Welcome

1. Welcome

2. Expectations of Students • Commitment of time and energy • Read the assignments prior to class • This course will help you: • grow your business • be successful on the College’s end-of-course examination

3. Housekeeping Items • Professor contact informationLobby & Welcome e-mail • Tutorial in Lobby • Status changes  • Text chat • Files for students • Recordings • Access Poll Layout     

4. Chartered Retirement Planning CounselorSM Professional Designation Program Module 1The Retirement Planning Process & Meeting Multiple Financial Objectives

5. Learning Objectives 1–1: Describe the six steps of the retirement planning process and what each contributes to the entire process. 1–2: Describe the two key financial statements in which client data are reflected. 1–3: Articulate the pros and cons of retirement income replacement percentages. 1–4: Explain the methods for determining retirement period income and expenses, and pre-retirement savings needs. 1–5: Calculate the future value of a current sum, the present value of an annuity due (PVAD), and the payment required in a present value of an ordinary annuity (PVOA). 1–6: Describe the problem of multiple financial objectives and a method for meeting each.

6. Video Play Video • LOs as Your GPS • 5:00 minutes • Play video from Video Layout Text chat or other questions

7. Questions to Get Us Warmed Up

8. Learning Objectives 1–1: Describe the six steps of the retirement planning process and what each contributes to the entire process. 1–2: Describe the two key financial statements in which client data are reflected. 1–3: Articulate the pros and cons of retirement income replacement percentages. 1–4: Explain the methods for determining retirement period income and expenses, and pre-retirement savings needs. 1–5: Calculate the future value of a current sum, the present value of an annuity due (PVAD), and the payment required in a present value of an ordinary annuity (PVOA). 1–6: Describe the problem of multiple financial objectives and a method for meeting each.

9. Six Steps of the Retirement Planning Process • Establish and define the relationship with the client • Gather client data • Analyze and evaluate the client’s financial status • Develop and present retirement planning recommendations and/or alternatives • Implement the retirement planning recommendations • Monitor the retirement planning recommendations

10. Statement of Financial Position • A personal balance sheet as of a specific date • Assets • Cash/Cash equivalents • Invested assets • Use assets • Liabilities • Mortgage loan balance • Auto loan balance • Credit card balances • Net worth (Assets – Liabilities)

11. Income Statement • A personal cash flow statement of income, expenses, and the resulting surplus or deficit for a period of time • Income • Salary, investment income, miscellaneous inflows, etc. • Expenses • Mortgage payments, taxes, insurance, utilities/household expenses, food, medical/dental, clothing/personal care, etc. • Surplus/Deficit (Income – Expenses)

12. Learning Objectives 1–1: Describe the six steps of the retirement planning process and what each contributes to the entire process. 1–2: Describe the two key financial statements in which client data are reflected. 1–3: Articulate the pros and cons of retirement income replacement percentages. 1–4: Explain the methods for determining retirement period income and expenses, and pre-retirement savings needs. 1–5: Calculate the future value of a current sum, the present value of an annuity due (PVAD), and the payment required in a present value of an ordinary annuity (PVOA). 1–6: Describe the problem of multiple financial objectives and a method for meeting each.

13. Pros & Cons of Income Replacement Percentages • Rough guide—e.g., use 80% of pre-retirement income • Help assess reasonableness of client’s goals • Most useful for young clients as a guide • Ratios should be viewed as rules of thumb • Persons approaching retirement within 20 years need thorough analysis of current and anticipated retirement expenses to establish reasonable retirement income needs

14. Pros & Cons of Income Replacement Percentages Palmer Study

15. Learning Objectives 1–1: Describe the six steps of the retirement planning process and what each contributes to the entire process. 1–2: Describe the two key financial statements in which client data are reflected. 1–3: Articulate the pros and cons of retirement income replacement percentages. 1–4: Explain the methods for determining retirement period income and expenses, and pre-retirement savings needs. 1–5: Calculate the future value of a current sum, the present value of an annuity due (PVAD), and the payment required in a present value of an ordinary annuity (PVOA). 1–6: Describe the problem of multiple financial objectives and a method for meeting each.

16. Time Value of Money Tips • Clear calculator before each problem • Generally you are given three variables and solve for a fourth variable • Do not confuse an annuity due (payments at beginning) with an ordinary annuity (payments at end) • Check for reasonableness

17. HP-10BII Keystrokes

18. Determining Retirement Income & Expenses • Analyze current living expenses • Adjust for expenses that will increase, decrease or end, which will appear based upon the client’s goals • Housing—may decrease with mortgage paid, but real estate taxes, utilities, insurance, and upkeep continue • Parking, dry-cleaning, apparel, and education may decrease

19. Determining Retirement Income & Expenses • Will your clients spend lessor more during retirement? • Expenditures for Social Security and retirement plans may disappear • Total income taxes may decrease with earned income reduction • Health care may dramatically increase • Travel and recreation costs escalate

20. Determining Retirement Income & Expenses Capital preservation • Living off of cash flow • Not reducing principal • Need $25,000 assuming 5% return: 25,000/.05 = $500,000 would provide the income needed • Few clients have sufficient assets to allow that strategy Capital utilization • Draws off yield and principal • Eventually, principal balance is exhausted (TVM calculation under LO 1-5)

