Investment and Retirement Planning

AuthorVern Krishna
Chapter : Investment and
Retirement Planning
Most people understand the value of contributing to retirement
accounts during their productive years of gainful employment and
then living o the accumulated nest egg after they retire. Certainly,
the government’s tax policies encourage deferring current income
until retirement. ere is a good reason for this: for most Canadians
the Canada Pension Plan (CPP), Old Age Security (OAS) and the
Guaranteed Income Supplement (GIS) are insucient support in
retirement years.
e evidence is alarming. More than half of Canadians live from
pay cheque to pay cheque and are not prepared for any unforeseen
nancial crisis, such as Covid- in . One-third of Canadians are
“asset poor” with their wealth in housing but with little income. Ten
million Canadians have no workplace retirement plans, and per-
cent have no retirement savings. e median retirement savings of
near- retirement individuals is $,!
As the above nancial prole of Canadians shows, there are several
reasons to plan for retirement. e rst, and perhaps most obvious, is
that, with good medical care, we are fortunate to be living healthier
 Financial Skills for Professionals
and longer lives. In , the current average life expectancy of Can-
adians at birth is.years.
e second is that government support payments are not nearly
sucient to sustain retirement and, given the state of government
nances and debt, are unlikely to improve. While government pay-
ments such as CPP and OAS are helpful, they are not nearly enough
to meet retirement needs, so we need to supplement them with addi-
tional sources of income.
ird, private pension plans are not nearly as generous as they
once were and are being cut back. Changes in employer pensions
from Dened Benet Pension Plans, which are the responsibility of
the employer, to Dened Contribution Pension Plans, which are the
responsibility of the employee, mean that individuals will require a
much higher level of private savings in the future.
Hence, unless one is on a government or public service indexed
pension plan, it is incumbent upon us to plan for our later years. e
good news is that we are more likely to live longer, but that means we
will also need more savings for our later years.
ere are three basic concepts in retirement planning:
) the time value of money (see Chapter );
) ination risk; and
) the income tax cost of investments.
e government has an important role in all three of these segments.
e time value of money depends upon interest rates, which central
banks (such as the Bank of Canada or, in the United States, the Fed-
eral Reserve) set to control ination and employment. Of course, the
government has exclusive control of tax rates on investment income.
. Time Value of Money
We start with the time value of money in retirement planning. ere
are two dimensions of time to consider in planning: future and present.
Chapter 18: Investment and Retirement Planning 
Given a sum of money, we can determine its value at some future date
if we know the rate of compound interest at which we can invest it.
Conversely, if we know that we will receive a sum of money in the
future, we can determine its present value today if we know the com-
pound rate at which it is, or can be, invested. us, all money is related
to time. Money has no value other than in the context of time.
Assume that Sacha, who is , wants to plan for his retirement, which
he expects will be when he is . He wants to make annual payments
into his retirement fund so that he can withdraw $, annually
for  years during his retirement, starting one year after he retires.
Assuming an  percent interest rate, compounded annually (ignoring
taxes), Sacha needs to make annual payments of $, into his sav-
ings fund.
PV of $
(Table )
FV of $
(Table )
Payment ($) PV ($) FV ($)
   pa 
  /
=  pa
e present value of the $, annual withdrawal is equal to
$,, which equals (with rounding) the future value of annual
contributions of $,.
Now, assume that the rate of interest is only  percent and Sacha
still wants an annual retirement withdrawal of $, in  years.
See Chapter  for discussion of time values.

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