Retirement Planning Case Study

Fall 2024

The Case: Timothy and Lisa Falcone Note: paper cases have significant limitations as they are simply black ink on white paper and not based on actual people. This case will attempt to give you a sense of who these people are, but you will still need to make some assumptions as you work toward an overall retirement solution for this family. Personal Information - As at 1 January 2024 Name Timothy Falcone Lisa Falcone Date of Birth January 1st, 1990 January 1st, 1988 Smoking Status Non - Smoker Non- Smoker Health In good health In good health Pension Defined Benefit Defined Contribution Employment Timothy is schoolteacher at St. Thomas Aquinas Secondary School in London. Tim started teaching September 1st, 2016. Tim started teaching as soon as he graduated teachers' college. His starting salary was $71,000. His current salary is $89,940. Tim's salary in indexed to inflation every year on January 1st. Tim sees himself continuing to teach high school until his retirement.Lisa works for London Life in an office administration role. Lisa has been employed by London Life ever since she graduated from the University of Waterloo in 2012. Lisa is a member of their defined contribution pension. Her current salary is $64,000 per year. Interests Timothy and Lisa have always been active. Timothy likes to golf, play volleyball and watch football, while Lisa likes to play soccer and go jogging. Recently they have decided they are going to try pickleball and have joined a league through the City of London. Major Assets Timothy and Lisa jointly own a home in London, Ontario that was purchased for $550,000. The house is currently valued at $775,000. They have no intentions of moving and have a mortgage remaining of $110,000, that they expect to pay off over the next 10 years. Timothy and Lisa saved very little in retirement, as they believe the pensions they have through work will be enough to meet their retirement needs. See Appendix for asset values. Pension Plans Timothy is a member of his employer's mandatory defined benefit pension plan. He joined the pension when he was hired at the school board. The plan is based on the average of the best 5 years of employment and will pay Timothy a 1.325% credit per year of service up to the YMPE and 2% on the amount above the YMPE. The pension is indexed to inflation. The pension has a maximum of 35 years of service. The pension has a qualification factor of 85 for early retirement. The plan has a .25% penalty per month for early retirement. The pension plan provides survivor benefits to Lisa in the event of Timothy's death. Lisa will be entitled to a spousal pension worth 60% of Timothy's pension at the time of his death. Lisa is a member of a Defined Contribution Pension Plan. She contributes 2% of her salary to the pension plan and her employer contributes 2%. She has been a member of the pension plan since Jan 1, 2014. The plan is invested with a balanced mandate. Timothy and Lisa both have a moderate risk tolerance. Expenditures Please see appendix for a list of expenditures that Timothy and Lisa have provided. Future Timothy and Lisa have had some discussions with family members who have told them they need to complete a retirement plan. They have decided they want to retire on Jan 1, 2045. See the following pages for appendices. Appendix 1 - Timothy and Lisa's expenses Timothy and Lisa have not historically tracked their expenses well. They have provided details on specific items below but do not have an accurate breakdown of their current lifestyle. They have provided you with their gross salaries above. However, on an annual basis they have a surplus of $10,000 per year. Item Amount Frequency Mortgage $1,500 Monthly Property Tax $400 Monthly Entertainment $325 Monthly Timothy RRSP $325 Monthly Lisa RRSP $250 Monthly Groceries $1,100 Monthly Heat/Hydro $300 Monthly Insurance $400 Monthly Cable/Internet $180 Monthly Appendix 2 - Timothy and Lisa's Assets House $775,000 Timothy RRSP - $27,250 Lisa RRSP - $28,000 Lisa DC Pension - $62,250 Cars - $33,000 RRSP Carry Forward Room 2023 (amount to be carried forward to 2024) Timothy - $40,000 Lisa - $32,000\fASSIGNMENT INSTRUCTIONS Your role is as that of a retirement planner. Your objective is to help your clients organize themselves in order to do some financial planning. In the real world, you would do so with clear step by step communication. Details on their income, expenses, assets and liabilities are provided in appendices. Clearly state what assumptions you need to make to complete your assignment. Complete this assignment in parts per the requirements listed below. Part 1 (5 marks out of 25) a} Estimate the CPP benefits that Timothy and Lisa will receive in retirement, (calculate the ratio of earnings to YMPE) and the OAS benefits they will receive in retirement, in future dollars. Show your calculations and list any assumptions you are making. Timothy and Lisa plan to take CPP and OAS as soon as they can. Hint: you will need to make an assumption on future salary increases. b) Determine the RPP annual pension income that Timothy will receive from his pension when he retires. Hint: remember to base the benefits on the future salary. c) Estimate the value of Lisa's DCP plan when she retires. Be sure to state your assumptions. Section Out of: OAS Estimate 8 CPP Estimate 16 DB pension Estimate 12 DC pension Estimate 12 TOTAL 48