Christians Education Planning - Case Study Example

Running Head: Christian’s Education Planning Name: Instructor: Institutional Affiliation: Date: His Goals and Objectives Have a high and well maintained living standards at retirement Pay minimal tax Have a good living standard despite the dead of the wife. Enhance financial independence Have the estates inherited by his heirs Providing the children with education Stay ahead of inflation. Be ahead of inflation Earn a higher rate of return. Maintain a higher RO I Manage his investment wisely Education Planning Investing for Education In order to secure reasonable and well rewarding employment in this increasing changing and competitive world that has be characterized by technological advances, Christian’s children have to acquire high educational and training qualifications. To acquire this qualification, it’s expensive as an individual and governments have to minimize spending, deficits and make sure that the budgets are balance. Approximately $ 49,000 is the amount required currently to finance university education for four years. These include food, tuition rent, additional fees and books. In 2022, eighteen years later, higher (university) educational will be estimated to be costing at least $ 83, 000. This is based on the assumption that the costs will be costing 3% per annum. With an investment of $ 150 monthly in an RESP earning 8.5%, Christian will be able to pay college fees for his children. Enrolling for the registered Education Savings Plans (RESPs) and in trust accounts are the two ways he can have his children acquire post-secondary education through saving. RESPs Beneficiaries of the government- approved RESPs get their post-secondary education funded purpose to which the funds were created for. One of the main advantage of the fund is that, it is not taxed until withdrawn with an amount as high as $5,000 is contributed every year towards the to a maximum of $ 45,000 contributed in a lifetime for every child. There is also the receipt of Federal Education Savings Grants (FESGs) for every RESP holder of close to $400 ($ 8, 00) for every child under the age of 18. The maximum benefits from FESG of $7,500 can also be derived by any member who is a holder of RESP per every child. In-Trust Accounts Christian can also choose to save for his children through the in-trust account. This is an investment account that is normally opened on behave of the children with the money invested on the held until the child reaches the age of 18. One unique characteristic of this fund is that any amount that is generated from this informal in-trust account and can be included in the child’s income. It is however taxed at a lower tax rate. These accounts have some differences that are conspicuous to RESPs. They include but not limited to: The holder can invest as much as he or she wishes in an in-trust account The amount collected does not necessary have to be used for education The contribution does not qualify for the FESG grants ___ Education Funding Plan Summary In order to secure reasonable and well rewarding employment in this increasing changing and competitive world that has be characterized by technological advances, Christian’s children have to acquire high educational and training qualifications. To acquire this qualification, it’s expensive as an individual and governments have to minimize spending, deficits and make sure that the budgets are balance. Education funding plan Name Funds Needed Future value of Savings Surplus/ Shortage Monthly Investment Amy $56,371 $3,127 $- 45,122 $ 298 Alice $60,627 $6,787 $-56,830 $ 162 Totals $116,789 $6,945 $ -109, 863 $ 360 A negative amount indicates an education fund Amy shortage; a positive amount indicates a surplus. Education Funding Plan Results Name Funds Needed Future Value of Savings Surplus/ Shortage* Monthly Name Investment Amy $56,271 $3,138 $ -53,138 $198 Alice $60,627 $3,797 $-56,830 $162 Totals $116,898 $6,935 $- 109, 963 $360 A negative amount indicates an education fund shortage; a positive amount indicates a surplus. Education Funding Funds Needed = 116,898 Future Value of Savings = 6,935 Shortage = 109,963 Education Funding Plan for Amy Monthly contributions required to fund education RESP contribution $ 165 CESG grant $ 33 Total RESP contribution A 198 Total Non-RESP contribution B Total monthly contribution (A plus B) $ 198 Education