Class Notes (835,382)
Canada (509,147)
MTHEL 131 (111)
David Kohler (106)
Lecture 11

MTHEL 131 Class Note Lecture 11

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Mathematics Electives
David Kohler

[Nov. 30, lecture 11] 1 Registered Pension Plan  Pension is provided by employer  2 types of pension plans:  Defined Contribution Plan (Money Purchased)  Contribution made to plan defined by a formula  Ex. Match up to 4% of your salary; if you make $4000/month, you put in $160/month, and your employer will match it, dollar to dollar: $160/month  Where does that $320/month go? → You choose how to invest that money:  Guaranteed Investment Certificates (GIC)  Fixed income bonds (government or cooperate)  Canadian Large Capitalization Companies  Canadian Small companies Riskier  US stocks/companies  International stocks/companies → You take a questionnaire to roughly determine how much you’re willing to risk, based on investment knowledge, age, etc → By the time of retirement, you may get $396,000 to buy some kind of annuity with  Defined Benefit Plan Actual benefit at retirement is defined by formula base on 3 factors Benefit at Retirement = Year of ServiceדEarning”×”Factor”  “Earning” depends on the definition of earnings: 1. CareerAverage; 2.Average of the Best 3 Years (entire career); 3.Average of the Last 5  “Factor” could be 1.0%, 1.5% or 2.0% Ex 1. “Earning”: career average; starts 30 years ago, earning from $8,000 to $65,000; the career average is $30,000; “Factor” is 1.0%; so this person’s pension is 30×$30,000×1.0% = $9,000/year Ex 2. “Earning”: Average of the Best 3 Years; starts 30 years ago, earning average of the best 3 years is $60,000; “Factor” is 1.5%; so this person’s pension is 30×$60,000×2.0% = $27,000/year Ex 3. “Earning”: Average of the Last 5; starts 30 years ago, average of the last 5 is [Nov. 30, lecture 11] 2 $60,000; “Factor” is 2.0%; so this person’s pension is 30×$60,000×2.0% = $36,000/year  The biggest determining of pension amount is the definition of earning  Employers may expect the employee to put money into the pension plan  If they don’t, it’s a non-contributory pension plan  If an individual is expecting to retire in March 2009, the stock markets crashed around that time; 40% of decline he has the defined contribution pension plan, period of 8 to 9 and 40% decline in the stock market, you would months get 40% less than you were expecting, since your equities lost value March 9, 2009  With defined benefit plans, the employer will assume the market risk  If you had defined benefit plan, you would still get the same amount you were expecting  Defined benefit plans are usually only used by large companies  Small employers use defined contribution plans  Lots of large companies try to switch the defined benefit plan to defined contribution plan  Everyone already working for the companies making switches will keep their same pension plan, but newcomers will have defined contribution plans About 𝟏 of Canadian have no pension plan 𝟑 →In Ex 3, if the pension is $36,000/year, $3000/month; you have no dependents, then you get a single life zero guarantee plan  If you drop dead a month after retirement, that’s the end of your pension  If you’re married, it’s illegal to receive a single life zero guarantee plan  You get a bit less money each month, but once you die, as long as your spouse is alive, they’ll get a pension every month
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