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 intact 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.

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