costs Total post-secondary education costs $ 64,838 Present value of the above costs at the start of 1st year of school A $ 56,271 Percentage of above education costs to be covered by this plan B $ 100.00% Funds needed at the start of the 1st year of school (A x B) C $ 56,271 Future value of current savings at the start of the 1st year of school D $ 3,138 Shortage (D minus C) $ -53,133 Education cost table Year# Year Age Total annual education costs Tuition costs Annual Room & Board Costs 1 2012 18 15,320 8,979 6,341 2 2013 19 15, 897 9,427 6,387 3 2014 20 16,574 9,700 6,497 4 2015 21 17,241 10,495 6,529­­­­­­ Totals $ 63,838 $ 38,702 26,737 Assumptions Current age 7 Start school at age 19 Years in school 5 Fund education using RESPs YES__________ Current RESP savings $ Annual RESP contribution $ 1,000 RESP rate of return 10.00 ________ Current non-RESP savings $ Annual non-RESP savings $ Non-RESP rate of return 5.00 %_______ Current annual tuition costs $ 6,000 Current annual room & board costs $ 6,000 Tuition inflation rate 5.00 % Room & board inflation rate 2.00 %_______ Education Funding Plan for Alice Monthly contributions required to fund education RESP contribution $ 135 CESG grant $ 27 Total RESP contribution A $ 162 Total Non-RESP contribution B $_____________...... Total monthly contribution (A plus B)________________________________$_____ _162______ Costs Education costs Total post-secondary education costs $ 69,861 Present value of the above costs at the start of 1st year of school A $ 60,627 Percentage of above education costs to be covered by this plan B $ 100.00 % Funds needed at the start of the 1st year of school (A x B) C $ 60,627 Future value of current savings at the start of the 1st year of school D $ 4,675_____ Shortage (D minus C) $ 57,720_____ Education cost table Year# Year Age Tuition annual Education Costs Tuition Costs Annual Room & Board Costs 1 2014 18 15,387 9,800 6,978 2 2015 19 16,217 10,267 7,202 3 2016 20 18,787 11,912 5,681 4 2017 21 16,671 12,360 6,701___________ Totals $ 69, 781 43,983 26,182__________ Assumptions Age Current age 4 Start school at age 18 Years in school 4 Fund education using RESPs YES______________ Current RESP savings $ Annual RESP contribution $ 1,000 RESP rate of return 10.00 %__________ Current non-RESP savings $ Annual non-RESP savings $ Non-RESP rate of return 5.00 %___________ Current annual tuition costs $ 5,000 Current annual room & board costs $ 5,000 Tuition inflation rate 5.00 % Room & board inflation rate 2.00 %___________ Education Funding Plan - Additional Assumptions The contributions made to RESP has its current RESP savings amount has it as principal contribution. This principal amount is used in calculating the contribution to RESP based on the maximum of $45, 000 lifetime limit. With a maximum of between to $ 34 or $ 450 per year, RESP and FESG contribution s and amount that is not enough for both the non- RESP as required to meet the shortfalls If Non-RESPs are used to fund education, no RESP or CESG calculations are performed. At the end of every month, all the monthly contribution are made Compound interest is the required for the calculation of the monthly contribution. The PV of annual cost of education at the beginning of the first year of the uses of school uses as RESP rate of return with this calculations made based on these estimates Recommendations Rebalance his current portfolio allocation from Cash 14%, Bonds 6%, Stocks 67%, and Balanced 13% to the following allocation: Cash 6%, Bonds 3%, Stocks 86%, Balanced 5%. He will require $ 202,982 in additional capital at retirement to fund his retirement based on the assumptions used in his plan. To achieve this requirement, he need to make annual investments of $2,129 between now and retirement with an average rate of return of 8.75%. He should review his retirement plan annually to account for any changes in the assumptions of his plan and his financial situation. To allow for the accounting of the financial changes made , an annual review of the document is to be made An investment on the university fees for the children has is to be made with $370 every month while making sure that he remain on course on meeting his financial goals. Risks Christian is very concern on some of the potential risks that he is facing like untimely death, illness, long-term illness and long-term care in the old age. Read More