If you wish to supplement your retirement by saving $200000 in 25 years,how much more would you have to save monthly if you saved the money outside rather than in an RRSP? Consider that investment returns should provide a yield of 8.5 percent compounded monthly and your tax rate is 30 percent,so the after tax return would be 5.95 percent.

Question

Quizplus · Accepted Answer

If the $200000 is saved in an RRSP, the tax rate would be deferred until withdrawal, and the entire $200000 would grow tax-free over the 25 years. If we assume an 8.5% compounded monthly rate of return, the monthly contribution required to reach the $200000 target in 25 years would be $352.08.

If the $200000 is saved outside of an RRSP, the tax rate of 30% would be applied to the investment returns. Therefore, the after-tax rate of return would be 5.95%. Given an 8.5% compounded monthly rate of return, the monthly contribution required to reach the $200000 target in 25 years would be $449.13.

The difference between the contributions required to reach the $200000 target in 25 years under both scenarios is $97.05. Therefore, the additional monthly savings required for the investment outside the RRSP is $97.05. Hence, the answer is C.

If You Wish to Supplement Your Retirement by Saving $200000