Case
Calculating Retirement Income
Nanci, age 42, and Serge, age 39, residents of Saint John, New Brunswick, have become increasingly worried about their retirement. Nanci, an office manager, dreams of retiring at age 62 so that they can travel and visit family. Serge, a self-employed benefits consultant, is unsure their current retirement plan will allow them to achieve that goal. He is concerned that the cost of living in New Brunswick, along with their lifestyle, has them spending at a level they cannot maintain. Although they have a combined income of well above $100 000 per year, they got a late start planning for retirement, which is now just 20 years away. Nanci has tried to plan by contributing to her RRSP, but she is currently investing only $3500, at the end of each year, of her before-tax income of $52 000. Serge does not have a set amount he contributes to his RRSP and puts money in it whenever he can. He currently earns $72 000 per year. In retirement, the couple would like to be able to cover their current annual expenses of $70 000. They project that they will each receive $1400 at the end of each month, in today’s dollars, from OAS and CPP. This amount will increase at an effective rate of 2 percent per year. Nanci and Serge have RRSP accounts currently valued at $20 000 and $47 800, respectively. Their RRSPs will grow at an annual rate of 6 percent per year, compounded annually, from now until the end of their retirement. Their marginal tax rate is 36.82 percent. The couple would like to plan for a retirement that lasts until Nanci reaches age 90. Use this information to help them prepare for a prosperous retirement.
Assuming an inflation rate of 3 percent, calculate the present value, at retirement, of their retirement income need. Calculate the present value, at retirement, of their OAS and CPP pension income. Calculate the present value, at retirement, of their RRSPs. Assume that Serge will match Nanci’s annual contribution amount. How much, if any, will they need to invest annually to make up for any shortfall? Nanci and Serge are considering reducing their expenses in retirement to $60 000 per year. How will this affect the amount they have to save in retirement? Assume that they make their annual investment at the end of the year and that they withdraw their retirement income need at the beginning of each year.
