Marty, age 56, and Marcia, age 53, are starting to think about retirement. Marty plans to retire

at age 65 and he expects to live to age 85. Marcia plans to retire at age 62 and she expects to

live to age 94. They estimate that they will need $70,000 per year, after-tax, in retirement to

give them the lifestyle they want. Marty will receive an indexed pension of $50,000 per year,

before-tax and Marcia will receive a small non-indexed pension of $7,500 per year, before tax,

from a previous employer. Marty will receive a retirement pension of $1,100 per month from

the Canada Pension Plan (CPP) and $800 per month in retirement income from the Old Age

Security program. Marcia will receive a retirement pension of $500 per month from the Canada

Pension Plan (CPP) and $900 per month in retirement income from the Old Age Security

program. CPP and OAS payments are before-tax. They currently have $127,000 in RRSPs. For

planning purposes, they are using a 8% nominal rate of return on savings before retirement and

a 5% nominal rate of return during retirement. Inflation is expected to remain at 2.5% per year

throughout their lifetime. The tax rate applicable to their situation is 25%. Please use the

appropriate discount rate and mode (begin/end).

1.

In percentage terms (e.g. 3.2345%), what is their real rate of return before and after

retirement?