Question
June 30, 2022. Elaine, aged 44, is a Data Specialist. Her husband, Paul, aged 42, is a Production Manager. Annually, Elaines gross earnings are $122,000
June 30, 2022. Elaine, aged 44, is a Data Specialist. Her husband, Paul, aged 42, is a Production Manager. Annually, Elaine’s gross earnings are $122,000 and Paul’s gross earns are $94,000. They have three children, Mady, aged 14, Travis, aged 11, and Marc, aged 9.
Elaine and Paul give you the following information regarding their current finances:
Elaine and Paul Net Worth Statement June 30, 2022
Liquid Assets Current Liabilities
Joint Chequing Account 8,852 Elaine Credit Card, 19.5% 5,412
Joint Savings Account 29,542 Paul Credit Card, 20.97% 5,458
Paul Vehicle Loan, 4.13% 6,525
Investment Assets Credit Line, 6.25% 31,562
Elaine TFSA 27,856
Paul TFSA 41,525 Long-term Liabilities
Elaine RRSP 58,940 Mortgage - Ottawa Home 561,200
Paul RRSP 42,596
Elaine DC Plan (Note 1) 139,568
Real Estate Assets
Home - Ottawa 1,050,000
Personal Assets
Elaine Vehicle 14,800
Paul Vehicle 21,900
Total Assets 1,435,579 Total Liabilities 610,157
Net Worth 825,422
Note 1: The defined contribution plan (DC Plan) is from Elaine’s prior place of employment. The funds are for retirement savings. Elaine selects the investments based on the limited fund options within the DC Plan. The before-tax real rate of return for the DC Plan is 3.6% pa.
Their TFSAs and RRSPs are invested in the below funds:
Fund | E(r ) before-tax | TFSA | RRSP |
Fixed interest | 3.65% | 11,285 | 45,751 |
Canadian Equities | 10.15% | 35,854 | 49,196 |
International Equities | 10.45% | 22,242 | 6,589 |
Total | 69,381 | 101,536 |
Elaine and Paul plan to use the funds in their TFSAs for future travel plans and emergency funds. The funds in the RRSPs and DC Plan are their current retirement savings. Elaine and Paul make annual contributions of $5,000 and $7,000 respectively to their RRSP accounts.
Their monthly cash flow surplus is $450.
One of Elaine and Paul’s financial savings goals is to have $900,000 (before-tax dollars) saved for retirement when Paul turns 65.
Elaine and Paul provide the following information regarding their group insurance coverage:
• Life Insurance
o Elaine, 2 x base salary to a maximum of $225,000. Beneficiary, Paul.
o Paul, 1 x base salary. Beneficiary, Paul’s Mom.
• Disability Insurance
o Elaine, coverage for 70% of gross income, to a maximum of $7,000 a month. The coverage has a 180-day elimination period and covers any occupation definition.
•Extended Health Coverage
o Comprehensive covers prescription drugs, and paramedical. $100 per person annual deductible, no maximum, coinsurance 80%.
•Dental: Comprehensive, $25 deductible per claim.
• Vision: Covered with an annual maximum of $500 per claimant.
In addition to the coverage listed above, Elaine and Paul tell you that they have a joint first-to-die, term life insurance policy with a face value of $250,000 and three years until maturity.
Elaine and Paul recently had their home and auto insurance coverage reviewed and implemented all the recommended changes to ensure adequate coverage.
Assumptions:
• Tax rates:
Taxpayer | Average Tax Rate (Federal and Provincial) | Marginal Tax (federal and Provincial) |
Elaine | 26.63% | 43.41% |
Paul | 22.08% | 33.89% |
• Inflation 3%.
A. Identify four risks that Elaine and Paul are exposed to (think risk management) and explain why they are risks and how the risks you have identified impact their personal finances? You can answer this question without showing calculations.
B. Using the income approach, calculate the amount of life insurance should each purchase to protect their family finances? Round up to the nearest $10,000 and assume they will retire when Paul turns 65. Assume payments are at the beginning of the period, use a real after-tax interest rate of 2%, and ignore the CPP benefits.
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