Imagine you just finished 30 years-old, earning $120,000 pre-tax per year paid at the end of each year. Assume you have no financial asset or explicit liabilities. Your salary grows 1% per year until you retire at the end of age 65 (35 full years of working). After retirement, you are entitled to receive a pension paying 50% of your last salary for the rest of your life (your pension would remain constant). Assume a valuation rate of 5% and a planning horizon to age 95 (30 full years of retirement). Your current subsistent consumption is $20,000 (paid at the end of the year). You expect your subsistent consumption to grow at rate of 2% until the end of age 95. Your goal is to maintain a constant discretionary consumption (standard of living) for the rest of your life. You should pay taxes according to the table below. Brackets AVERAGE tax rate $0 to $100,000 30% $100,0000 to infinity 40% Please answer: Part A: If you put your savings in a TFSA account, what is the highest real & constant standard of living that you can achieve? Part B: What fraction of your fifth salary (salary at the end of age 35) should you save to achieve your financial goal? Do not forget subsistent consumption. Part C: How much financial capital should you have at age 65, so that you can achieve your financial goal. This is also known as your target “retirement nest egg”.

Imagine you just finished 30 years-old, earning $120,000 pre-tax per year paid at the end of each year. Assume you have no financial asset or explicit liabilities. Your salary grows 1% per year until you retire at the end of age 65 (35 full years of working). After retirement, you are entitled to receive a pension paying 50% of your last salary for the rest of your life (your pension would remain constant). Assume a valuation rate of 5% and a planning horizon to age 95 (30 full years of retirement). Your current subsistent consumption is $20,000 (paid at the end of the year). You expect your subsistent consumption to grow at rate of 2% until the end of age 95. Your goal is to maintain a constant discretionary consumption (standard of living) for the rest of your life. You should pay taxes according to the table below. Brackets AVERAGE tax rate $0 to $100,000 30% $100,0000 to infinity 40% Please answer: Part A: If you put your savings in a TFSA account, what is the highest real & constant standard of living that you can achieve? Part B: What fraction of your fifth salary (salary at the end of age 35) should you save to achieve your financial goal? Do not forget subsistent consumption. Part C: How much financial capital should you have at age 65, so that you can achieve your financial goal. This is also known as your target “retirement nest egg”.