Answer the question based on the following information,

- You are currently 35 years old

- Earn $120,000/year - paid at the end of each month

- Hope to retire at 65 but have absolutely nothing saved for retirement

- Your job entitles you to a real (after-inflation) pension paying 40% of final retirement salary for the rest of your life

- Your pension is guaranteed to increase at the rate of inflation (Assume inflation is 1% throughout the period.

Qa) When you turn 65, how much financial capital must you have in order to not run out of money by 95?

Assumptions:

- Tax rate of 35% during your working life and in retirement

- All your capital is in RRSP account and earns a 5% rate of return before tax throughout the period

- Pension plan is guaranteed to pay you 40% of your earnings at age 65 and then increase by 1%/ year

- Inflation increases by 1% per year

- You want to keep spending the same dollars in retirement as you did during your working years.

Qb) What rate of return will you require and do you believe this type of return is achievable? Why or why not.

Assume:

- You are able to accumulate $1,500,000 in an RRSP & want to keep your capital intact at retirement to pass onto your children and only live from your capital

- You have already calcuated the $75,000 to be the inflation adjusted starting after-tax income requirement when you retire

- You estimate your tax rate will be 35% throughout the period

- The rate of inflation throughout your retirement period to be 2%/year

- You have no pension plan (unlike in part a, they are not connected)