Reference no: EM132781121

Question 1 - Case Study 1 - Earnest starts his First Job- Earnest, your college school friend shows up at the bank where you have just started working. He also has found a new job. Earnest is 25 years old, lives with his parents, has no debt, and drives an older model car. He landed a junior position with a small architectural firm on January 1st of this year. He was surprised to get a job so soon after graduating, and his only work experience up to that point was as a summer camp counsellor for three years when he was 17, 18, and 19 years old. He made $6,500 each of the three summers that he worked.

The company where Earnest works does not have a pension plan. Earnest make $60,000 a year. He has some questions he would like you to answer as his knowledge about retirement issues is limited.

After some discussion and completing questionnaire to determine Earnest's risk tolerance for investments you agree on some assumptions;

Earnest expects a nominal return of 6.25% annually during the accumulation phase

Earnests expects a nominal rate of return of 5.5% annually during retirement

Inflation is expected to be 1.75%

His marginal tax rate is 32%

Note: Round all inflation adjusted rates to two decimal places (example 5.12)

Required: Complete the following questions:

a) Assuming Earnest has never contributed to a RRSP before what is the amount of the RRSP contribution he can make this year, including his salary up to the end of the current year? Show all calculations.

b) John was wondering how much money he could save in an RRSP by age 65. Assuming Earnest will immediately contribute the maximum amount of RRSP available (as calculated above) and contributes at the beginning of the year, the maximum allowable yearly amount (based upon a $60,000 salary) for the next 40 years, how much money will he have in his RRSP in real (today's) dollars?

c) Explain to Earnest the amount of monthly income he could receive if he was to take his RRSP and at age 65 and transfer all the funds (as calculated above) to a RRIF. He would like his payments at the beginning of each month, adjusted for inflation, and to last for a 25-year period. What would be Earnest's monthly income?

d) Earnest mentioned that one of his greatest desires to spend a couple of months in the town of Porto Portugal, where his father lived before coming to Canada. He would like to do that as a birthday present to himself when he turns age 60. If he took $25,000 out of his RRSP what would be the taxes owing and the withholding amount? Show all calculations.

Case Study 2 - Mona, who has just turned 63 years old has just retired. She will have taxable income of $96,000 this year. She has asked you about collecting her CPP benefits. She would receive $1,000 each month in CPP benefits if she collects at age 65. Explain to her the amount she will receive if she collects at age 63 (24 months early) and the amount she will collect if she collects at age 67 (delays collection for 24 months). Show your calculations.

a) Mona's older sister Monica, is 66 years old, retired, and has an annual taxable income of $97,400. She received OAS of $580 each month. The OAS clawback threshold is $75,910 for this year. What amount will she receive every month after the clawback? Show all calculations.

Question 2 - Provide a brief (point form) description of the benefits and drawbacks of a Registered Retirement Income Fund and a Fixed-term Annuity as viewed by a retiree.

Question 3 - Dakota is 64 years of age worked as a brew master for Big Knuckles Brewery. He retired last year and has a Locked-in Retirement Account (LIRA) that holds his RPP from Big Knuckles. Dakota wants to transfer the LIRA to a type of account that will provide retirement income. Explain to Dakota the options available and any specific restrictions, if any, that apply to those options.