Problem
Marcia, age 56, is starting to think about retirement. She plans to retire at age 65 and she expects to liver to age 90. She estimates that she will need $53,000 per year, after-tax, in retirement to give her the lifestyle she wants. She will receive an indexed pension of $30,000 per year, before-tax and a small non-indexed pension of $5,000 per year, before tax, from a previous employer. She will also receive a retirement pension of $700 per month from the Canada Pension Plan (CPP) and $600 per month in retirement income from the Old Age Security program. CPP and OAS payments are before-tax. She currently has $70,000 in her RRSP. For planning purposes, Marcia is using an 7% nominal rate of return on savings before retirement and a 5% nominal rate of return during retirement. Inflation is expected to remain at 2.5% per year throughout her lifetime. The tax rate applicable to Marcia's situation is 25%.
A. In percentage terms (e.g. 3.2345%), what is Marcia's real rate of return before and after retirement?
B. What is the after-tax present value, at retirement, of her required retirement income of $53,000? (you are supposed to calculate the present value of her retirement income.)
C. What is the after-tax present value, at retirement, of her indexed pension?