Question

Robert is 34 years old and is engaged to be married. He is looking to start saving towards buying a house. He and his fiancée Alisha however have not made any plans towards any of their life goals.

Robert

Robert graduated high school in Romania, and got into engineering school at University of Toronto right after. Having graduated among the top students in his country, he was able to obtain a full scholarship and graduated university with no student debt. He started working for a firm DigitalDesign LLC where he worked as a software engineer for 3 years where he started out with a salary of 60,000 CAD annually. Even though he was set up for success, he did take time away from his job, sponsored his brother education at Carleton University, worked for a non-profit in Africa, and travelled for a year. These left him with a bit lower savings than estimated. He currently has around 200,000 CAD saved in financial assets and earns around 130,000 CAD annually. The company he works for has no pension plan.

Alisha

Alisha finished her undergraduate degree in architecture and worked in Romania for a few years. She moved to University of Toronto for her master’s degree and currently works for an architecture firm that designs factories. She has around 85000 CAD in financial assets and earns 80,000 CAD a year. She also has no pension plan. Like Robert, she likes to travel but also takes a trip once a year back to Romania to visit her family.

The Wedding

They are planning to have two ceremonies, a very small one with close friends in Toronto, which would cost (8,000 CAD). A big wedding in Romania with around 400 guests, which would cost 40,000 CAD. Their parents would foot half the wedding bill in Romania.

Lifestyle and Life Goals

Both Robert and Alisha live in a spacious 2-bedroom condominium in midtown-Toronto and they do not plan to move out of it anytime soon. None of them drives a car and they take public transit or Taxi/Uber. They plan to have only 1 kid 2 years from now and plan to remain in the apartment and put a down payment (50%) on the condo. They do like eating out once a week and Robert likes to go out for drinks with his pals on the weekend. They plan to take two trips a year. One trip to Romania during Christmas and once during the summer. When the child enters university (20 years from now), they want to be able to fund all the tuition and living expenses (totaling 100,000$). When Robert turns 50, they plan to buy a cottage in Romania near the coast for 300,000 CAD.

For Retirement, Robert and Alisha want to have 5,000,000 dollars together. All prices are based on today’s CAD. Robert and Alisha expect their real income to grow by 1% a year. Assume retirement age = 65.

Income Statement

Income	Robert	Alisha	Combined
Salary	130,000	80,000
Less Tax	35,000	21,000
Less CPP	2,500	1,700
Less: EI	950	775
Income after Tax	91,550	56,525
Food			9000
Student Debt			0
Utilities + Phone/internet			2500
Leisure/ Eating Out/ Entertainment			12000
Rent			30000
Car			0
Travel			10000
Misc			8000
Total Expenses			71500

Assume an average tax rate of 40%.

A) Create an detailed Investment policy statement for Robert and Alisha

B) Are their goals reasonable? How much money do they need to save in their first year for each of their goals and the total amount? ( Assume expenses to go up by 10,000$ a year once the kid is born)

C) If they plan to spend 50,000 each year in retirement and plan to leave 500, 000 CAD as inheritance, (to be withdrawn at the beginning of each year) are their retirement goals sufficient?

Answer 1

It's a great practice to create an investment policy statement. It can help you articulate the key reasons why you're investing, what you're hoping to gain from your investments, whether you're on track to meet your goals, and whether any changes are in order.

Once you've created one, you can use your investment policy statement as your compass, a check to keep your investment portfolio on course to meet its goals even when the market and your emotions are telling you to run for the hills. Referring to your investment policy statement before you make any investment decisions can help ensure that you're investing with your head, not your gut.

Corporations and big institutional investors like pension plans create elaborate, 20-page investment policy statements. However, you needn't hire a consultant to develop your investment policy statement, and you don't have to use consultant-ish terms like "Executive Summary" and "Reporting Requirements," even though they appear in a lot of investment policy statements prepared by the pros.

In fact, the best investment policy statements for individuals are fairly stripped down and written in plain English; that way, you'll be able to easily identify the things that you should be focusing on.

If you have separate investment portfolios geared toward different investment goals--for example, you have your own retirement assets that you expect to tap in 20 years as well as a education savings plan for your 15-year-old--you may find it helpful to create separate investment policy statements for each sleeve of your portfolio. Don't get too carried away, though. By getting too complicated and creating too many sleeves of your portfolio, you risk getting bogged down in paperwork and missing the big picture about whether your investments are on track to get you to your goals.

Step 1

Using Morningstar’s Investment Policy Statement (PDF) as your template, start by writing down your key investing goal and the year in which you hope to reach it. If it's a goal that you will pay for over a number of years, such as retirement or college, fill out the Duration field. Of course, when it comes to retirement, filling out this field means quantifying your own longevity. It’s tricky. Use the country’s average life expectancy rates to arrive at a reasonable estimate. From there, it's helpful to be optimistic and assume even greater longevity: Add at least a few years.

Step 2

To the extent that you can, quantify how much your goal will cost. If you have a financial goal that's more than a year or two away, it's important to adjust the cost upward to reflect what you'll actually pay once inflation is factored in. That gets even more complicated for goals you expect to fund over several years, such as retirement or college.

Step 3

Go online or refer to your most recent statements to arrive at the current value of the investment assets you have earmarked for that specific goal. Also indicate how much you plan to invest toward this goal on an ongoing basis.

Step 4

Next, document your asset allocation targets for these investments.

Because your portfolio's asset allocation will ebb and flow based on how stocks are performing versus bonds and cash, your investment policy statement should set a range for your asset allocation rather than targeting a static figure for each asset class. After all, you don't want to have to make changes to your portfolio just because stocks went up 5% over the past month; that kind of trading can be costly and time-consuming.

For the broad asset classes, a range of 10 percentage points (or even 15 or 20 percentage points if you'd like to be a hands-off investor) is reasonable. For example, say your asset allocation target for your retirement portfolio is 55% stock, 40% bonds, and 5% cash. In your investment policy statement, you'd set out the ranges as follows:

Stocks: 50% to 60% Bonds: 35% to 45% Cash: 0% to 10%

Some investment policy statements include sub-asset-class brea