The Case: Greg and Jessica Smith
Note: paper cases have significant limitations as they are simply black ink on white paper and not based on actual people. This case will attempt to give you a sense of who these people are, but you will still needtomakesomeassumptionsas youworktowardanoverallretirementsolutionforthisfamily.
Personal Information – As at 31 December 2020
Employment
Greg is a nurse at Victoria Hospital in London. Greg started his current job on January 1st 2021 and expects to continue in this role until his retirement. His current salary is $82,000 per year. Greg is a member of the HOOP pension plan and joined the pension when he started at Victoria Hospital.
Jessica works for London Life in an office administration role. Jessica has been employed by London Life ever since she graduated from the University of Waterloo in 1998. Jessica is a member of their defined contribution pension. Her current salary is $65,000 per year.
Health
Greg and Jessica have always been quite healthy. However, last month Greg had his annual physical and it was discovered that he has moderately high blood pressure. His doctor was quite concerned as Greg’s family has a history of high blood pressure. His doctor has suggested that medication is not required right now; instead he has advised Greg to begin an exercise program, at 3 times per week and to pay close attention to his eating and sleeping habits to reduce stress from his life. He is currently 6 feet tall and weighs 190 pounds. Greg and Jessica consider themselves non-smokers as Jessica only occasionally smokes a cigarette during a girls-weekend away in Las Vegas twice a year.
Major Assets
Greg and Jessica jointly own a home in London, Ontario that was purchased for $450,000. The house is currently valued at $675,000. They have no intentions of moving and have a mortgage remaining of $310,000, that they expect to pay off over the next 15 years.
Greg and Jessica saved very little in retirement, as they believe the pensions they have through work will be enough to meet their retirement needs. See Appendix for asset values.
Pension Plans
Greg is a member of his employer’s mandatory defined benefit pension plan. The plan is based on the average of the last 5 years of employment and will pay Greg a 1.5% credit per year of service up to the YMPE and a 2% credit on the amount above the YMPE. The pension is indexed to inflation. The pension has a maximum of 35 years of service. The pension plan provides survivor benefits to Jessica in the event of Greg’s death. Jessica will be entitled to a spousal pension worth 60% of Greg’s pension at the time of his death.
Jessica is a member of a Defined Contribution Pension Plan. She contributes 3% of her salary to the pension plan and her employer matches. Jessica also makes optional contributions of 1%, that the employer does not match. The plan is invested with a balanced mandate. Greg and Jessica both have a moderate risk tolerance.
Expenditures
Please see appendix for a list of expenditures that Greg and Jessica have provided.
Future
Greg and Jessica have had some discussions with family members who have told them they need to complete a retirement plan. They have decided they want to retire at age 60 and have provided you with a retirement budget in today’s dollars.
See the following pages for appendices.
Appendix 1 – Greg and Jessica’s expenses
Greg and Jessica have not historically tracked their expenses well. They have provided details on specific items below but are looking for your assistance on what living expenses amount to for their rest of their current lifestyle. They have provided you with their gross salaries above.
Appendix 2 – Greg and Jessica’s Assets
House $375,000
Greg RRSP – $18,000
Jessica RRSP – $21,000
Jessica DC Pension – $45,000
Savings – $1,400
Cars – $23,000
RRSP Carry Forward Room 2020
Greg – $139,000
Jessica – $98,000
Appendix 3 – Historical Incomes
Appendix 4 –Monthly Retirement Expenditures (in today’s dollars)
Housing Maintenance – $350
Groceries – $925
Dining Out – $500
Hydro – $250
Heating – $120
Internet/Cable – $225
Gas – $270
Automobile Insurance – $235
Entertainment – $200
Vacation – $500 Memberships – $275
Gifts – $250
Home Insurance – $75
Property Tax – $400
Cell Phones – $120
Vehicle Maintenance – $275
Personal Care – 200
Medical – $300
Miscellaneous – $200
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Your role is as that of a retirement planner. Your objective is to help your clients organize themselves in order to do some financial planning. In the real world, you would do so with clear step by step communication. Details on their income, expenses, assets and liabilities are provided in appendices. Clearly state what assumptions you need to make to complete your assignment.
a- Estimate the CPP benefits that Greg and Jessica will receive when they are 60, (calculate the ratio of earnings to YMPE) and the OAS benefits they will receive at age 65, in future dollars. Showyourcalculationsandlistanyassumptionsyouaremaking. Hint:youwillneedtomake an assumption on future salary increases. You will also need to use the historical YMPE/YBE figures to complete.
b- Determine the RPP annual pension income that Greg will receive from his pension when he retires at age 60.
Hint: remember to base the benefits on the future salary.
c- Estimate the value of Jessica’s DCP plan when she retires. Be sure to state your assumptions.
d- please share screen shots of the excel sheets.