You are currently 35 years-old, earning $120,000 per year -- paid at the end of each month -- and hope to retire at age 65, but have absolutely nothing saved for retirement. However, you are quite fortunate to have a job (and work in a country) that entitles you to a real (after-inflation) pension paying 40% of your final (retirement) salary for the rest of your life. Your pension is guaranteed to increase at the rate of inflation. Assume inflation is 1% throughout the period.

Please answer: Part A: When you turn 65 how much financial capital must you have in order not to run out of money by age 95? Assume a tax rate of 35% during your working life and in retirement. Also, assume all your capital is in RRSP account and earns a 5% rate of return before tax throughout the period. Remember that your pension plan is guaranteed to pay you 40% of your earnings at age 65 and then increase by 1% per year. You would like to keep spending the same dollars in retirement as you did during your working years. Assume inflation increases by 1% per year.

Part B: Assume you are able to accumulate $1,500,000 in an RRSP and would like keep your capital in-tact at retirement to pass on to your children and only live from your capital. You would like your income to be $75,000 in real dollar terms starting the year you retire after-tax. In other words, you have already calculated the $75,000 to be the inflation adjusted starting after-tax income requirement when you retire. You estimate your tax rate will be 35% throughout the period and the rate of inflation throughout your retirement period to be 2% per year. What rate of return will you require? Do you believe this type of return is achievable? (In this part assume you have no pension plan unlike in part A the two parts are not connected to one another). Why or why not.