MoneySmarty 35 will be in the 46% marginal tax bracket for the next 30 years. Every year she expects to have savings of $10,000 from her take home pay. She will save everything of this by putting it in an RRSP. The money in RRSP will be invested in a diversified equity portfolio earning a before tax rate of return of 5% p.a. At the end of 30 years she will retire and will use all the money in her portfolio to buy a 20 year annuity earning a before tax rate of return of 4%.

MoneySmart who is also 35 will also be in the 46% marginal tax bracket. Every year he also expects to have savings of $10,000 from his take home pay. He has decided to invest his annual savings for 30 years outside an RRSP in a growth portfolio, growing at an annual rate of 8% per year. Of this $10,000 per year of savings, he will put $5,500 per year (maximum allowed) in a TFSA account. After 30 years he will also use all the money in his portfolio to buy a 20 years annuity earning a before tax rate of return of 4%. Assume that after retirement each one of them will be eligible to get maximum CPP and OAS per year as stated in Table 17.4. Use 2012 values.

a. What will be the before and after tax annual income for MoneySmarty? Use Ontario section of table 17.1 to determine the average tax rate.

b. What will be the after tax annual income for MoneySmart? Assume his average tax rate during retirement will be 28%