SCENARIO # 2: Planning for Retirement (30 marks)

Date of BirthPosition

KennyAugust 30, age 55Regional Manager / Pharmacist

LillyAugust 12, age 52Office Manager

Kenny and Lilly Johnson live in Mississauga, Ontario for the past 25 years. They married in 1979 and they both work outside the home and enjoy an active social life. Kenny joined Power Pharmacy January 1, 1993 and is currently the regional manager responsible for the operation of 10 drug stores. Kenny's 2013 annual salary is $ 89,000, which is also equal to his earned income. On January 1, 1995, when he was first eligible, Kenny joined Power Pharmacy's defined benefit pension plan, and he is now fully in the pension plan. Harry earns am annual pension benefit of 2%, up to the maximum permitted, in this non-contributory plan.The plan is a final earnings plan, based on the final three years.Kenny's earnings have remained unchanged for the past four years.

Lilly is the office manager for Sunlight Inc., a firm she joined on July1st, 2007.Her 2013 earned income is $103,000 and she participates in Sunlight'sdefined contribution pension plan.Her pensionable earnings are $94,000, on which she and her employer each contribute 5% of the pensionable earnings.Lilly has participated in the pension plan since joining Sunlight.As of January 1^st, 2013, Lilly's pension assets had a market value of $90,000 and a book value of $45,000.Lilly's 2012 pensionable earnings were $92,000, while her 2012 earned income was $100,000.

Together, Kenny and Lilly currently earn a total of $192,000.Kenny and Lilly each own a self-directed RRSP, of which they are the respective owners.Kenny's RRSP acct has a market value of $77,000 which a book value of $30,000.Lilly's acct RRSP has a market value of $58,000 and a book value of $25,000.On October 31^st, 2012, a $10,000 Canadian term deposit matured in Lilly's RRSP, and she immediately reinvested the $10,000, into an investment that counts as foreign investment.

Kenny and Lilly are both in the 35% marginal tax bracket.

QUESTION 4 - Defined Benefit Pensions:

When answering these questions, please assume it is January 1, 2013.The maximum annual pension entitlement for a defined benefit pension plan is $2,697 per year of service.

4 a) How much pension benefit will Kenny accrue for 2013? (2 marks)

4 b) Calculate Kenny's annual pension income if his employment continues and he retires from Power Pharmacy on December 31^st, 2023 (assume his earnings remain unchanged). (2 marks)

4 c) Calculate the present value of Kenny's pension at age 63, assuming the following: (4 marks)

• Retirement income is paid at the end of each month for 25 years, with no additional survivor benefits; and
• An annual nominal interest rate of 6 % compounded monthly.

QUESTION 5 - Defined Contribution Pensions

5 a) Calculate the total contributions made into Sunlight pension plan, on Lilly'sbehalf for 2013? (2 marks)

5 b) Calculate the value of Lilly's pensions adjustment that will affect her 2013 RRSP contribution room. (2 marks)

5 c) Using Lilly's pension assets at January 1^st, 2013, project the value of her pension assets at the end of 14 years from now, assuming an annual nominal interest rate of 4 % annually, with no additional contributions. (4 marks)