Question

1. Florian plans to retire in 25 years and spend 35 years in retirement. He currently earns $82,500 before-tax annually, which increases annually with the level of inflation. He has determined that he needs 70% of his pre-retirement income for his retirement years. He currently has $282,000 in his RRSP account and $10,000 in a non-registered account. He will earn 5.50% before retirement and during retirement he will readjust his portfolio to be more conservative earning 3.50%. Inflation is 2% and his marginal tax rate is 35%. All payments are at the end of the period unless stated otherwise.

a) What is the amount he needs to have saved at retirement?

b) What is Florian's shortfall?

c) If Florian saves monthly. How much does he need to save each month to address his shortfall and reach his retirement goal?

Answer 1

All the calculated answeres are in bold and formula for the same are on the adjacant tab

Formulas/calculations Given Accumulation age Spending age 25 years 35 years 70% of $82,500 Current earnings Required at retirement Interest rate before retirement Interest rate after retirement Inflation Marginal tax rate Savings in RRSP account Savings in non registered account $ 82,500.00 $ 57,750.00 5.50% 3.50% 2% 35% $ 282,000.00 $ 10,000.00 Calculations After tax real rate of return before retirement After tax real rate of after retirement Inflation adjusted return before retirement Inflation adjusted return after retirement Formulas/calculations 3.57500% Interest rate*(1-tax rate) 2.27500% Interest rate*(1-tax rate) 1.54% ((1+interest rate)/(1+inflation rate))-1) 0.27% ((1+interest rate)/(1+inflation rate))-1)