Mini Case Section

The Smith's Household (20 marks)

Mr. & Mrs. Smith had generally done a good job managing their finances. They both had jobs they enjoyed. They also had two children. Sammy was in first-year university and Beth was a couple years younger. The Smith's had saved $22,000 for their children's education. However, the Smiths were concerned that this amount may be inadequate as education costs seemed to be exceeding the rate of inflation.

More worrisome was the fact that Mrs. Smith's father was now living in a long-term care facility. While the monthly cost was currently manageable at $2,050, it was expected that these costs would rise by roughly 7% per year. Although the father's CPP and Old Age Security covered a portion of the costs, the Smith's had to cover the balance.

Adding to the growing financial burden was the question of whether the Smith's, aged 45 and 46, had saved enough for their retirement. They had consistently been savers and made annual deposits to their RRSPs. At the same time, they were afraid the current demands may derail their future saving ambitions, or worse yet, require them to draw upon the RRSP savings.

1.What, if any actions the Smith'shave taken would you consider to be wise financial planning choices?(6 marks)

2.What areas of financial concern do the Smith's face?(6 marks)

3.Using time value of money calculations, compute the following: (8 marks)

a.In three years, what would be the value of the $22,000 education funds assuming a 12% interest rate?

b. If the cost of long-term care is increasing at 7 percent a year, what will be the approximate monthly cost for father's care in eight years?

c.The Smith's plan has been to deposit $1,500 a year to each of their RPSP's. If they will have been doing this for 40 years by the time they retire, what will be the value of each RRSP? Assume an average annual return of 9 percent could be achieved over those 40 years.