Case Study - Retirement Plan

David and Lisa have come to you to determine if their current level of savings will be sufficient to sustain their current lifestyle (i.e., disposable income) when they retire. They have provided you with the following important information necessary to provide them advice:

• David is 50 years old and his wife Lisa is 51;
• They plan to retire in 10 years;
• They need a plan that assumes that David lives to age 91 and Lisa until she is 96; and
• They live in a small house in Toronto and plan to stay in the house during their retirement.

Financial Information

Financial information for David:

• David has earned over $100,000 in each of the last 5 years and expects to be able to sustain $100,000 in take-home pay after taxes, CCP, and EI premiums for the next 10 years until his retirement.
• David has no company pension and has not in the past made contributions to an RRSP. However, he has contributed $15,000 in each of the last two years to an oil and gas mutual fund which currently has a balance of $30,000.He intends to continue to save $15,000 annually until retirement.

Financial information for Lisa:

• Lisa currently earns $40,000 in take-home pay after taxes, CCP, and EI premiums and expects to maintain this amount until retirement.
• Lisa has contributed $2,000 to her RRSP for the last 7 years and currently has a balance of $20,000.She intends to continue to save $2,000 annually until retirement.
• Lisa has an inflation-adjusted company pension of $25,000 in today's dollars that she will collect upon retirement in 10 years

Financial information for David and Lisa:

• David and Lisa are currently making annual mortgage payments of $42,000 that will continue for the next 10 years after which their house will be debt-free
• They are also currently paying $25,000 annually for the education their two children and will continue with this support for the next 5 years
• For each of the last 5 years prior to retirement, assume David will contribute to an RRSP the additional $25,000 not paid out in school expenses.
• Also assume that any tax rebate from RRSP contributions by either David or Lisa are reinvested in their RRSPs
• At age 65, both David and Lisa will be eligible to collect 80% of their CCP entitlement

Case Study Requirement

You are expected to undertake calculations to provide to this couple an amount (if any) of additional savings over the next 10 years prior to retirement needed to support (in inflation-adjusted dollars) their disposable income at a level equivalent to 80% what they are currently experiencing.

These calculations will be undertaken on an EXCEL spreadsheet.The exercise will be based on:

• Calculating the net present value (at the beginning of their retirement period) of net after-tax revenue and income during their retirement
• The second calculation will be to compare this to the future value of all their accumulated savings available at the beginning of their retirement period.
• In the event that the future value of the savingsis not sufficientto support the present value of their net retirement expenditures, you will calculate what additional annual savings needed over the next 10 years to balance these two calculations
• In the event that the future value of the savingsexceedsthe present value of their net expenditures, you will calculate the reduction in annual savings that they would be able to afford over the next 10 years to balance these two calculations

Important Considerations

• Assume in your analysis that the annual inflation rate over the entire pre and post retirement period is 2% and that investments they have or will make will yield a 4% return.
• CPP and OAS revenue, when received at age 65, will be in inflated dollars with the claw-back (if any) based on their retirement income at that time.
• Be sure in the EXCEL spreadsheet(s) that you submit that all links are included so I can follow how you carried out your calculations.

1. Calculation of net revenue required during retirement
2. Calculation of savings available at the beginning of the retirement period