Identifying the Exposure and Managing the Risk
Case Study No. 2
The retirement strategy for the Jones and the Smiths are different but equal in value. The Jones invested in an expensive home while the Smiths in an RRSP. What is their exposure?
The Jones Family
Mr. Jones
Mrs. Jones
No RRSP, but $1M third-party liability insurance.
Fair Market Value of the Home
$3.5M
Hard Equity
$40,000
Retirement Planning
Sell home, buy new home for $1M and have $2.5M of capital to retire on.
Exposure
Fair Market Value
$3,500,000
Liability Insurance
($1,000,000)
Hard Equity
($40,000)
$2,460,000
The Smith Family
Mr. Smith
Mrs. Smith
RRSP of $2.5M, and $1M third-party liability insurance.
Fair Market Value of the home
$1M
Hard Equity
$40,000
Retirement Planning
Stay in the current home and retire on RRSP capital.
Exposure
Fair Market Value
$3,500,000
RRSP
($2,500,000)
Liability Insurance
($1,000,000)
Hard Equity
($40,000)
$40,000
Why the difference?
RRSPs are exempt from bankruptcy but homes, only $40,000 is exempt.
Conclusion
Both families are well positioned for retirement. The Smiths are better protected due to their investments in RRSPs rather then a more expensive home.
Solution for the Jones Family
Protect their home with a Principal Residence Protector™.
Why?
It would take a lifetime to recover their investment in their home that was to be used to facilitate their retirement.