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George Alves (38) and his wife Marianne (38),




Scenario: The Alves Family


Background Information


George Alves (38) and his wife Marianne (38), live with their children Estelle (15) and


Jonathan (12) in a neighbourhood of middle- to high-income homes in Capital City.


Marianne works at home in a small Internet-based travel business she started 4 years


ago. She earns $10,000 per year, after tax. George is an ironworker and frequently


works on high-rise buildings. He earns $55,000 per year, after all deductions.


Georges father is retired and Georges mother is not able to function independently, so


his father must attend to her needs for much of his day. George supports his parents


by providing them with a part-time helper, reflected in the parental care section of the


Alves familys personal expenses (see Exhibit 1). George does not see this changing in


the foreseeable future.


George and Marianne have not done major work on their house since they purchased it


12 years ago, and they want to put in a new kitchen as soon as possible. They feel the


renovation can be done for $10,000, spread evenly over the next 2 years, if George


does some of the work himself. They would like to pay for the cost by cashing in an


investment. The kitchen renovation is an important goal, especially for Marianne who


likes to entertain. The house is fully insured with a named perils policy and the contents


are covered for actual cash value. The family purchased this coverage through Georges


union because it was the cheapest available.


George and Marianne are very interested in providing their two children with a good


university education. A local university advises that the cost of tuition and student living


expenses, currently $7,000 per year, will increase at least with inflation. George feels


the children will value their education more if they contribute to the cost, so he is


committed to providing a fund sufficient to pay half of the cost for each child (in actual


dollars at the time they are needed), for each year the child is enrolled in a 4-year


university program. He wants this entire fund available when the first child begins


university. As is customary, the Alves children will start university at the beginning of


their eighteenth year, tuition and living costs must be paid at the beginning of each




The Alves family has always driven used cars. They put a lot of miles on their vehicles


because George often works out of town and prefers to drive his own car in case he


needs to get home in a hurry. He is also able to load his own tools in the trunk and


back seat when he travels by himself. The familys last car was purchased 4 years ago


and they made the last monthly payment of $294 just this week. George has been


talking to a dealership about buying a new car at a cost of $26,500. He was offered


$8,500 for the old car on trade, which seems to him like a reasonable deal.


George has also been thinking of leasing a new car. This would be a new venture for


him, because he has always borrowed to buy his cars. If he buys, he will borrow over


60 months at 7.5%. Leasing would require a 3-year contract at a financing rate of 3%.


The monthly lease payment, including tax, would be $135.35. Administration charges


on the lease would be $800, paid up front. The same trade-in value would still be


applicable to the lease. The best estimate is that the car would be worth $12,000 after


5 years and $15,000 after 3 years. The family lives in a province with a sales tax of




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For planning purposes, George will use the lowest annual payment but he would like to


know what else he should consider when deciding whether to buy or lease. After


reading a newspaper article about the equivalent annual NPV method, he has decided


to use this method to choose the best financial option.


Georges carries car insurance with a deductible of $500 and liability coverage of




Unlike most of their friends, the Alves take no real vacations and only manage to get


away camping for a couple of days in the summer. They want to take a 2-week


vacation each year for the next 3 years, while their children are still at home. They


estimate the cost of such a vacation to be $6,500 per year.


Cash and Debt Management


George keeps all his cash in a chequing account because he says you never know


when you might need it. George also looks to his 5-year GICs and Canada Savings


Bonds for emergency funds. Mariannes cash is in a savings account. Georges


chequing account has a $15 monthly fee and pays no interest. There is also an


additional charge for any cheques he writes.


For credit purposes, George has a gold card and a companion card for Marianne. The


fee is $125 a year for the main card and $60 for Mariannes card. The yearly interest


rate is 18%. The card gives travel rewards and has an insurance waiver for rental


vehicles. The Alves never carry a significant credit card balance because they do not


like debt.


When George and Marianne bought their home 12 years ago, they opted for a 15-year


amortization period so the home would be paid off as soon as possible. The payment


schedule was heavy, but the additional income from Mariannes business allowed them


to continue to make the scheduled payments. They would like pay the mortgage off




The mortgage balance was $28,972 when the mortgage term expired last week. The


Alves are negotiating the renewal now at the new and lower rate of 6.50%. They would


like to pay it off in 2 years, instead of the 3 that remain. (They cannot remember what


their new monthly payments would be, the old one was $893.) The house cost


$120,000 and it has appreciated at 3.25% per year. While the value of the house is


expected to continue to grow at this rate, future inflation is expected to be


approximately 2.50% a year.


Risk Management and Insurance Issues


There is a very high risk of accidents in Georges work. Safety improvements have


resulted in fewer accidents, but any accidents are serious. Despite the risk, the


company does not offer any disability coverage because accidents are so infrequent.


The company does have a 3-month sick leave provision. George feels adequately


protected because he has liability coverage against accidents in his homeowners




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Georges employer provides optional group life insurance in multiples of an employees


yearly salary, to a maximum of three times gross salary. George has purchased


coverage of $185,000, twice his annual gross salary, though he could take a maximum


of $278,000. George and Marianne are not sure if they are carrying the correct amount


or type, of life insurance.


