Couple wondering if they can afford to retire in few years

PERSONAL SITUATION.

You have an appointment with Keval and Priya Singh. They would like your advice on their current financial situation. Keval is 63 years old, he is very ill, and he is currently on disability. Priya is 60 years old and works as an office manager. They are married and live in Belleville, Ontario. They have two teenagers both living at home, one with two years to go to complete university and the other in Grade 11.

EMPLOYMENT INCOME

Their total income totals $ 86,000 per year before tax, but it will soon shrink. $ 32,000 of that is Kevals 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 $ 11,400 per year will also end when he moves into a long term care facility. The kids get $ 250 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 $ 400,000 house with a $ 250,000 mortgage; two cars worth $ 25,000 in total against car loans of $ 28,500. 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 $ 16,500. They have $ 60,000 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 $ 15,000.

Keval & Priya are understandably worried. Priya is wondering if they should sell their house. The direct cost of owning the house without repairs is their mortgage of $ 1,200 per month. Their monthly utilities work out to be $ 400 per month. Debt management is here and pressing. The couples income is stressed by the high cost of feeding two teenagers. They spend $ 1,600 per month on groceries, $ 220 a month for cell phones, $ 600 for entertainment, $ 500 for two car loans, $ 300 for car repairs, oil change and gas, and $ 4,800 annually for home and car insurance.

Keval 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

Priya has saved $ 60,000 in RRSPs which grows at 4 % above inflation.

If Keval dies, CPP will pay 60 % of his disability benefit and Priyas CPP to a maximum of $ 14,000 per year. The exact amount will depend on when he passes away. We will estimate that she will receive $ 9,600 from CPP at age 60. At 65, she will get the OAS benefit for about $ 6,600 per year and at that time she will start getting her RRSP payments. We assume that Keval would get $ 7,680 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.

Priyas 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 Keval and Priya Singh.

2. Prepare a complete Cash Flow statement for Keval & Priya Singh

3. Do you recommend that they sell their home? Provide your rationale

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

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

6 a). Calculate the future value of Priyas RRSP at age 65 ?

6 b). How much would the total value of her RRSP at age 65 generate in income per year (assume N=25 years)

7. What is their total income before tax in retirement, assuming Keval is alive ? Consider CPP, OAS and other sources of income in retirement.

8: What are your top two recommendations for Keval and Priya ? Provide your rationale