Retirement Case Study
Xiang (Colin) Shi
0892883
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Executive Summary
Dear Bill and Janet,
After taking a detailed look into your profiles and documents, I have creat
ed this document in order to help you understand the current financial situ
ation and report different sources you will receive after retirement. As a
matter of fact. combining CPP, LIF, DB, RRIF, and OAS, you will receive $5
6,765 at age 63, increasing to $113,766 bases on inflation. But your estima
ted expenditures increase as well, bases on the inflation, and you may have
a deficit from the retirement till the expectancy age 90.
I will help you to figure the finance out during the report, and together w
e can find some ideas to decrease the deficit, even more, create a surplus.
Retirement Goals & Objectives
The goals of our discussion today is fairly simple, to keep a relatively si
milar life level as you are having today, or even better.
In the profile, you have shown me the current expenses, which are more inve
sted in the future rather than now. On the other hand, the future expenditu
res are more focus on entertainment. In order to create the needed capital
for the lifestyle, we may need to adjust some decisions, as well as change
some ideas about future expenditures.
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In the below parts of this report, I will explain your expenditures in the
future, all the details about future income including government sources, e
mployer sources, and private saving sources. On the other hand, I will prov
ide you recommendations which help you to create a surplus when you are enj
oying retirement. All the detailed calculations will be included in the app
endix at the last of the report.
Summary of Expected Retirement Expenditures
Housing Maintenance
$400
Groceries
$800
Dining Out
$400
Hydro
$250
Heating
$120
Internet/Cable
$140
Gas
$200
Automobile Insurance
$235
Entertainment
$300
Vacation
$700
Memberships
$300
Gifts
$250
Home Insurance
$75
Property Tax
$500
Cell Phones
$130
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Vehicle Maintenance
$275
Personal Care
$300
Medical
$300
Miscellaneous
$400
You have provided me a projected monthly retirement expenditure covering mo
st of the areas. The total monthly cost in today’s dollar is $6,075. As it
increases by 2% of inflation, the number will increase to $8,676 monthly in
2037, calculating as 6075*(1+0.02)^(2037-2019). This will lead to an annual
cost of $104,119. It is a huge cost that your future income cannot cover.
Summary of Expected Retirement Income Sources
There are three main income sources during your retirement, government sour
ces, employer sources, and your own saving sources. I will list them out an
d explain them.
● Government Sources
Government sources include Canada Pension Plan and Old Age Security. For CP
P, Bill’s is calculating the total period of his work (63-18=45), then dro
p the number of the lowest income years (the number of years=45*17%). As a
result, the CPP period is 37.35. Since Bill’s income is always higher than
the estimated YMPE, he will have a total ratio of 3700%, the total ratio di
vided by the CPP period is the average ratio of 0.99. As I estimated in the
appendix, Bill, your average YMPE of last 5 years is $77,283, times it with
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average ratio, and 25% of the number will be your maximum CPP. The same cal
culation applies to Janet, too. Since you are retirement earlier than age 6
5, there is approximately $2,756 penalty (Calculating as CPP Benefit*[1-12*
(65-63)*0.6%]) for Bill and $2,421 (same as above) for Janet.
It looks like a small difference, but it actually causes huge changing for
the beginning balance of CPP. After the penalty, there is $16,383 for Bill
at age 63 and increase to $27,964 at age 90 with inflation. On the other ha
nd, there is $14,390 for Janet and increase to $24,563 at age 90 with infla
tion.
OAS is the income you will receive from age 65, it is calculated bases on t
he maximum OAS income in 2019 which is $7,362 individually, using N=2019 to
2039=20, I/Y=inflation=2%, P/Y=1, C/Y=4, PV=-7362, PMT=0, COMP FV=10972, wh
en you reach age 65, the number should be $21,944 as you combine the OAS. B
ut the number is regardless of your marital status, which means it could be
lower due to different circumstances. For example, your other income are ab
ove the limit to receive the full amount of OAS.
● Employer Sources
Employer sources include the defined benefit plan for Bill and defined cont
ribution plan for Janet. For Bill, the DB income at age 63 is $22,197 ((Ave
rage of last 3 years YMPE*1.3%*years of service)+(average of last 3 years i
ncome-average of last 3 years YMPE)*2%*years of service), numbers are shown
in appendix). For Janet, your DCP income are based on the 8% of the income
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as the contribution, and with an estimated rate of return of 3%, your DCP w
ill transfer immediately to LIF, which is used to hold pension funds and ev
entually payout retirement income, with the start balance of $220,480, it w
ill pay a minimum withdrawal start at $8,165 at age 63. Since you need to t
ransfer half of the beginning balance to RRIF, which I will introduce late
r, you will have the minimum withdrawal of $4,170 from LIF annually.
