Family Maintenance Fund

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Recommended: Family management practices for maintaining financial stability

Sue and Tom Wright are assistant professors at the local university. They each take home about $40,000 per year after taxes. Sue is 37 years of age, and Tom is 35. Their two children, Mike and Karen, are 13 and 11.

Were either one to die, they estimate that the remaining family members would need about 75% of the present combined take-home pay to retain their current standard of living while the children are still dependent. This does not include an extra $50/month in child-care expenses that would be required in a single-parent household. They estimate that survivors' benefits would total about $1,000 per month in child support.

Both Tom and Sue are knowledgeable investors. In the past, average after-tax returns on their investment portfolio have exceeded the rate of inflation by about 3%. ASSUME THAT THEIR REAL RATE OF RETURN = 4% SO THEY EARN 7% ON THEIR INVESTMENTS.

1. If Sue Wright was to die today, how much would the Wrights need in the family maintenance fund? Use the "needs approach" and explain the reasons behind your calculations.

2. Suppose the Wrights found that both Tom and Sue had a life insurance protection gap of $50,000. Present the steps in sequence how Wrights should proceed to search for protection to close that gap?

Solution:

Question #1: Calculating the Maintenance Need

 Monthly Survivor Expenses = [(75% * $80,000) /12] + $50

 Monthly Survivor Expenses = ($60,000/12) + $50

 Monthly Survivor Expenses = $ 5,000 + $50

 Monthly Survivor Expenses = $5,050

 Monthly Survivor take home-pay = $40,000 / 12

 Monthly Survivor take home-pay = $3,333.33

 Total Contribution by Survivor = $3,333.33 + Monthly Survivor’s Benefits = $1,000

 Total Contribution by Survivor = $3,333.33 + $1,000

 Total Contribution by Survivor = $4,333.33

 Monthly Maintenance Requirement = Monthly Survivor Expenses - Total Contribution by Survivor

 Monthly Maintenance Requirement = $5,050 - $4,333.33

 Monthly Maintenance Requirement = $716.67

 Annual Maintenance Requirement = Monthly Maintenance Requirement x 12 month

 Annual Maintenance Requirement = $716.67 x 12

 Annual Maintenance Requirement = $8,600.04

The contributions of the survivors would equal monthly take-home pay of $40,000/12 and survivors' benefits of $1,000. The remaining calculations are contained on the following worksheet:

Monthly Survivor's Expenses $5,050.00

Monthly Survivor's take-home pay $3,333.33

Monthly Survivor's Benefits $1,000.00

TOTAL CONTRIBUTION BY SURVIVOR -$4,333.33

Monthly Maintenance Requirements $716.67

Calculate size of Maintenance Funds x 12

Annual Maintenance Requirement $8,600.04

Multiply by Annuity Factor (7 yrs at 4%) x 8.

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