John and April have been referred to you by one of your best clients for help with their financial affairs. John is self-employed as a Massage Therapist and April is a teacher. They are not married. John is 41 years old and has just recently graduated as an RMT. He is building his practice and is surprised by how fast it is growing. He has been in practice for two and a half years and is paying himself a salary of $50,000 per year. April is 35 and has been working as a teacher for the past 12 years. They have one child, Samuel, who just turned a year old. April earns a salary of $65,000 with summers off. John was married before he met April. He was married for two years but had no children. He now pays his former wife $800 per month. John and April have been living in an apartment while they save for a house for the last 6 years. They are paying a rest of $1,200 a month. They are looking to buy a house soon. Another family issue that a house would solve would be to allow April’s mother Sarah to move in with them. Sarah just turned 63 and is thinking of retiring. Her savings consist of $125,000 invested in GIC’s earning 4%; she has no pension and will likely be relying on government pensions to live. John and April are concerned that Sarah will not have enough to live on, given that government pensions do not provide much in the way of income. Sarah has lived in Canada all her life and has always worked. She is in very good health. John and April both feel strongly about Samuel receiving some sort of post secondary education. They feel that on average, this type of education will cost 10,000 per year (inflation adjusted) by the time Sam goes to school. They estimate he will go to school for 4 years starting at age 18. They currently have a RESP account set up where they are contributing $25 per month. They have saved $200, but they have not seen much growth yet. They want you to assume that the value of the RESP is $200 for any calculations. They were sent a brochure in a welcome wagon basket when Sam was born for “University Scholarship Funds”. A salesman came over and set them up on a monthly contribution plan. They are earning about 6% on their investment. John’s father just passed away and John and his brother Hank are the executors of the estate. John was very close with his father and took his death very hard. His father had a fair-sized estate consisting of his home, purchased 15 years ago for $300,000 now worth $500,000; a RRIF account worth $650,000 and an unregistered investment account of $200,000 with an ACB of $150,000. His father’s only debt was an unsecured line of credit for $30,000. The beneficiary on The RIF account was “Estate” and so was the beneficiary on his only life insurance policy for $150,000. All his father’s other property was owned solely in his father’s name. His father also had a company pension plan that paid him $40,000 a year and was collecting $11,000 a year in government benefits including OAS and CPP. John and his brother do not get along and so the estate is taking forever to settle. John is concerned that if they don’t settle the estate soon, some of the assets in the estate might 2 begin to decline in value. John is also concerned because his father had moved in with Marsha, his girlfriend, a little over 18 months before he passed away. There was no beneficiary named on his RRIF accounts. She was not included in his father’s will, and she is very upset about it. She has retained a lawyer and is threatening to make the estate even more of a hassle to settle. Marsha is a widow and is currently retired and receiving a CPP pension, including a survivor’s pension, as well as a modest private pension. John suspects that she was counting on inheriting the bulk of his father’s estate. April is worried that the stress of dealing with Hank and Marsha is taking its toll on John and that his health is starting to suffer. John and April both have small RRSPs that are invested in GICs at their local bank. John has about $10,000 and April has $15,000. April also has a pension through the teacher’s association. Her last PA was $3,500 and the commuted value of the pension was $35,000 on her last statement. John and April have been increasingly concerned with the low rates on GICs at renewal time. They have felt for some time that they needed to do something so John and April saw another Financial Planner a few months ago but found him too pushy. They told you that he wanted them to sign a contract without reading it and that they felt pressured to buy that day without really understanding the information they were given. He told them that if they did not start investing the same day, they would not have enough time to save all the money they would need. He told them that they would need to have savings of $500,000 by the time they retire, assuming they both wanted to retire at John’s age of 65. They had told him that they both expected to live 25 years in retirement and that they would need $55,000 (in future dollars) per year excluding all savings to date. He gave them the following information regarding investments he could make for them: Beta Return Canadian Index Fund 1.0 10.2% International Income Fund 0.8 8.5% Canadian Growth Fund 1.2 11.1% Canadian Aggressive Fund 1.8 13.0% The year that the returns were quoted for the market returned 10.2% and the T-bill rate was 4.8%. The advisor also suggested they consider buying a real return bond. The bond had a 4% real coupon rate.
Unlike normal annuity payments consisting of mostly interest (and little capital) in the early years and vice-versa in the later years, a _____________ overcomes this potential problem by spreading the interest evenly over the life of the annuity.
Straight life annuity