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QUESTION 1 Retirement Planning & TVM (20 marks)

Andrew and Helena Smith have moved to Canada recently and have secure jobs that provide a defined benefit pension plan. They are 40 years old and want to retire at age 60 if they can. At age 60, the defined benefit pension plans would provide $40,000 p.a. before tax for both of them and this amount is indexed annually.

At age 65, they would get an additional $12,000 p.a. before tax in OAS and CPP combined. They have no RRSP contribution room carried forward because they have just moved to Canada. Their combined annual RRSP contribution limit is $10,000 p.a. and they will contribute this amount each year until retirement.

They estimate that they need $60,000 p.a. after tax in retirement, and they want to save enough to provide that amount to their age 90. Their average tax rate in retirement will be 20%.

In addition, when they retire, they want to buy a mobile tiny home which is currently $125,000. The amount saved for this tiny home is $10,000 and it is in a TFSA. They will use any tax refunds from their RRSP contributions to save for the tiny home.

Their current average tax rate is 25% and their current marginal tax rate is 30%. They are quite conservative and will invest entirely in a mixture of debt securities and index equities yielding a 6% before tax nominal rate annually. Inflation is about 2% p.a.

Required

1. How much do they need to have saved at 60 to fund their retirement income (excluding the tiny home) in real before tax dollars? (5 Marks)
2. Will they have saved enough in their RRSP at age 60 to fund their retirement income (excluding the tiny home) income needs? (5 Marks)
3. Will they have enough money to purchase their tiny home? (5 Marks)
4. Using the savings plan 1c, explain to Andrew and Helena two assumptions that have been made about inflation and what they should do about it? (5 Marks)

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