Planit:Single Needs Illustration Calculator Exercise Answer Key
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Question One:
Lynne and Tom want to ensure that they can fund a comfortable retirement lifestyle starting at age 55. Right now they are 38 and 40 respectively, and their assumed mortality is age 90. Their inflation assumption is 3.0%.
Note: For Canada, Lynne and Tom are both fully eligible for CPP and OAS.
Tom currently saves $5,000 towards his RRSP, which already has capital of $80,000. Elaine saves $3,500 towards her RRSP, with a balance of $50,000. The rate of return for these registered investments is only 5.43%. They have some open investments worth $30,000, but are not currently saving anything into them. Their non-registered portfolio is growing at 7.54% annually.
They also said that they only require $55,000 annually to fund their retirement lifestyle.
- From the Single Needs Calculator, what is the value of the present value of their total surplus or deficit? $_____
- What are the Planning Alternatives that would allow them to achieve their retirement objective? _____
- Income Available $_____
- Annual Registered Savings $____
- Rate of Return on Non-Registered Investments _____
- % Delayed Retirement Age ______
Answer:
To start off, on the Home page, click on the Single Needs Illustration under the Calculators drop-down menu.
1. The first field, Average Tax Rate, can be left at the default.
2. Since you will be planning until the planning horizon of the youngest client, set the Birth Year to 38 years ago.
3. The Requirement and Inflation can be set to $55,000 and 3.0% respectively.
4. Likewise set the From Age to 55, when they plan to retire.
5. Set the To Age to 90, the assumed age of mortality.
6. Their Registered Investments can be entered as $130,000 (the combined value of Tom’s $80,000 RRSP and Elaine’s $50,000 RRSP).
7. The Non-Registered Investments have capital of $30,000.
8. The Rate of Return should be set to 7.54% for the non-registered investments, and 5.43% beside the registered investments.
9. Their Registered Annual Savings will be the total amount being saved into their RRSP (or other registered type) accounts, in this case $8,500 (John’s $5,000 savings plus Elaine’s $3,500).
10. They aren’t making any savings into the open accounts so the Non-Registered Annual Savings field can be set to $0.
11. The Index for the savings can be assumed to be the same as the inflation: 3.0%
12. After a quick review, click the Calculate button at the bottom.
Under the Summary section, the Shortage value under the Present Value $ section should be $191,453.
Under the Planning Alternatives section, there should be listed a variety of changed assumptions that would allow for a successful achievement of your retirement goals.
- Income Available $29,216
- Annual Registered Savings $53,768
- Rate of Return on Non-Registered Investments 16.80%
- Delayed Retirement Age 66
Question Two:
Susan wants to ensure she can fund four years of university tuition and residence for her son, Mike. Due to the continually rising costs of post-secondary education, they want to assume that the rate of inflation is set at 5.0%.
Mike is 16-years old. Susan wants to fund $10,000 per year, suggesting Mike can cover the remainder through his own savings or scholarships. Susan is currently saving $3,000 annually into an RESP account, with $14,000 already invested with a rate of return of 9.5%.
Note: For Canada, these savings will qualify her for the $500 Canadian Education Savings Grant.
From the Single Needs Analysis Summary Report, identify the:
- Overall Deficit in Today’s Value:$_____
- Reduced Income Requirement:$_____
- Age at which Mike could Attend for 4 Years:____
- Annual Registered Savings Required:$_____
Answer:
Click on the Single Needs Illustration under the Calculators drop-down menu.
1. The first field, Average Tax Rate, can be set to 0%, based on applicable taxes for educational investments.
2. The goal is for Mike, so the Birth Year can be set to 16 years ago.
3. The Requirement and Inflation can be set to $10,000 and 5.0% respectively, as they indicated.
4. Likewise set the From Age to 18, when the child would plan to attend university.
5. Set the To Age to 21, since the calculations will be done until the end of age 21, so over a total of four years.
6. The Registered Investments can be entered as $14,000
7. The rate of return could be set to 9.5%
8. The $3,000 of annual savings should be entered in the Registered Annual Savings since this will treat the savings as tax-sheltered.
9. The clients did not indicate they were indexing their savings so the Index can be assumed to be 0.0%
10. In the Other Revenues section, you would enter the information for any education grants for your country.
15. After a quick review, click the Calculate button at the bottom.
Under the Planning Alternatives section, there should be listed a variety of changed assumptions that would allow for a successful achievement of your retirement goals.
- Overall Deficit in Today’s Value: $15,580
- Reduced Income Requirement: $5,680
- Age at which Mike could Attend for 4 years: Age 23
- Annual Registered Savings Required: $12,008
