Reference no: EM132775551
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:
Problem 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
Problem 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?