Q: Is the nominal rate of 7% the same before and after retirement?
A: Yes
Q: If CPP starts at age 60, is it reduced?
A: Yes
Q: If OAS starts at age 65, how do I calculate the PV at age retirement (age60)?
A: Calculate the PV of OAS payments to age 65 and then calculate the PV of the OAS from age 65 back to age 60. You have to do 2 TVM calculations.
Q: Is the real rate of return on OAS benefits the same as the real rate of return on CPP benefits?
A: Yes (answers to questions 2 and 5 are the same).
Retirement Planning Case Javon was born on January 1, 1997. Now (today), is January 1 of the year 2022. So, Javon is currently age 25 . Javon has been working at ABC Investment Management Ltd. for 2 years and plans to work until his 60th birthday, January 1,2057 . His current pre-tax pensionable earnings are $50,000. Since Javon first joined ABC Investment Management Ltd. his salary has increased by 5% per year. Javon expects that, over the next thirty-five years, he will also see annual raises of 5% per year. As of today, Javon's RRSP has a fair market value of $11,488 in it. Although he has maximized his RRSP contributions over the years, he has made very poor investment decisions which have led to a net decline in his RRSP savings account. In fact, Javon is not even sure if RRSPs are the best investment vehicle to use for retirement. As such, he is considering discontinuing saving inside his RRSP account and, from now on, purchasing preferred shares in a non-registered savings account. In fact, Javon is considering purchasing 1,000 five-year retractable preferred shares at a price of $25 per share in a non-registered savings account. The dividend yield for these preferred shares will be 7%, payable quarterly. After five years, the dividends are redeemable at their purchase price. Based on family history and his healthy lifestyle, Javon expects to live up to age 90 . That is, he will live up to and including January 1, 2087. For calculation purposes, assume that Javon will earn a nominal rate of return of 7.00% per year compounded monthly on any investments that he has, now or in the future. Also assume that inflation will remain at a constant 2.50% per year compounded annually during the planning horizon. Javon's marginal tax rate is 35%. The tax rate on dividend income is 15% Javon has determined that in retirement, 35 years from now, he will need $4,000 per month in today's dollars, in total pre-tax annual income. In planning for his retirement, Javon would like you to take into consideration CPP and O benefits. Assume that Javon will qualify for the full CPP and OAS monthly benefit amour of $1,253.59 and $685.50, respectively. Since Javon will start collecting CPP benefit at a 60 , he will not receive the full benefit. The CPP and OAS benefits will be fully indexed inflation (2.5%) and will be adjusted annually on January 1st. Javon currently rents a very nice apartment close to the ABC Investment Management Ltd. Offices and has no plan to purchase a home in the foreseeable future. 1. What was Javon's starting salary? (2 marks) 2. What is Javon's real rate of return on CPP benefits? (2 marks) 3. What is the present value at retirement of Javon's retirement income need? ( 2 marks) 4. What is Javon's reduced CPP benefit? What is the present value at retirement of Javon's CPP benefit? ( 3 marks) 5. What is Javon's real rate of return on OAS benefits? ( 2 marks) Retirement Planning Case Javon was born on January 1, 1997. Now (today), is January 1 of the year 2022. So, Javon is currently age 25 . Javon has been working at ABC Investment Management Ltd. for 2 years and plans to work until his 60th birthday, January 1,2057 . His current pre-tax pensionable earnings are $50,000. Since Javon first joined ABC Investment Management Ltd. his salary has increased by 5% per year. Javon expects that, over the next thirty-five years, he will also see annual raises of 5% per year. As of today, Javon's RRSP has a fair market value of $11,488 in it. Although he has maximized his RRSP contributions over the years, he has made very poor investment decisions which have led to a net decline in his RRSP savings account. In fact, Javon is not even sure if RRSPs are the best investment vehicle to use for retirement. As such, he is considering discontinuing saving inside his RRSP account and, from now on, purchasing preferred shares in a non-registered savings account. In fact, Javon is considering purchasing 1,000 five-year retractable preferred shares at a price of $25 per share in a non-registered savings account. The dividend yield for these preferred shares will be 7%, payable quarterly. After five years, the dividends are redeemable at their purchase price. Based on family history and his healthy lifestyle, Javon expects to live up to age 90 . That is, he will live up to and including January 1, 2087. For calculation purposes, assume that Javon will earn a nominal rate of return of 7.00% per year compounded monthly on any investments that he has, now or in the future. Also assume that inflation will remain at a constant 2.50% per year compounded annually during the planning horizon. Javon's marginal tax rate is 35%. The tax rate on dividend income is 15% Javon has determined that in retirement, 35 years from now, he will need $4,000 per month in today's dollars, in total pre-tax annual income. In planning for his retirement, Javon would like you to take into consideration CPP and O benefits. Assume that Javon will qualify for the full CPP and OAS monthly benefit amour of $1,253.59 and $685.50, respectively. Since Javon will start collecting CPP benefit at a 60 , he will not receive the full benefit. The CPP and OAS benefits will be fully indexed inflation (2.5%) and will be adjusted annually on January 1st. Javon currently rents a very nice apartment close to the ABC Investment Management Ltd. Offices and has no plan to purchase a home in the foreseeable future. 1. What was Javon's starting salary? (2 marks) 2. What is Javon's real rate of return on CPP benefits? (2 marks) 3. What is the present value at retirement of Javon's retirement income need? ( 2 marks) 4. What is Javon's reduced CPP benefit? What is the present value at retirement of Javon's CPP benefit? ( 3 marks) 5. What is Javon's real rate of return on OAS benefits? ( 2 marks)
