Carolyn Fallis, MTax, CPA, CA, CFP
Instructor, Toronto Metropolitan University
 A Science
◦ Quantitative analysis to support each decision
◦ Given limited financial resources, maximize one’s
after-tax utility in retirement
◦ Timing and type of retirement income
 An Art
◦ Creative solutions to meet variable cash flow needs
◦ Not just about numbers
◦ Consider client’s attitudes
◦ and perspectives
 Life Expectancy of Canadians is increasing
 Normal Retirement Age
- No longer
 Saving for Retirement does not rank
◦ New data for Gen X – savings is minimal
 Economic Factors
◦ Demise of Employer sponsored Pension Plan
Low interest rate environment
Low Inflation
Recent changes to Personal Income taxation in Canada
 No longer enough to ask if the client has
enough retirement income resources?
 Need to assess what “risks” are mitigated by
the nature of retirement income sources
 How can we plan to make sure
the client is insulated from
changing face of retirement?
 Investment risk – what value will it be?
◦ Known benefit vs estimated benefit
 Longevity risk – how long will it last?
◦ Life Annuity vs Lump Sum Savings
 Inflation risk – Will purchasing power erode?
◦ Indexed vs Non-indexed
 Taxation risk – What if taxation changes?
◦ Before tax vs After tax savings
 Need to understand client preferences and
attitudes towards nature of retirement
income
 Lump sum savings – RRSP/ RRIF/TFSA to
supplement income needs
◦ General fund vs Specific Fund
 Annuitized streams vs Lump sum
 Retirement Planning Process
 Retirement planning toolkit
◦ Refine/review our skills for
 Inflation
 need to know how our purchasing power will be impacted
over many years leading up to and subsequent to
retirement
 Time Value of Money
 Need to be able to calculate the value of an annuitized
stream or calculated the amount of savings per year to
reach a goal
 Income taxation
 Need to be able to calculate the amount of income, after
tax! Only income, after tax, clearly shows what is left for
one to “consume”, save or spend.
 1. Gather current financial Information
 2. Prepare financial statements to reflect
current financial situation
 3. Quantify short and long term goals
 4. a) Prepare short term budgets
◦ b) Estimate Retirement Spending
5. Calculate required retirement savings
6. Monitor Results and make changes
 Period of Accumulation
◦ Benefits of an early start
◦ Compounding of interest/earnings
 Rate of Return
◦ Estimate based upon history?
 Amount of Savings Required
◦ If not calculated, may overestimate amount
required for retirement
◦ Opportunity cost is forgone spending now
 How much will you need in retirement?
◦ Start with estimate – refine as years pass
 How much will you receive from gov’t
pensions, current pension plans, current
savings?
 How much will you need at retirement date?
 Shortfall/Surplus?
 Change in expectations or actions?
 Required = $50,000 per year (BOY)
 PV of RRSP = $98,700
 Estimated date of retirement = 17 years
 Length of retirement = 35 years
 What is the amount required on Retirement
date to fund this?
◦ PV of this spending stream on retirement date
 Answer:
$970,560
 Need to practice key strokes?
 Compounded one time per year
 ‘n= 35 years
 ‘i = 4%
 FV = 0 (nothing will be left)
 Solve for PV
 Now consider all sources of income
◦ Pension Plans
◦ Government Plans
 Recalculate savings required at
retirement
 $19,920 (BOY – after tax) x PV of annuity (35, 4%)
 Amend the required amount in
retirement
 Calculate the required savings per year
to see if it is feasible
 Employment Information
◦ Salary,
◦ Bonus calculations,
◦ Insurance coverage,
◦ other taxable/non-taxable benefits
◦ Restrictions to work continuity
 Economic Outlook
 Physical impact of work
◦ Self employed – historical revenue/ risk of
business
 Assets – liquid assets
 Non-registered investment assets
 Registered pension plan
 Registered Retirement Savings Plan
 Personal Use assets – house, cottage, car, house
contents
 Luxury Assets – Piano, memberships with equity
ownership
 Liabilities
◦ Credit card
◦ Line of credit
 Long Term Liabilities
◦ Mortgage
◦ Long term obligations to others
◦ Ongoing funding for long term care (parents)
 Expenses:
◦ Ongoing Household expenses
 Heat, hydro
 Property tax
 Telephone
 Insurance
 Living expenses
◦ Transportation (including insurance/gas)
◦ Food, wine, beer, fashion
◦ Child care
 Why do we need current position?
