Mercedes and Alejandro San Martin

It is now ten years later (January 2031) and things have changed. Mercedes and Alejandro are now ages 62 and 61, respectively, on January 1, 2031. They both have decided they would like to retire later this year; each on their own respective birthdays (Alejandro on August 27 at age 62 and Mercedes on October 22 at age 63). They both feel that they have sufficient income and savings that will allow them to enjoy a comfortable lifestyle during retirement. But they have never worked with a financial advisor, so this assumption is simply a feeling they have. Therefore, before making the final decision about retirement, the San Martin's have approached you to help them assess their financial decision relative to the important decision.

Alejandro now holds a senior management position with Shoppers Drug Mart, where he has worked for the past three years. Prior to this job, he worked for Grande Pharmacia for roughly 30 years (he started working there in 1998). When Alejandro left Grande Pharmacia, he decided to take a deferred annuity, to begin at age 65, as the settlement of his pension options. His deferred annuity is a life annuity with a 100% survivor option. The monthly payment of $2,200 begins at the end of the month in which he reaches age 65.

At Shoppers Drug Mart, Alejandro participates in a defined contribution pension plan, which he joined at the time he was hired. The market value of his pension assets is $45,000, while the book value is $40,500. The plan allows for a two-year vesting period. Upon termination of employment, or at retirement, the pension plan allows funds to transfer to a LIRA, provided the individual is age 71 or less during the year when the transfer occurs.

Mercedes has now been working at Starlight Inc. for 19 years and is their Vice-President of Finance. Six years ago, the company established an individual pension plan for their senior executives, which included Mercedes. This non-contributory individual pension plan (IPP) provides a 2% benefit for each year of service at the company and is based on career average earnings. At present, Mercedes has six years of participation in the plan, prior to which she did not participate in any pension plan. Mercedes began working at Starlight on July 1, 2012. She has been discussing the possibility of retirement with her employer and they have offered her a $75,000 payment in recognition of her long service with the company.

Prior to her participation in the IPP, Mercedes contributed regularly to an RRSP and has accumulated substantial assets. During that period, she made $45,000 in contributions to a spousal RRSP, where she was the contributor and Alejandro was the annuitant.

For Mercedes and Alejandro, the time has come for retirement; it is now right around the corner. They now want to know whether the retirement plan they have been building will provide long-term financial security for them after they stop working. So, they are looking for your help and have given you the following list of questions to answer for them.

For any calculations, assume that the market value and book value of the assets remain unchanged between January 1, 2031 and each of their respective retirement dates later this year. Also, only use information in Part 2 of this case to answer the following questions. Do not refer back to details from Part 1. The passage of time since Part 1 has made many of the details in Part 1 irrelevant now, ten years later.

SUMMARY OF KEY FINANCAL DETAILS

All Values as of January 1, 2031

MercedesAlejandro

Date of BirthOctober 22August 27

Annual Salary$150,000$150,000

Earned Income$100,000$150,000

RRSP (Annuitant) - Market Value ($)$390,000

RRSP (Annuitant) - Book Value ($)$270,000

Spousal RRSP (Annuitant) - Market Value ($)$45,000

Spousal RRSP (Annuitant) - Book Value ($)$30,000

RPP - Market Value ($)$45,000

RPP - Book Value ($)$40,500

Non-Registered Assets ($)$200,000$250,000

Mercedes and Alejandro are both in the 45% marginal tax bracket.

Question to answer and explain for Mercedes and Alejandro:

What are your thoughts about Mercedes' and Alejandro's decision to retire this year? Is it a wise decision financially? What additional recommendations would you offer?