Ethan is a registered nurse working at a long-term home. His annual gross salary is $70,000 (before tax).

He has recently attended a seminar on how to use a Tax-Free Savings Account (TFSA). Ethan is already contributing to a Defined Contribution pension at work; however, he wants to save more for retirement. He will use a TFSA, as the investment income earned in a TFSA is not taxed.

Ethan has just completed a specialist designation. Effective immediately his salary will increase by 20%. After this increase, his salary will increase by 3% for all subsequent years. Assume that the tax on all salary income is 25%.

Ethan plans to save the following at the end of each year: 5% of after tax salary for the next 15 years, then increase the annual savings to 10% of after tax salary for the remaining years. Ethan will earn 7% p.a. on his savings.

*Ignore contribution limits for TFSA.

Required:

1. How much will Ethan have saved in his TFSA after 15 years? (10 marks)

2. How much will Ethan have saved in the TFSA after 20 years? (10 marks)

3. If the inflation rate is 2% p.a. for every year, what is the real value of the TFSA balance (use balance calculated in part b), in todays dollars? (5 marks)