It is January 2023 and you have secured your first job as a retirement planner. At a

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Question:

It is January 2023 and you have secured your first job as a retirement planner. At a new year's celebration, you run into an old friend, Rhett, from high school. You are both excited about your new careers and Rhett tells you about his life since you have last seen each other.

Rhett is 22, and is living at home with his parents in Toronto. He does not pay rent (lucky!) and has no set financial obligations right now. He may try to buy a used car in the next year. He has no debt from his post-secondary education as his parents were good savers and paid for it all. He is still dating his high school sweetheart, Jeanne, who is currently overseas teaching English at a school in a foreign country. He hopes that they will get married one day but, right now, he is looking to have some fun.

Rhett is starting his new job tomorrow and will earn $50,000 per year as a plumbing apprentice. His plan is to gain experience and then, in 10 - 15 years, he hopes open his own business. Prior to this, Rhett has only ever worked two summer jobs, in 2022 and 2021, earning $7,000 each year.

Your eyes light up because Rhett can be your first client. Since it is unlikely that he will ever have a pension plan as a self-employed plumber, you will have to help him save for retirement. In hopes of getting him as your first client, you bring up the idea that he should start saving for retirement today.

Rhett looks at you like you are crazy and says "Why should I start so early??? I want to have some fun now. Not to mention the fact, that, if I save for anything....it should be a house for me and Jeanne to start our family life together. We want 3 children by age 40! I have the rest of my life to save for retirement...maybe I will start when I reach the age of 40! I do not plan to retire until age 65....that is the year 2066!"

Required:

You can tell you have your work cut out for you!....To help Rhett, you will go home and do some calculations to help convince him that he should start saving for retirement early.

Assume that John will earn a 6.5% nominal rate of return, compounded annually, on any savings. The inflation rate is assumed to be 2%. Assume his marginal tax rate is 30% and that his annual salary will continue at $50,000.

a) Assuming that Rhett has never contributed to an RRSP before, calculate his RRSP Contribution limit for 2024. (2 marks)

b) Assuming that Rhett makes the contribution in 2024 (above) and that he will contribute the maximum amount possible to his RRSP at the beginning of each year (based upon 50,000 salary) for the next 17 years (2024 through to 2040 inclusive), how much will he have at the end of 2041? (2 marks)

c) If Rhett lets the amount at the end of 2040 (b above) grow until retirement date, without any further contributions, how much will he have on retirement date? (2 mark)

d) Now, if Rhett waits to age 42 and starts contributing $18,000 per year to his RRSP at the beginning of the year (assuming that he has enough RRSP contribution room) at that time, how much will he have on retirement date? (2 marks)

e) Compare the response from (c) and (d) to illustrate the impact of starting to save early & draw a conclusion. What challenges may he face with starting to save $18,000 per year after the age of 42? (3 marks)

f) Briefly outline for John how he can use some of his RRSP savings to purchase his first home. Outline the limit that can be used and the re-payments that are required to the RRSP.