◦ Starting point
◦ Understand current spending/history
◦ Identifies opportunities for savings
◦ Identifies when obligations may cease or change
 Statement of Financial Position
◦ Assets vs. Liabilities
 Use FMV
 Emphasis on timing and paying down debt
 Reality test
 Any unaddressed risk?
 Disability
 Death
 Unemployment
◦ Quantifies Net worth at a point in time
 Statement of cash flows
◦ Include entire mortgage payment as an expense
◦ Discretionary spending (do not include car or house
expense- need to live somewhere – use shelter and
car respectively (p. 19)
◦ Forces you to quantify all spending (including
donations, entertainment)
◦ Savings is a draw on cash --- must quantify and
ensure balance


As part of #2, preparation of statements of current
position will identify gaps and risks
May identify /quantify goals for next years
◦ More trips with children
◦ Golf more
◦ Reduce workload
◦ Debt repayment
◦ Changing needs --- downsize car, house?
 What is feasible?
 May need to adjust:
◦ Age of retirement
◦ Estimated lifestyle
◦ Planned savings strategy
◦ Investments – assume more or less risk
 More opportunity for tax minimization
 RESP, RRSP, TFSA (new opportunity)
 1. Calculate the amount that is required on
retirement date to meet retirement
expectations.
◦ PV of PMT stream with FV= O
 2. Calculate the PV of the expected income
from gov’t plans
 3. Take amount available today…..add future
savings --- calculate the FV of that amount
at retirement date
 Other considerations
◦ Tax sheltered in retirement (RRIF, TFSA)
◦ Spending patterns
 Pg 24/25
 Non registered lower income
 Non registered higher income
 Registered lower income
 Registered higher income
 Be conservative
 Uncertainties in life will occur
 Change in attitudes and values of clients
 Review of calculations & meaning of the
terms
 Use of a timeline
 Fixed payment vs. annuity
 Ordinary annuity (end of year) vs. Annuity due
(beginning of period)
 Understand the meaning --- key for
retirement planning and CFP Examination
 Example #1 - Future Value of a Principal
amount and annual Income stream
◦ Real words – invest a sum and earn interest per
annum
◦ Know the PV, know the interest earned, multiple
compounding --what is the future value of this ?
 PV of a sum that will earn income
 Variables that are known:
◦ Future Value in today’s dollars
◦ Interest rate
◦ compounding frequency
◦ Solve for PV
 Practical use – good when you know that you
need a sum (i.e. Downpayment or retirement
amount)
 Future value of an cash stream (annuity)
 End of year, (given in question)
 Payment = $1,000
 Know interest rate and frequency of
compounding
 Practical use --- if I save x amount per year,
how much will it grow to?
 May consider taxes & inflation in interest rate
used
 Future value of an cash stream
(annuity)
 Beginning of year, (given in question)
 Payment = $1,000
 Know interest rate and frequency of
compounding
 Practical use --- if I save x amount
per year, how much will it grow to?
 May consider taxes & inflation in
interest rate used
 Present value of an annuity
 Know the amount you want (payments
in the form annuity)
 Payment = $1,000
 Periods = 4
 Interest rate = 4.25%
 Practical use = How must do I need to
deposit to fund a financial need
(regular payment of expenses
(university or mortgage)?
 Present value of an annuity
 Know the amount you want (payments in
the form annuity)
 Payment = $1,000
 Periods = 4 (but beginning of year –
adjust the payment period) or set to BGN
 Interest rate = 4.25%
 Practical use = How must do I need to
deposit to fund a financial need (regular
payment of expenses (university or
mortgage)?
 Future value of a sum on deposit
 Watch how it is compounded
 Convert the periods and interest rate
to quarterly amounts
 Periods = 4 but due to quarterly =4.25% is really 1.0625 % per period.
 Practical use = What is the impact of
the quarterly compounding ??? How
much difference does it make? Look
at time horizon.
 Need to watch what interest rates you are
using in your calculation
 Depending on how your client quantified
their needs, you may need to adjust the
interest rates for inflation
 Adjust the interest rates for the impact
of inflation = REAL RATE OF INTEREST
 REAL ECONOMIC GAIN – or real gain in
purchasing power --- cannot look just at
dollar values

A.
B.
C.
D.
Fido wishes to know how much her RRSP will be worth if she
contributes $2,000 on January 1 of each year for 20 years and
earns a nominal return of 6% compounded annually. How
much will she have accumulated at the end of 20 years?
$69,438.50
$73,571.18
$77,985.45
$194,963.63