FIN1035 Retirement Planning


Practice Questions

Factors Affecting Retirement Planning

Time Value of Money (“TVM”)


CPT – Compute key used to initiate financial calculation once all values are known and inputted.

N – Number of periods.

I/Y – Interest rate per period (consistent with N above).

P/Y – Number of payments per period (ie. annual, semi-annual, quarter, month, etc.)

C/Y – Compounding period (ie. annual, semi-annual, quarter, month, etc.)

PV – Present value (ie current value in today’s dollars equivalent to some future amount or income stream).

PMT – Amount of regular payment, either income or expense (only applicable for annuity questions).

FV – Future value (ie amount of money at some point in the future that is equivalent in today’s dollars to a current amount of money or income stream into the future).

Factor #1:      Longevity

No Applicable Financial Calculations

Factor #2:      Inflation

  1. Andre’s financial advisor told him that, to meet his retirement goals, he must earn a “real” rate of return each year of 4%. In the year just ended, inflation jumped unexpectedly to 3.5%. Andre’s tax-sheltered retirement funds earned 7%. Andre thought he has exceeded his required rate of return. What is Andre’s “real” rate of return? 
  2. Andrea plans to save $5,000 a year for 4 years. Money will be put aside at the beginning of the year. She is only 49 years old, so she is willing to take some risk, but not a lot. Thus, she expects she can earn a nominal rate of return of 9%, when inflation is 3%. What will be the future value of her investment plan in 4 years?
  3. (Note – Income Indexed to Inflation) Janine wants to estimate the value of her CPP retirement income of $9,300 at retirement in 5 years. CPP payments are indexed to inflation. To discount, she will use a long-term Government of Canada bond rate of 7% at a time when inflation is 3%?
  4. (Note – Income Not-Indexed to Inflation) Janine also has a pension plan that will pay her $9,300 at the beginning of each year. However, this pension payment is not indexed to inflation (ie. the payments are in nominal dollars). Assuming the same 5 years until retirement, what is the value of these pension payments now. To discount, she will use the same  long-term Government of Canada bond rate of 7% and inflation is still 3%?

Factor #3:      Rates of Return

  1. (Scenario #1 – Given a nominal rate of return before tax, calculate the nominal rate of return after tax – both interest income and also capital gains earned).

Oliva has received 6% interest on a Guaranteed Investment Certificate (GIC) after 1 year. Her marginal tax rate is 48%. What is her after-tax rate of return?

Oliva also owns some shares in a publicly traded company. Coincidentally, she received a 6% rate of return on her investment in these shares after 1 year. Her marginal tax rate is 48%. What is her after-tax rate of return?

  1. (Scenario #2 – Given a nominal rate of return before tax, calculate the real rate of return after tax – both interest income and also capital gains earned).

What is Oliva’s “real”, after-tax, rate of return if inflation is 3%?



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