Jeff and Sylvia Chan both age 65 plan on retiring next month and they have come to you for help in preparing for their retirement. They still have some debts outstanding including a mortgage of $125,000 that is on a variable rate of 2.85% and requires payments of $583 per month. They can convert this mortgage to a closed five year term at any time. They also pay property taxes of $4,650 per year. In addition, they also have a line of credit where they have borrowed $40,000 and are required to make minimum interest only payments charged at a rate of prime + 2.0%. They also have Royal Bank credit card debt of $20,000 each subject to an interest rate of 18% and minimum monthly payments of 3% of the balance owing which would include the interest amount.

As far as assets their principle residence is worth $850,000 and they each have an RRSP with CIBC worth $600,000 for Jeff and $700,000 for Sylvia. They also have funds invested in redeemable term deposits worth $250,000 earning .75% at TD Bank. Their primary source of income in retirement will be based on the minimum withdrawal from their RRIFs at age 65, along with maximum Canada Pension Plan (CPP), and OAS. All of their retirement income will be subject to income tax at rate of 40%.

In retirement they expect to spend:

$800 per month on food

$600 per month on entertainment

estimated auto insurance will cost $170 per month for Jeff and $130 for Sylvia

estimated fuel costs of $250 each per month

Golf club for Jeff of $300 per month

yoga classes for Sylvia of $100 per month

together they expect to spend $10,000 per year on a travel vacation

Jeff spends approximately $500 per month on lunches with his friends

they each spend $2,500 per year on gifts for friends and family

they expect personal care (haircuts, grooming) to cost $100 per month each

clothing/dry-cleaning is expected to cost a total of $100 per month

household cleaning supplies will cost $100 per month

health care costs of $200 each per month

property insurance of $1,200 per year

Utilities are expected to cost $200 per month

they also expect that they each spend $250 per month each on miscellaneous items like coffee, newspapers, etc.

Requirement:

Q1: If they decide to downsize and sell the house or market value of $850,000 how much will they receive after standard realtor commissions and taxes? They purchased the house for $200,000 in 1980 and their tax rate is 40%. (2)

Q2: When Jeff and Sylvia purchase home insurance that has a co-insurance clause of 80%, what would be the minimum amount of coverage they would need assuming a replacement cost of $850,000? What happens if they insure the replacement cost for less than 80%? (2)