Rushti is a 60 year old teacher. Ontario teachers are lucky because they get indexed defined benefit pensions. His salary now is $72,000. If he works until he is 65 his salary will rise by 2.5% each year and then he will have 27 years of service. His pension pays 2% X years of service X his five-year average earnings (last 5 years) in the first year of retirement and is indexed after that. He has a disabled child who is confined to a wheelchair and who will need continued support and so he will need 90% of his salary in pre-tax retirement income. He will start receiving at age 65 $7,200 p.a. in OAS and $15,000 in CPP. He has no RRSP room because of his pension contributions. In addition to his pension contributions at work he is able to save a bit in his TFSA, $6,000 p.a. and it already has $85,000 in it. His investments until he retires earn a nominal rate of return of 5%. Once he is retired he will move to a less volatile investment strategy that is expected to earn 2% p.a. in real terms. We use a real rate of return after he retires because all his income is indexed and therefore the value in his first year of retirement is in real dollars. Assume his salary increases work like this: during next year ending at age 61 he will earn $72,000 X 1.025 = $73,800, and so on each year. The rate of inflation is 1.5%. His marginal tax rate is 40% before retirement and 32% once he is retired. He would like to provide income for 30 years of retirement, and the value of his house a long time from now will provide support for his disabled daughter if she lives longer than he does.

a) What will be is salary in the last year he works (the year he turns 65)?

b) Assume that his final year salary is $82,000 and his five year average for the pension calculation is $77,000. How much income does he believe he needs in the first year of retirement? Answer

c) Assume that he needs $70,000 income in the first year of retirement and his five-year average for the pension calculation is $77,000. What is his income shortfall after all his pensions?