Chapter 1: The Retirement Planning Process
1. What are the steps in the retirement planning process? (See Learning Obj) (pg 4)
Gather current fin info
prep statements to reflect current fin situation
• statement o fin position/ statement of net worth/ BS
• statement of CF
quantify S-T and L-T goals
prep S-T budgets and estimate retirement spending. These budgets have 3 purposes:
• help client meet S-T goals
• ascertain how much the cline will be able to save each yr (and what adj, if any, must be made
to budget to meet retirement goals)
• estim annual retirement spending
calc req retirement savings
monitor results and make changes as needed
2. What factors affect the plan when planning for retirement? (pg 4)
period of accumulation
• longer the period of accumulation = less one must contribute each year
• retirement savings plans usually allow investments to grow tax-free -- the longer
they are in the plan = better.
amount of annual savings required
• get an accurate and realistic estimate of the amount that they will need in
retirement --bring one close to their goal = without over-sacrificing now.
• overestimated the amount that they need in retirement = give up living today
while they save diligently for tomorrow. (i.e. they do not take that family trip for
fear that they will not meet retirement goals- this can be a huge sacrifice).
• do not try to quantify the amount they will realistically need = put off saving
seriously for retirement until it gets closer (at which time, it may be too late).
rate of return
• additional 1% of return (over 30 years) on required retirement savings = worth
the additional risk? Chapter 1: The Retirement Planning Process
• tax deferred savings vehicles effectively provide a higher rate of return --> allow
for tax free compounding.
• estimates will be sufficient for planning purposes
• As retirement approaches, the plan should be fine tuned (and projections will be
more accurate) so that decisions can be made
• as retirement approaches, attitude towards retirement planning objectives has
changed (i.e. they do not want to retire at age 65 or they cannot stand another
day of work past age 61).
• A retirement plan must reflect the family’s goals and objectives (which can also
evolve over time). In some cases, it is an iterative process (it will be done over
and over again). In other cases, the objectives will endure and will only require
3. Does the possibility of leaving an estate for your children or other beneficiaries affect retirement
planning? (pg 6)
retiree wants to leave an estate to beneficiaries. If so, after drawing all of the retirement
income, there will be a lump-sum left behind. Upon death, there would be a lump sum
remaining. (i.e. all assets would not have been drawn down).
Savings at retirement = Total Annual retirement income until death + Amount required to
be left behind for Estate
W n C (PVIFA n, k+ Estate (PVn, k
PVIF n, kthe value at retirement of the amount of the estate at the end of retirement
discounted for the period of retirement at some discount rate, k.
4. What are 5 aspects of retirement income need that have to be addressed in order to plan for
How much will you need in retirement? ( = retirement exp)
• at first = may start as an estimate (%) of current income or current spending
• as retirement gets closer = the annual retirement spending should be
CALCULATED based upon the creation of a line-by-line cash flow/spending
What will you receive from government pension programs, from current pension plans
and from current savings?
How much will you have at retirement? - based on current savings rate and pension
What is the shortfall or surplus?
If shortfall --> what changes can be made to meet the shortfall? (What variables can you
change to ensure that the plan is feasible?) (i.e. save more, higher rate of return, extend
time horizon until retirement).
5. What are sheltered and unsheltered savings? What are the tax implications of each?
• pmts into plans (company pension plans and Registered Retirement Savings)
where no tax paid now on contributions to these plans
• no tax paid on income earned by these savings until the money is w/drawn f/ the
plan Chapter 1: The Retirement Planning Process
• savings (investments in stock and mutual funds that are purch w/ tax paid funds)
• tax is paid annually on most income earned f. non-sheltered savings
• less tax payable on these funds as they are liquidated to be used in retirement
6. Planning for retirement focuses on 2 main goals during retirement. What are they? (pg 10)
optimize after tax income during retirement
optimize one’s after-tax estate
7. What is the Canada Educational Savings Grant (CESG)? Are contributions tax deductible? Who
pays the taxes when it is withdrawn? (pg 16)
Canada Educational Savings Grant (CESG)
• 25% of contrib to max of $500 p.a for each child
• income not taxed until child w/draw funds for school
• child pay tax at lower rate than contributor
8. Is it important to separate S-T liabilities on the family's Statement of Financial Position? Why or
why not? (pg 17)
no b/c pmts are both monthly
9. Who should determine the categories for the statement of cash flows? Is it more useful to a family
to separate liability pmts into the correct accounting categories of interest exp and principle pmts,
or is it more useful to put the entire pmt under "Shelter costs"? (pg 18)
practical perspective: the interest and principal components of debt perspective should
be grouped together = in total, they represent the cost of living in the house --> mortgage
payment is like rent
make sure that the debt amount owing is reduced in th