Vanita, the superintendent of a local school board, will retire at the end of this school year
Question:
Vanita, the superintendent of a local school board, will retire at the end of this school year when she turns 55. Her husband Jayraj plans to continue working for the next five years until he turns 65. The couple does not expect to draw income from their assets while Jayraj is still working. Once Jayraj retires, the couple estimates they will need $10,000 per month (before taxes, in today's dollars) in addition to their full Canada Pension Plan (CPP) retirement and Old Age Security (OAS) pensions for the remainder of Jayraj's projected lifetime of 100 years. Vanita and Jayraj own their home, estimated to be worth $800,000 by the end of the year. They are selling their home upon Vanita's retirement and investing the proceeds in a joint non registered investment account. Their monthly living expenses include their rental costs after selling their home. Jayraj has a federally regulated Locked-In Retirement Account (LIRA) valued at $98,000 and a Registered Retirement Savings Plan (RRSP) worth $600,000. He plans to continue contributing $20,000 to his RRSP annually at the beginning of the year until he retires. The couple has 70 percent of their investments in fixed income and 30 percent in equities, in preparation for retirement (equity allocation is all deferred capital gains). Their average annual rate of return is 3.5%. Starting next year, Vanita's defined benefit pension plan will provide a monthly benefit of $4,000, indexed to inflation at 2%. The couple is debt-free and has $15,000 set aside for emergencies. Based on a previous cash flow analysis, they expect to have $500 in surplus cash flow going forward until Jayraj retires. Jayraj expects to remain in the same tax bracket once he retires, while Vanita expects to be in a lower tax bracket once she begins receiving her pension. The couple would like some assurance that they are on track to meeting their retirement income goals.
1. If Jayraj begins drawing from a RRIF account at age 65, what would be his RRIF minimum withdrawal in his first year? (2 marks)
2. How much will Vanita have in after-tax income when she retires? Assume she will have a 25% marginal tax bracket. (1 mark)
3. What additional step can Jayraj take to ensure more financial flexibility from his LIRA at retirement? (1 mark)
4. What can Jayraj do with his RRSP funds at retirement if he wants to remove sequencing risk from his income plans? (1 mark)
5. What income tax reduction opportunity(ies) are available to Vanita and Jayraj once they are both retired? (1 marks)
6. Will Vanita be subject to OAS clapback at age 65? Assume no income splitting. Please show your math. (2 marks)
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford