Retirement Projections: The Magnus

Brian and Lynette Magnus are planning on retiring in 8 years time. They are both currently 56 years of age. When the couple retires, they want to spend time with their grand children and relax. They also want to be able to play golf and travel a couple of times a year. The Magnuss believe that they will need 60% of their current joint income per year in retirement to cover their living and travel expenses.

Brian works as a quality control Manager in a private firm. He earns $110,000 per year and his company has a defined contribution pension plan. He contributes 5% of his income and his company matches his amount. The current balance in his DCPP is $285,000 and it is invested in a balanced portfolio that has been providing an average rate of return of 8%.

Lynette is a senior manager at a bank and earns $ 140,000 per year. She has been a member of her defined benefit pension plan for the past 20 years. She anticipates that her average earnings at retirement will be $ 120,000. Her pension plan has a 1.75% factor.

The Magnuss have also been contributing to their RRSPs over the last number of years in anticipation of the retirement. Brians RRSP is valued at $156,000 and has been earning an average rate of return of 5%. Brian has been contributing $500 per month and plans to continue these contributions until retirement.

Lynettes RRSP is substantially smaller as she has minimal RRSP contribution room because she is a member of a DBPP. The value of her RRSP is $42,500 and has been earning an average of 5%. Lynette will be continuing her current contribution of $100 per month until retirement.

The Magnuss plan on downsizing their home when they retire and move out of the city. They are

anticipating that they will have some equity to put towards retirement.

Brian and Lynette have lived in Canada all their lives and will qualify for the maximum OAS of $700 when they retire. They have also both been contributing to CPP since they started working. Both will qualify for the maximum CPP because of the level of their income and years of contribution into CPP. They anticipate they will each receive $1,400 at retirement.

Assumptions:

• Life expectancy 90
• Rate of Return in retirement 7%
• Average Tax Rate (26%)
• Inflation 2.25%

1. What amount of money will the couple need when they retire at 64? (5 marks)
2. How much money will they have when they retire? (16 marks)
3. Do they have enough money? (1 mark)
4. What recommendations would you give to the Magnuss (3 marks)