Suzanne is 65 years old and has worked for BCE for 25 years. She is a member of

Question

Suzanne is 65 years old and has worked for BCE for 25 years. She is a member of a Defined Benefit Pension Plan that will pay a retirement benefit of 2% of the average of her best 3 years of earnings multiplied by her years of service. Her salary in the year before retirement was $82,000, and rose by an average of 5% per year over the last few years. Suzanne also has $200,000 in her RRSP invested in Canadian stocks. She estimates her income needs in retirement at $50,000 a year before tax.

Part A: What will be Suzanne’s annual pension benefit from BCE? Calculate pension benefit.

Part B: If Suzanne expects to live until the age of 85, how much should she have in retirement savings at the time of retirement taking into consideration her corporate pension income? Ignore income from OAS (Old age security) and CPP (Canada pension plan) and assume an investment return of 5% per annum. Calculate amount required for her retirement savings.

Part C: Is Suzanne’s RRSP (registered retirement savings plan) asset allocation appropriate? Please explain one reason why it is, and one reason why it isn’t.

Explanation / Answer

last year of income =82,000, 2nd last year = 82000*(0.95)=77900, 3rd last year = 77900(0.95)=74005

average=sum of income /3 =77968.33

retirement benefits are 2% =77968.33(0.02)=1559.37

a)annual pension benefits from BSE= $1559.37

B)her annual need substracting pension = 50,000-1559.37 =48440.63

present value of needs(present value of annulity) = 48440.63(1-1.0530)/0.05=744651.2124

she has 200,000 dollars in RRSP therefore she need to have 744651.2124-200,000=$544651.2124 in her account

c) yes her RRSP asset allocation is appropriate as a 65 year old she should have aroun 30% invested in stocks and that is the case here

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