Andrea and Scott are meeting with their Financial Planner, Finn Wong, today regarding their retirement. They are both 43 years of age and hoping to retire in 20 years. They have two children, age 10 and 12. They are unsure of how much money they will need to retire. They ask Finn to help them to make sure that they are on the right track to retirement. 

Andrea is a teacher in Toronto and earns a salary of $93,000 annually. She is a member of the Ontario Teachers Pension Plan, which is a defined benefit pension plan. She started teaching when she was 26 years old and her pension will be based on her best five average salary and a 2% factor. She is currently at the top of the pay grid and expects that her salary will keep up with inflation. Andrea asks Finn if she is eligible to retire with her full pension in 20 years if the factor on her pension is 85. Once she starts to receive her pension it will be indexed for inflation. 

Scott works for a candy company as a marketing manager. His income is $81,000 annually. He has a group RRSP through his employer where he puts in 6% of his salary and they match 50% of his contributions. He has chosen to invest this money in a balance portfolio earning 5.5% per year, compounded annually. 

Scott and Andrea would like to spend their retirement travelling twice a year and golfing. They estimate that a golf membership will cost them $15,000 annually and their trips would cost them $12,000 annually. Andrea is also concerned with making sure that they are not a burden to their children in the event that they become ill.

 

Net Worth Statement for Andrea & Scott Baker

As of December of Last Year

Assets
House Group RRSP RESP  DBPP  TFSA (Emergency fund in cash) Total Assets	$1,000,000 $188,000 $52,000 $308,000* $21,000 $1,569,000
Liabilities
Mortgage Line of Credit Credit Card Total Liabilities	$676,893 $11,300 $0 $688,193
Net Worth	$880,807

Cash Flow Statement for Andrea & Scott Baker

As of December of Last Year

Income	Annually
Scott's Employment Income                            $81,000       Less: Taxes, EI & CPP                                    $19,200 Andrea's Employment Income                      $103,000       Less: Taxes, EI & CPP                                    $25,050       Less: Pension Contribution                            $9,900	$61,800     $68,050
Total Take Home Income	$129,850
Expenses
Housing Mortgage Payments House Maintenance Home Insurance Utilities - Heat, water, electricity Property Taxes Automobiles Lease Payments (Honda & Audi) Gas, Operating Expense & Repairs  Other Expenses Phone, cable, internet Food Clothing Entertainment & Vacation Miscellaneous Savings Scott's Group RRSP Contribution RESP TFSA	$46,925 $6,000 $3,400 $6,500 $4,200   $13,200 7,200   $3,840 $6,200 $3,600 $10,000 $6,000   $4,860 $5,000 $2,200
Total Expenses	$129,125
Surplus or (Deficit)	$725

 

Assumptions:

• Inflation - 2.5%
• CPP Maximum (2023) - 1305.67
• OAS Maximum (2023) - $691
• Andrea's Best Five Years average - $128,600
• ATR in retirement 21%
• MTR in retirement 31%
• Nominal Return in Retirement - 5.5%
• Life Expectancy - Age 90

Requirements:

 Based on their current spending, what do you estimate that they will need in the first year of retirement to cover both expenses and taxes. (7 marks)

 Calculate the amount of money that they will need on the date of their retirement. 

At what age can Andrea retire with her full pension?

What is the value of all of their sources of retirement income on the date of their retirement? 

 Do they have enough money to retire when they are 62 years old? 

 What recommendations would you make to them about their retirement planning? What are the benefits and drawbacks of these recommendations?

Answer rating: 100% (QA)

Answer To estimate the amount Andrea and Scott will need in the first year of retirement to cover both expenses and taxes we can use their current expenses as a starting point and adjust for inflation ... View the full answer