In-class Assignment: Retirement Projections The Ramseys

Gordon and Gayle Ramsay are planning on retiring in 12 years time. They are both currently 52 years of age. When the couple retires they want to move out of the city and golf. They also want to be able to travel a couple of times a year. The Ramsays believe that they will need $125,000 per year in retirement to cover their living and travel expenses.

Gordon works at an automotive company as an engineer. He earns $150,000 per year and his company has a defined contribution pension plan. He contributes 5% of his income and his company matches his amount. The current balance in his DCPP is $365,000 and it is invested in a balance portfolio that has been providing an average rate of return of 5.35%.

Gayle is a secondary school teacher and earns $96,000 per year. She has been a member of her defined benefit pension plan for the past 23 years. She anticipates that her average earnings at retirement will be $99,000. Her pension plan has a 2% factor.

The Ramseys have also been contributing to their RRSPs over the last number of years in anticipation of the retirement. Gordons RRSP is valued at $120,000 and has been earning an average rate of return of 6%. Gordon has been contributing $500 per month and plans to continue these contributions until retirement.

Gayles RRSP is substantially smaller because she has minimal RRSP contribution room because she is a member of a DBPP. The value of her RRSP is $34,600 and has been earning an average of 7%. Gayle has been contributing $100 per month and plans to continue these contributions until retirement.

The Ramseys plan on downsizing their home when they retire and move out of the city. They are anticipating that they will have $250,000 in proceeds from this transaction to put towards retirement.

Gordon and Gayle have lived in Canada all their lives and will qualify for the maximum OAS of $750 when they retire. They have also both been contributing to CPP since they started working. Both of them will qualify for the maximum CPP because of the level of their income and year of contributions. They anticipate they will each receive $1,430 when they retire.

Assumptions:

Life expectancy 90

Rate of Return in retirement 5.35%

Average Tax Rate 30%

Inflation 2.2%

1. What amount of money will the couple need when they retire at 64? (5 marks)

2. How much money will they have when they retire? (16 marks)

3. Do they have enough money? (1 mark)

4. What recommendations would you give to the Ramseys (3 marks)