QUESTION 3:

IAMBEST will be in the 46% marginal tax bracket for the next 35 years. Every year she expects to have savings of $5,000 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 6% p.a. At the end of 35 years she will retire and will use all the money in her portfolio to buy a 25 year annuity earning a before tax rate of return of 5%

METOO will also be in the 46% marginal tax bracket. Every year he also expects to have savings of $5,000 from his take home pay. He has decided to invest his annual savings for 35 years outside an RRSP in a growth portfolio, growing at an annual rate of 10% per year. After 35 years he will also use all the money in his portfolio to buy a 25 years annuity earning a before tax rate of return of 5%.

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 IAMBEST? Use Alberta (AB) section of table 17.1 to determine the average tax rate.

b. What will be the after tax annual income for METOO? Assume his average tax rate during retirement will be 32%.

$ 14,000 16,000 20,000 25,000 30,000. 35,000 40,000 45,000 50,000 55,000 60,000 65,000 70,000 75,000 80,000 85,000 90,000 100,000 125,000 150,000 200,000 250,000 350,000 500,000 1,000,000 3,000,000 0.00 0.00 0.01 0.04 0.08 0.10 0.12 0.14 0.16 0.17 0.19 0.20 0.21 0.23 0.24 0.26 0.27 0.29 0.32 0.33 0.35 0.35 0.36 0.37 0.33 0.39 0.00 0.00 0.02 0.05 0.08 0.10 0.11 0.13 0.15 0.16 0.17 0.18 0.19 0.21 0.23 0.24 0.26 0.29 0.32 0.34 0.37 0.38 0.40 0.41 0.42 0.43 0.01 0.02 0.04 0.09 0.12 0.14 0.16 0.17 0.19 0.21 0.22 0.23 0.24 0.26 0.28 0.30 0.31 0.34 0.37 0.39 0.40 0.42 0.43 0.44 0.45 0.46 0.00 0.01 0.03 0.07 0.10 0.12 0.14 0.16 0.18 0.19 0.20 0.22 0.23 0.25 0.26 0.28 0.29 0.32 0.34 0.36 0.37 0.39 0.40 0.41 0.42 0.43 0.00 0.00 0.00 0.01 0.03 0.07 0.10 0.12 0.14 0.16 0.18 0.19 0.21 0.22 0.23 0.25 0.26 0.28 0.29 0.32 0.35 0.36 0.37 0.38 0.40 0.40 0.41 0.42 0.00 0.01 0.05 0.07 0.09 0.11 0.13 0.15 0.16 0.17 0.18 0.20 0.21 0.23 0.25 0.26 0.29 0.32 0.34 036 0.38 0.39 0.40 0.42 0.43 0.01 0.03 0.08 0.10 0.13 0.15 0.17 0.19 0.21 0.22 0.24 0.3 0.27 0.29 0.30 0.32 0.34 0.37 0.39 0.42 0.43 0.45 0.47 0.48 0.49 0.00 0.00 0.01 0.04 0.06 0.03 0.10 0.12 0.13 0.15 0.16 0.17 0.18 0.20 0.21 0.23 0.25 0.27 0.30 0.31 0.34 0.35 0.37 0.38 0.39 0.40 0.00 0.00 0.02 0.06 0.08 0.10 0.11 0.13 0.15 0.16 0.18 0.19 0.20 0.22 0.24 0.26 0.28 0.31 0.35 0.36 0.39 0.40 0.42 0.43 0.45 0.46 0.01 0.02 0.04 0.08 0.11 0.13 0.15 0.17 0.19 0.21 0.22 0.23 0.25 0.27 0.28 0.30 0.31 0.34 0.37 0.39 0.41 0.42 0.44 0.45 0.46 0.47 '0.00 0.00 0.01 0.06 0.09 0.12 0.13 0.15 0.17 0.19 0.20 0.21 0.23 0.25 0.26 0.28 0.29 0.32 0.34 0.36 0.38 0.39 0.41 0.42 0.43 0.44 This table shows the average tax rate for a single retiree in this situation: ' Age 65 or older 0.00 0.00 0.01 0.05 0.08 0.10 0.12 0.13 0.15 0.17 0.18 0.19 0.20 0.22 0.24 0.25 0.27 0.29 0.32 0.34 0.36 0.37 0.39 0.40 0.41 0.42 - Receives full OAS and enough eligible pension income to get the maximum non- refundable tax credit for pension income ' OAS elawback applied on high income - Reduction of GIS not included TABLE 174 Maximum Government Pensions- 2011 and 2012 Maximum Monthly Pensions Details Canada Pension Plan $960:00 [$986.67] . For persons retiring at age 65 who contributed at the maximum rate on the MPE for the majority of their career . Actual amount varies according to lifetime profile of contributions, and age of retirement $2,500 (lump sum) . Lump-sum death benefit to spouse or estate $1,153.37 [$1,185.50] . Disability benefit prior to age 65 Old Age Security $537.97 10540.121 . Every Canadian at age 65, provided they have 544.98 lived in Canada for a sufficient number of years . Clawback of 15%, starts at net income of $67,668 and is 100% of OAS for net income of $110,123 [2012: Clawback starts at $69,562 and is 100% at $112,772] Guaranteed Income Supplement Single: $329.44 [$732.36] . Reduced by 50% of income excluding OAS, GIS, Married to a pensioner: and Spouse's Allowance $483-68 [$485.61] . Maximum income limits: . single - $16,320 [$16,368] couple both receiving OAS- $21,552- [$21,648] . couple, only one gets OAS - $39,420 [$39,264] . couple, one with OAS, one with Spouses Allow- ance - $30,192 [$30,336] OAS + GIS Minimum Income Floor Single: $1,267 #1 [$1,272.48] . OAS + GIS for a single person/couple with no Couple: $2,043-30 [$2,051.46] other income . Retired Canadians aged 65 or over are entitled to this minimum level of income, with some qualifications Spouse's Allowance $1,021 65 ($1,025.73] . Person aged 60 to 64 who is a spouse of a person eligible for OAS and GIS