Couple wondering if they can afford to retire in a few years

PERSONAL SITUATION.

You have an appointment with Harry and Kelly Ellis. They would like your advice on

their current financial situation. Harry is 63 years old, he is very ill, and he is currently on

disability. Kelly is 60 years old and works as an elementary school teacher. They are

married and live in Pickering, Ontario which is situated 30 miles east of Toronto. They

have two teenagers both living at home, one with three years to go to complete

university and the other in Grade 10.

EMPLOYMENT INCOME

Their total income totals $ 88,000 per year before tax, but it will soon shrink. $ 33,000 of

that is Harrys corporate disability payments based on serious neurological issues. You

figure their marginal tax rate (MTR) is 25 % and their average tax rate (ATR) is 20 %.

Disability payments will end when he turns 65 in 2024. A CPP disability payment of $

11,600 per year will also end when he moves into a long term care facility. The kids get

$ 275 each as CPP dependants and that will end as well in 2024. The couple rent out

an apartment in their basement for $ 1,000 per month.

FINANCIAL MANAGEMENT

Their situation is grim when you consider their declining incomes, but it gets worse

when you consider their net worth. They own a $ 450,000 house with a $ 260,000

mortgage; two cars worth $ 26,000 in total against car loans of $ 29,500. They also

have an outstanding balance on their credit card and an unsecured line of credit. They

pay a high interest rate on these two debts with a total combined balance of $ 17,000.

They have $ 62,000 in RRSPs invested in a balance portfolio and an outstanding loan

taken as part of the Home Buyers plan. The outstanding loan for the HBP is $ 16,000.

Harry & Kelly are understandably worried. Kelly is wondering if they should sell their

house. The direct cost of owning the house without repairs is their mortgage of $ 1,250

per month. Their monthly utilities work out to be $ 440 per month. Debt management is

here and pressing. The couples income is stressed by the high cost of feeding two

teenagers. They spend $ 1,700 per month on groceries, $ 240 a month for cell phones,

$ 700 for entertainment, $ 550 for two car loans, $ 350 for car repairs, oil change and

gas, and $ 5,200 annually for home and car insurance.

Harry has two corporate disability policies for a total death benefit of $ 250,000;

however, one of the policies for $ 100,000 expires at age 71.

RETIREMENT PLANNING

Kelly has saved $ 62,000 in RRSPs which grows at 3 % above inflation.

If Harry dies, CPP will pay 60 % of his disability benefit and Kellys CPP to a maximum

of $ 14,200 per year. The exact amount will depend on when he passes away. We will

estimate that she will receive $ 9,800 from CPP at age 60. At 65, she will get the OAS

benefit for about $ 6,700 per year and at that time she will start getting her RRSP

payments. We assume that Harry would get $ 7,800 per year from OAS at age 65 and

no CPP payments. They would continue to get $ 12,000 annual rent in retirement from

their basement apartment.

Kellys income would be too high for the Guaranteed Income Supplement (GIS). Her

early start to taking CPP at 60 means a 36 % cut in her benefits for the rest of her life.

REQUIRED

Show all your work and state all your assumptions.

1. Prepare a complete Net Worth statement for Harry and Kelly Ellis. (5 marks)

2. Prepare a complete Cash Flow statement for Harry & Kelly Ellis (5 marks)

3. Do you recommend that they sell their home? Provide your rationale (2 marks)

4. What are your recommendations, if you have any, to reduce their monthly

expenses ? (2 marks)

5. Do you have any recommendations on what they should do, if anything, about

their outstanding loans ? (2 marks)

6 a). Calculate the future value of Kellys RRSP at age 65 ? (3 marks)

6 b). How much would the total value of her RRSP at age 65 generate in income

per year (assume N=25 years) (3 marks)

7. What is their total income before tax in retirement, assuming Harry is alive ?

Consider CPP, OAS and other sources of income in retirement. (4 marks)

8: What are your top two recommendations for Harry and Kelly ? Provide your

rationale (4 marks)