● Private Saving Sources
Now, we will talk about the other important income of your retirement. Priv
ate saving sources are the income received from RRSP and RRIF. Transfer hal
f of the beginning balance of Janet’s LIF is to increase the income from R
RIF.
There are two parts of calculation for both of your RRSP income. First, is
saving money into the RRSP account, and when you are retiring, the ending b
alance of RRSP will go into RRIF to pay out at least a minimum withdrawal d
uring the period of retirement. For the entire contribution period, I used
21% of the contribution room for Bill each year and 18% of contribution roo
m for Janet annually, and for the RRIF, I used rate of return of 2.5% for B
ill and 2.4% for Janet. Since the detailed calculation is quite large, I pu
t it in the appendix, and you can check the Excel attached for more. I will
explain to you if you have any doubts.
The estimated income from RRIF for Bill starts from $8,574 at age 63 and $1
0,068 for Janet.
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Summary of Expected Retirement Surplus or Shortfall
This part is focusing on the surplus or shortfall after we calculate all th
e numbers, and unfortunately, you have a deficit from the beginning of reti
rement. With the 2% inflation, when you two retire at 2037, you will fall i
nto the first bracket of tax, which means you only need to pay tax for 20.
5% of your total individual income. The after-tax total income for the firs
t retirement year is $56,765 and as I have said at the beginning of the rep
ort, you have a projected expenditures of $104,119, gives you a monthly def
icit of $3,946.
Well, there is no need to worry and panic, firstly, I have not use any tax
deduction or return. Furthermore, it is only estimation for the retirement.
But the data tells us that we need to work together in order to create a su
rplus or balance between income and expense. By all means, it is essential
for you two to have a decent retirement life.
Recommendation
In this part, we will make effort together to make the deficit of $3,946 be
come $0 or even surplus.
1. Cut off expenditures
With reasonable decrease in the expenditures, the deficit can be effectivel
y reduce. For example, based on the general idea you provided, you expect s
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pending $1,700 on entertaining related (Dining out+entertainment+vacation+m
embership=400+300+700+300=1700). I would recommend keep $1,000 budget for t
hese programs each month, which gives you options to choose different styl
e, in the meanwhile, giving you $1,000 less deficit at the age of 63 (Decre
ase the monthly expense by 700*(1+2%)^(2037-2019)=1000)
2. Delaying retirement from 63 to 65
As I mentioned in the above, if you two retired in 63, there will be a pena
lty for the 2 years. But if you are considering delay the retirement to 65,
based on the same formula, we will have a CPP beginning balance of $20,096
without any penalty for Bill (Based on the same calculation process) and $1
7,772 for Janet. In the meantime, increasing the contribution percentage an
d the rate of return, which means looking for higher return investment for
RRSP and RRIF, as well as increase your LIF withdrawal and RRIF withdrawal.
The reason I am suggest the above plan is, firstly you have enough disposab
le income to cover increasing contribute in the RRSP. Furthermore, you have
left out in RRIF, we can increase withdrawal and making the ending balance
to zero. On the other hand, since you have RRSP room left over, I suggest t
o contribute the full limit at 65 and increase the starting balance of RRI
F.
Since you have a annual disposable income of $65,736 at the year of 2019, t
here is enough for the new contribution.
Combining recommendation 1 & 2, you will have a surplus until 72 years old.
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3. Increase Janet’s RRIF ROR and purchase an annuity in the age of 82
Since Bill has already fall into the second bracket of provincial tax, I su
ggest you not to increase his income, but instead, using a higher rate of r
eturn at 6% for Janet from the beginning of her RRIF. She will only apply t
o the second bracket at the age of 65, and stay in the first bracket until
age 90. In this way, you will have a surplus until the age of 82. By using
the surplus from age 65 to age 82 to purchase an annuity, you can rely on a
fixed income annuity until the age of 90 with surplus.
Conclusion
The analysis and calculation of you are generally done in the document, wit
h further details and more calculations, for example, tax reductions and mo
re accurate expense estimation, we can together set up a more accurate rese
arch regard your situation. I look forward to work with you in the future,
and do my best to provide a decent retirement plan for you.
Appendix
The appendix is in the attached Excel file in order to show clear calculati
ons and details.