George and Marianne have discussed expected costs in the event of his death. They


feel that personal expenses, excluding loan payments, would drop to about 75% of


current levels if either one of them were to die. In 6 years, those expenses would drop


to 50% once the last of the two children reached 18 and left home to go to university.


They foresee this condition would last until Mariannes death in about 45 years after


that. Marianne would continue to live in their home and they feel she and the children


should have the new car and the kitchen renovation. The education fund would also be


a necessity. Marianne would probably be in a 25% average tax bracket after Georges




Given the projected expense reductions, they see little need to insure against the event


of Mariannes death since George would continue to work.




In addition to a pension plan through his employer (see Retirement below) George has


$14,200 in his chequing account




a $10,000, 20-year government bond with a coupon rate of 5.125% (semi-annual


payments), a yield of 6%, and 6 years left to maturity.


Marianne has a savings account with a balance of $1,300. The familys assets and


liabilities are shown in Exhibit 2. When they purchased their home 12 years ago, they


also decided to commit themselves to RRSP contributions. Since then, George has


contributed $2,000 a year to his RRSP. They decided that Marianne does not earn


enough to contribute to an RRSP. Georges RRSP has grown at an annual compound


rate of 4.5% over the 12 years. In the future it is expected to grow at 6% (see


Exhibit 3). The RRSP is invested in the BlueBell Canadian Fund. George liked the idea


that it was a no-load, deferred charge fund, so he also purchased some for his


unsheltered account. His latest statement from BlueBell shows that his non-registered


holdings are now worth $8,450. The statement also pointed out that the fund has a


Beta of 1.26. George doesnt know the significance of that, but it sounds important.


The Canada Savings Bonds were bought through a payroll deduction plan at work.




George wants to retire when he is 60, and with enough money to provide for 25 years


of post-retirement income. Retirement is a high priority, as he sees his career as a


young mans job. George feels that he and Marianne will require an annual net income


of 60% of their combined net incomes (currently $65,000 as shown in Exhibit 1 below)


to maintain their desired retirement lifestyle. While he and Marianne could continue and


expand the Internet business after retirement, they really do not want to, unless it is


necessary. Both George and Marianne would take CPP when they each reached age 60


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(22 years from now for both of them). They expect they will be in a 25% average tax


bracket at that time with minimal income from CPP and their investments.


Georges employer has provided a defined contribution pension plan for the past 11


years. An employee can contribute up to $6,000 per year and the employer will match


the employees contribution to a maximum of $3,500 per year. George contributed


$2,000 in each of the first 2 years that the plan was available. Every year since then


he contributed $3,500. The plan has earned a compound average rate of 5.25% per


year since inception. The future rate of return is expected to be slightly higher (see


Exhibit 3). George plans to continue to contribute $3,500 of his own money up until he


retires. His contributions are deducted at source.


For planning purposes, George considers that only the money in his pension plan and


RRSP will be used for retirement purposes. It is very likely that they will have other


financial assets by the time they retire, but they will use these for the extras, such as


trips and maybe even health care.


Hint: To create a retirement plan for the Alves, calculate


annual retirement needs in todays before-tax dollars


annual retirement income available from Canada Pension Plan


current annual shortfall (from the numbers above)


inflation-adjusted shortfall


funds needed at retirement to cover the shortfall


future value of retirement assets (RRSP and Pension Plan)


total future value of retirement assets needed at start of retirement


shortfall at time of retirement


yearly contributions needed to make up shortfall.


Estate Issues


One of Georges main concerns is caring for his parents. He worries that if anything


happens to himthe only childhis parents will not have the extra income of $6,000


a year that he provides them. George estimates that he will probably continue to


subsidize his parents for the next 15 years.


George is also concerned about his mothers inability to look after her investments if


anything were to happen to Georges father. Georges father is keen about managing


his investments, unlike his son, and while he is alive, there is no problem. Since


Georges father is interested in finance, George named his father as executor of his


own will when he and Marianne got married. A great deal has happened since then.


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Exhibit 1


The Alves


Income and Expenses (for last year)


Income (net)














Expenses (yearly)




Mortgage Payments


Property Taxes


Property Insurance




Utilities, heat, phone, etc.






Gas, insurance, repairs


Parental Care


Health and Hygiene






Miscellaneous (charitable donations, gifts, etc.)


RRSP contribution


Leisure and Travel


Total Expenses1


Surplus (deficit)




Does not include all scheduled payments


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Exhibit 2


The Alves


Assets and Liabilities (as of today)








Chequing Account


Savings Account




Registered (RRSPs)


BlueBell Canadian equity fund




Government of Saskatchewan bond


Canada Savings Bonds




BlueBell Canadian Equity Fund






Household furnishings
































Credit Cards overdue


Line of Credit Mariannes business


Personal Loans - car






Total Liabilities






Net Worth




George and Marianne have their investments registered in separate names


Face value




Just renewed for 5 years




Historic cost




Original value




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Exhibit 3


The Alves


Other Financial Information


CPP death benefit


Maximum CPP benefit at age 65


(current, but indexed to inflation)


Expected annual inflation rate


Expected average, pre-tax, nominal return on


all sheltered and unsheltered investments


Estimated Funeral Expenses


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Paper#27166 | Written in 15-Dec-2015

Price : $17