Todd tells you that he has revised his retirement plans. He thinks it may be more realistic to retire in 25 years as opposed to the original 20 years he had mentioned last time you offered advice. His goal is to save $1.5 million by that time. This is his best estimate not knowing what his life expenses will be once he is married. He would like to use his savings to kick start his retirement plan. He currently has $105,000 room in his RRSP contribution limit according to the notice of assessment he received after having filed his 2020 tax return.

Todd’s employer offers a defined-contribution pension plan (DCPP). Todd’s employer will match an employee’s contribution (dollar for dollar) up to $250 per month; however, Todd is not taking advantage of this plan. Todd wondered if he would still be able to contribute to an RRSP and/or a TFSA if he contributes to the DCPP.

Todd currently does not have a will and wonders if one is necessary. He recently became an uncle of twin boys: Todd and Terry. Leaving them a legacy to help pay for college is something he has been considering.

Part 3: Questions and Answers

1. With regard to Todd’s revised retirement plans, currently his gross annual salary with his employer is $110,770.

1. How much will he have in 25 years if he takes full advantage of his employer’s defined-contribution pension plan and invests $500 per month at an annual interest rate of 4 percent, compounded monthly? Recall that his employer will match his contribution up to a certain amount. (2 marks)

2. How much can Todd contribute towards his RRSP every year? 

3. If Todd contributes to his DCPP at work, how much can he contribute to an RRSP?  

4. How much will he have to save per month at an interest rate of 8 percent compounded monthly, in a higher risk diversified portfolio, to reach his $1.5 million goal in 25 years to make up for what the DCPP will not provide?  

5. Based on your answer to part d, is it realistic that Todd could save that amount each month ? 

6. Should Todd achieve his $1,500,000 target, how much money would he have to live off of every month for 35 years? Assume 4% return annual compounding. 

7. Todd is concerned that if he leaves his current employer, what would happen to his pension plan. What can you tell Todd about his concern?  

2. Todd feels he will likely only need $6000/month before taxes to enjoy his retirement. So how much will he need in his account to be able to retire, and live off every month for 35 years (including the DCPP and his RRSP). Assume 4% return annual compounding? 

3. If Todd does get married, how would that impact his goal?  

4. Assuming Todd will max out on his RRSP contribution, how can he now reach this new target? Explain.  

5. If Todd really wishes to provide for his nephews’ post-secondary education, how can a will help him to achieve that goal? What else might Todd consider to assure his nephews’ post-secondary education?  

6. Should Todd consider writing a will if he has a charitable organization he would like to leave money to? Explain.