 a month and they would like to set aside these funds for either their
RRSP or for a down payment on their first house.
Financial Position
Real Estate
Marcus and Karla would like to buy a home in the new development across
from their school. The model they like is priced at $530,000. They know this
is a bit much for a first home, but they have fallen in love with the design.
They are not sure if they will be able to qualify for the mortgage, and would
like your advice on the matter.
They would also like to know more about the. Home Buyers Plan, and how
they might be able to withdraw funds from their RRSPs to purchase this
home. They say they have some cash on hand, about $15,000, and did not
know whether they should put it in their RRSP or use it as part of their
down payment.
Education Savings
As soon as Peter was born, Marcus and Karla opened a high interest
savings account with an online bank and have been depositing small
amounts from time to time - mostly money given to Peter as gifts from
aunts and uncles. The balance has grown to $8,000 and they would now
like to invest the funds in the stock market - in something that would yield
higher returns over the long run. They have heard about registered
education savings plans (RESPs), and tell you they picked up a brochure at
the doctor's office for a pooled scholarship trust fund. They would like to
know more about the different education savings plans available.
Marcus’ Investments, Registered
Marcus opened an RRSP Daily Interest Savings account at Massive Bank
two years ago. He says that, because he was uncertain of what kind of
investment to make, he simply left the funds in a high-interest savings
account, where he is earning 1.25% interest. He tells you that he just
added $1,000 to the account last week that has a current value of $7,000
Marcus’ Investments, Non-Registered
Marcus has non-registered money invested in Canada Savings Bonds,
which he purchased in 2008. He is earning 4.8% rate of interest.
 $1,000 Series 9 Canada Savings Bond, Compound Interest
Karla's Investments, Registered
Karla banks at the local Community Credit Union, and has purchased GICs
with her RRSP contributions.
 $2,000 GlC,3.0% rate of interest, matures this month
 $2,500 GlC,2.5% rate of interest, matures this month i
Karla's Investments, Non-Registered
Karla has an interest in fine art, and two years ago she purchased a
painting at an auction when she was visiting friends in the country. The
painting is by a well-known Canadian artist from the 1930s. She bought the
painting for $500, but believes it is probably worth nearly $10,000. While
she is very attached to the work, she is thinking about selling it to a friend
of hers who is an art dealer.
Liabilities
Marcus has a student loan with an outstanding balance of $15,000 with
Massive Bank and is paying 6.5% in interest. He is also carrying a $2,000
balance on his Massive Bank Visa card, and is paying 25% interest on the
card.
Marcus and Karla have a car lease for their four-door sedan that costs
them $500 a month" They say that, living on campus, they don’t use the car
as much as other people probably do. As a result the current mileage on
the vehicle is quite low; averaging-only 15,000 kilometres per year. They
figure that 30% of the car’s actual use is from Marcus driving to his
students' houses to give lessons.
Karla has no outstanding debts, and pays off her credit card every month.
Insurance Information
Both Marcus and Karla have group life insurance through their employer for
two times their annual salaries. They also have disability, health and dental
insurance coverage. Both of them say they are concerned they do not have
adequate life insurance coverage, and are worried about what would
happen to Peter if either of them where to die prematurely. If one spouse
were to die, they believe that the survivor would require additional income
equal to at least 45% of their current combined gross income for the next
35 years. They would prefer that the mortgage on their home should be
completely paid off should one of them die.
When they were researching mortgages and home buying, they spoke with
an adviser at Massive Bank who told them they could obtain mortgage life
insurance through the Bank. They want to know if they are required to
purchase mortgage life insurance through the lender, and if it is a good
idea to do so.
Marcus and Karla have also heard about mortgage insurance offered by
the Canada Mortgage and Housing Corporation (CMHC), and want to know
if that is the same thing as mortgage life insurance.
Risk Profile
Marcus and Karla agree that they are both fairly conservative investors.
They are prepared to accept some risk in return for potentially higher
returns, but since stock market investing is new to them they say they want
to start slowly.
Liquidity is a primary concern for both of them, and they say that for the
next year they want to be able to access their savings on relatively short
notice. This is because they anticipate purchasing a home in the near
future, and the local housing market is fairly hot. If they see an opportunity
they may need to move quickly.
Wills and Power of Attorney
Shortly after Peter was born, Marcus and Karla purchased a will planning
package from a Canadian software company. They filled out the forms on
their computer, printed off the wills, and had two of their friends from school
witness the documents. They have named Marcus' sister, Jill, as the
executrix, and they have named Karla's brother, Charles, as Peter’s
guardian.
Goals and Objectives
Besides home ownership, Marcus and Karla say that their first priority is
making certain that Peter has enough money so that he can go to
university. Since they work in education themselves, they know how much
the cost of tuition has increased over the last decade and they expect the
trend to continue in the future. They read that the cost of a post-secondary
education is expected to rise to about $100,000 by the time peter attends
university and they want to try to have this amount on hand by the time he
finishes high school. Marcus and Karla say that their primary focus is on
saving for Peter's education instead of their retirement, since they already
have very good pension plans and many years to earn income to fund
retirement.
Marcus and Karla Nagi
Statement of Net Worth at January 1, 2019
ASSETS
Liquid Assets
Marcus
Joint Chequing Account
Canada Savings Bonds
Savings Account (for son)
Total Liquid Assets
Investment Assets
$7,500
$1,000
$4,000
$12,50
0
Karla
$7,500
$4,000
$11,50
0
Total
$15,00
0
$1,000
$8,000
$24,00
0
Registered Assets
$7,000
$4,500
Total Investment Assets
Personal-Use Assets
$7,000
$4,500
$11,50
0
$11,50
0
$5,000
$2,000
$5,000
$2,000
$10,00
0
$17,00
0
$33,00
0
$10,00
0
$4,000
$10,00
0
$24,00
0
$59,50
0
$0
$33,00
0
$15,00
0
$2,000
$17,00
0
$42,50
0
Automobile
Personal Effects (owned jointly)
Artwork
Total Personal-Use Assets
TOTAL ASSETS
$7,000
$26,50
0
LIABILITIES
TOTAL LIABILITIES
$15,00
0
$2,000
$17,00
0
NET WORTH
$9,500
Student Debt
Credit Card
Marcus and Kalra Nagi
Monthly and Annual Cash Flow as of January 1, 2019
INCOME
Marcus' Employment Income
Marcus' Business Income
Karla's Employment Income
Interest Income
Monthly Annual
$5,417
$65,000
$1,200
$14,400
$6,250
$75,000
Marcus
Karla
$12
$8
$12,887
$144
$96
$154,640
Taxes, CPP and EI
$1,167
$14,004
Taxes, CPP and EI
$1,350
$150
$350
$55
$16,200
$1,800
$4,200
$660
Lease
Insurance
Gas and Operating Expenses
Repairs and Maintenance
TOTAL EXPENSES
$500
$120
$110
$85
$250
$150
$450
$400
$150
$1,200
$350
$112
$156
$7,105
$6,000
$1,440
$1,320
$1,020
$3,000
$1,800
$5,400
$4,800
$1,800
$14,400
$4,200
$1,344
$1,872
$85,260
SURPLUS
$5,782
$69,380
TOTAL INCOME
EXPENSES
Withholdings at Source - Marcus
Withholdings at Source - Karla
Loan and Credit Card Payments
Rent
Home Insurance
Automobile
Telephone
Internet and Cable TV
Food
Clothing
Personal Care
Child Care (for Peter)
Entertainment
RRSP Contribirtion - Marcus
RRSP Contribirtion - Karla