It is now ten years later (January 2031) and things have changed. Mercedes and Alejandro are now
Question:
It is now ten years later (January 2031) and things have changed. Mercedes and Alejandro are now ages 62 and 61, respectively, on January 1, 2031. They both have decided they would like to retire later this year; each on their own respective birthdays (Alejandro on August 27 at age 62 and Mercedes on October 22 at age 63). They both feel that they have sufficient income and savings that will allow them to enjoy a comfortable lifestyle during retirement. But they have never worked with a financial advisor, so this assumption is simply a feeling they have. Therefore, before making the final decision about retirement, the San Martin’s have approached you to help them assess their financial decision relative to the important decision. Alejandro now holds a senior management position with Shoppers Drug Mart, where he has worked for the past three years. Prior to this job, he worked for Grande Pharmacia for roughly 30 years (he started working there in 1998). When Alejandro left Grande Pharmacia, he decided to take a deferred annuity, to begin at age 65, as the settlement of his pension options. His deferred annuity is a life annuity with a 100% survivor option. The monthly payment of $2,200 begins at the end of the month in which he reaches age 65. At Shoppers Drug Mart, Alejandro participates in a defined contribution pension plan, which he joined at the time he was hired. The market value of his pension assets is $45,000, while the book value is $40,500. The plan allows for a two-year vesting period. Upon termination of employment, or at retirement, the pension plan allows funds to transfer to a LIRA, provided the individual is age 71 or less during the year when the transfer occurs. Mercedes has now been working at Starlight Inc. for 19 years and is their Vice-President of Finance. Six years ago, the company established an individual pension plan for their senior executives, which included Mercedes. This non-contributory individual pension plan (IPP) provides a 2% benefit for each year of service at the company and is based on career average earnings. At present, Mercedes has six years of participation in the plan, prior to which she did not participate in any pension plan. Mercedes began working at Starlight on July 1, 2012. She has been discussing the possibility of retirement with her employer and they have offered her a $75,000 payment in recognition of her long service with the company. Prior to her participation in the IPP, Mercedes contributed regularly to an RRSP and has accumulated substantial assets. During that period, she made $45,000 in contributions to a spousal RRSP, where she was the contributor and Alejandro was the annuitant. For Mercedes and Alejandro, the time has come for retirement; it is now right around the corner. They now want to know whether the retirement plan they have been building will provide long-term financial security for them after they stop working. So, they are looking for your help and have given you the following list of questions to answer for them. For any calculations, assume that the market value and book value of the assets remain unchanged between January 1, 2031 and each of their respective retirement dates later this year. Also, only use information in Part 2 of this case to answer the following questions. Do not refer back to details from Part 1. The passage of time since Part 1 has made many of the details in Part 1 irrelevant now, ten years later. SUMMARY OF KEY FINANCAL DETAILS All Values as of January 1, 2031 MercedesAlejandro Date of BirthOctober 22August 27 Annual Salary$150,000$150,000 Earned Income$100,000$150,000 RRSP (Annuitant) - Market Value ($)$390,000 RRSP (Annuitant) – Book Value ($)$270,000 Spousal RRSP (Annuitant) - Market Value ($)$45,000 Spousal RRSP (Annuitant) – Book Value ($)$30,000 RPP – Market Value ($)$45,000 RPP – Book Value ($)$40,500 Non-Registered Assets ($)$200,000$250,000 Mercedes and Alejandro are both in the 45% marginal tax bracket. Questions to answer and explain for Mercedes and Alejandro: When answering these questions, please assume the maximum annual pension entitlement for a defined benefit pension plan has not changed over the last nine (9) years and is still $2,697 per year of service. 1.Assume Alejandro transfers the balance in his spousal RRSP to a spousal RRIF as of December 31, 2030 and sets it up to ensure that he is able to minimize any required payments from the fund. What is his minimum RRIF withdrawal requirement for 2031? 2.For 2031, Alejandro would like to withdraw $5,000 from the RRIF. Will any attribution issues arise? Why or why not? 3.If Alejandro names Mercedes as the successor annuitant of his spousal RRIF, and he subsequently dies in 2031, what are the tax consequences? 4.How much of the $75,000 long service payment, if any, can Mercedes shelter from tax? 5.What are the implications, if any, of Mercedes transferring the eligible portion of the retiring allowance discussed in question #4 above to a spousal RRSP where she is the contributor? 6.If Mercedes opts to tax shelter the eligible retiring allowance discussed in question #4 and #5 above, what implications, if any, will it have relative to her RRSP contribution room? 7.When Alejandro left his job at Grande Pharmacia three years ago, he opted to take a deferred annuity pension settlement. Using an expected payout period of 27 years, what is the present value of Alejandro’s pension from Grande Pharmacia at his age 65, using an annual nominal interest rate assumption of 5%, compounded monthly? 8.What is the value of Mercedes’ accrued pension benefit for 2031? 9.What are your thoughts about Mercedes’ and Alejandro’s decision to retire this year? Is it a wise decision financially? What additional recommendations would you offer?