Designing a Retirement Plan for Mercedes and Alejandro San Martin

It is now nine years later and things have changed. Mercedes and Alejandro will be ages 60 and 62, respectively, on January 1, 2028, and they have decided that they would like to retire within the next few months. They both feel that they have sufficient income and savings that will allow them to enjoy a comfortable lifestyle during retirement, but they have never worked with a financial advisor, so this assumption is simply a feeling they have. Therefore, before making the final decision about retirement, San Martin’s have approached you (now October 2027) to help them assess their financial decision relative to the important decision.

Alejandro now holds a senior management position with Shoppers Drug Mart, where he has worked for the past three years. Prior to this job, he worked for Grande Pharmacia for roughly 27 years. When Alejandro left Grande Pharmacia, he decided to take a deferred annuity, to begin at age 65, as the settlement of his pension options. His deferred annuity is a life annuity with a 100% survivor option. The monthly payment of $2,200 begins at the end of the month in which he reaches age 65.

At Shoppers Drug Mart, Alejandro participates in a defined contribution pension plan, which he joined at the time he was hired. The market value of his pension assets is $45,000, while the book value is $40,500. The plan allows for a two-year vesting period. Upon termination of employment, or at retirement, the pension plan allows funds to transfer to a LIRA, provided the individual is age 71 or less during the year when the transfer occurs.

Mercedes is now the Vice-President of Finance for Starlight Inc. Six years ago, the company established an individual pension plan for its senior executives, which included Mercedes. This non-contributory IPP provides a 2% benefit for each year of service at the company and is based on career average earnings. At present, Mercedes has six years of participation in the plan, prior to which she did not participate in any pension plan. Mercedes began working at Starlight on July 1, 2012. She has been discussing the possibility of retirement with her employer and they have offered her a $75,000 payment in recognition of her long service with the company.

Prior to her participation in the IPP, Mercedes contributed regularly to an RRSP and has accumulated substantial assets. During that period, she made $45,000 in contributions to a spousal RRSP, where she was the contributor and Alejandro was the annuitant.

For Mercedes and Alejandro, the time has come and retirement is now right around the corner. They now want to know whether the retirement plan they have been building will provide long-term financial security for them after they stop working. So they are looking for your help and have given you the following list of questions to answer for them.

For any calculations, assume that the market value and a book value of the assets remain unchanged between October 1, 2027, and January 1, 2028. Also, only use information in Part 2 of this case to answer the following questions. Do not refer back to details from Part 1. The passage of time since Part 1 has made many of the details in Part 1 irrelevant now, nine years later.

SUMMARY OF KEY FINANCIAL DETAILS

All Values as of October 1, 2027

Mercedes                    Alejandro

Date of Birth                                                               October 22                  August 27

Annual Salary                                                             $150,000                     $150,000

Earned Income                                                           $100,000                     $150,000

RRSP (Annuitant) – Market Value ($)                        $390,000

RRSP (Annuitant) – Book Value ($)                           $270,000

Spousal RRSP (Annuitant) – Market Value ($)                                              $45,000

Spousal RRSP (Annuitant) – Book Value ($)                                                 $30,000

RPP – Market Value ($)                                                                                  $45,000

RPP – Book Value ($)                                                                                     $40,500

Non-Registered Assets ($)                                           $200,000                    $250,000

Mercedes and Alejandro are both in the 45% marginal tax bracket.

Questions to answer and explain for Mercedes and Alejandro:

When answering these questions, please assume the maximum annual pension entitlement for a defined benefit pension plan has not changed over the last nine (9) years and is still $2,697 per year of service.

1. Assume Alejandro transfers the balance in his spousal RRSP to a spousal RRIF as of December 31, 2027, and sets it up to ensure that he is able to minimize any required payments from the fund. What is his minimum RRIF withdrawal requirement for 2028?
2. For 2018, Alejandro would like to withdraw $5,000 from the RRIF. Will any attribution issues arise? Why or why not?
3. If Alejandro names Mercedes as the successor annuitant of his spousal RRIF, and he subsequently dies in 2028, what are the tax consequences?
4. How much of the $75,000 long service payment, if any, can Mercedes shelter from tax?
5. What are the implications, if any, of Mercedes transferring the eligible portion of the retiring allowance discussed in question #4 above to a spousal RRSP where she is the contributor?
6. If Mercedes opts to tax shelter the eligible retiring allowance discussed in question #4 and #5 above, what implications, if any, will it have relative to her RRSP contribution room?
7. When Alejandro left his job at Grande Pharmacia a few years ago, he opted to take a deferred annuity pension settlement. Using an expected payout period of 27 years, what is the present value of Alejandro’s pension from Grande Pharmacia at his age 65, using an annual nominal interest rate assumption of 5%, compounded monthly?
8. What is the value of Mercedes’ accrued pension benefit for 2028?