21. Determining Retirement Income & Expenses Income from Assets • Rental income • Dividends • Interest Evaluate life expectancy— may well be into the 90s • Use averages just as starting point • Make adjustments based on client’s personal health, habits (e.g., smoking, drinking, exercise, current fitness) and family history • Add 5 to 10 years for good measure • With couples, base the estimate on the life of the individual expected to live longer

22. Determining Retirement Income & Expenses • Employer-sponsored retirement plans • Social Security • Earned income—may delay retirement, work part-time or begin own business • Can increase benefit from retirement plan and Social Security by delaying retirement • After attaining Social Security’s full retirement age, earned income does not reduce the benefit paid • Need to include expenses pertaining to work—e.g., taxes, transportation, apparel • Reduce number of years retirement must be financed

23. Retirement Needs Analysis Analyze expenses to determine a budget • Consider additional discretionary expenses, such as travel • Dream fulfillment costs money Inflation • At 3.5% inflation, purchasing power of $100 reduces to about half in 20 years Health care issues • 65-year-old couple may have $240,000 unreimbursed medical expenses throughout retirement

24. How Much Money Will Be Needed? After reviewing the underlying issues and areas of concern, two primary questions must be addressed • How much money will be needed to fund the retirement budget? • How much of the retirement nest egg can safely be withdrawn year-by-year?

25. Funding Calculation • Present value serial payment calculation • Step 1: find the inflated value of one year’s retirement income need (stated in today’s dollars) • Step 2: Calculate the present value (annuity due; PVAD) of all the annual retirement income payments, which will increase each year (a serial payment to deal with inflation) • Set the calculator to BEGIN mode (PVAD) • Use an inflation-adjusted rate of return when calculating the PVAD

26. Funding Calculation Example Step 1 Find the inflated value of $75,000 in 15 years: • 15 N; 3.5 I (or I/YR, depending on the calculator); 75,000 PV; solve for FV = $125,651 (rounded). • So the equivalent value of $75,000, inflated for 15 years at 3.5%, is $125,651. This becomes the starting income payment for the second step.

27. Funding Calculation Example Step 2 Calculate the PVAD of 25 years of payments, using a first payment amount of $125,651, and factoring both inflation (3.5%) and the rate of return (7%) (i.e., a serial payment). This requires two steps: First, determine the inflation-adjusted interest rate, then calculate the serial payment PVAD. To determine the inflation-adjusted interest rate, do the following: • ([1.07 ÷ 1.035] – 1) × 100, which becomes ([1.0338] – 1) × 100 = (.0338) × 100 = 3.3816. • So, the inflation-adjusted interest rate is 3.3816. This is what we will use to calculate the PVAD for the sum required at the beginning of retirement. • 25 N; 3.3816 I (or I/YR); 125,651 PMT [0 FV]; PVAD = $2,168,725 (rounded). Your answer may vary slightly depending on the exact interest rate entered.

28. Variability in Retirement Planning Assumptions • Traditional planning uses straight-line returns • i.e., the same rate continues throughout the retirement period • Two significant areas of variability • Inflation • Investment return • Monte Carlo analysis can help gauge variability of investment returns • Stress testing adds greater reality to the process

29. Learning Objectives 1–1: Describe the six steps of the retirement planning process and what each contributes to the entire process. 1–2: Describe the two key financial statements in which client data are reflected. 1–3: Articulate the pros and cons of retirement income replacement percentages. 1–4: Explain the methods for determining retirement period income and expenses, and pre-retirement savings needs. 1–5: Calculate the future value of a current sum, the present value of an annuity due (PVAD), and the payment required in a present value of an ordinary annuity (PVOA). 1–6: Describe the problem of multiple financial objectives and a method for meeting each.

30. Multiple Financial Objectives • Problem of competing goals • Housing • Children’s education • Emergency funds • Care of elderly parents or disabled children • May require establishing separate investment accounts to meet different needs

31. When Client’s Funds Are Insufficient Reduce retirement income need • Delay retirement • Reduce the cost of the retirement lifestyle • Reduce or eliminate bequests to the children Increase the resources available • Do part-time work • Spend less and save more prior to retirement • Invest personal retirement savings more aggressively

32. Make It the Client’s Plan • Client must take ownership of the retirement plan • Plan make sense to the client • Plan must use assumptions that client understands and agrees to • Client must perceive the plan as serving his or her best interests • Client must recognize the need to fund other financial goals • Required funding must be a realistic goal that client can maintain

33. Factors Impacting the Decision to Retire The decision to retire involves much more than monetary issues. Additional considerations are: • Social • Cultural • Interpersonal/relational • Life fulfillment The planner needs to uncover what will make retirement meaningful to the client • May or may not be retirement in the traditional sense 1-33

34. Retirement Funding Decisions • Social Security: Does it make more sense to wait for full retirement age or to start benefits at age 62? • Health • Lifestyle choices • Financial differential • Additional sources of income • Medicare eligibility • Employer-sponsored retirement income plans 1-34

35. Question 1 Jack and Jill have had a combined gross salary of $87,000 in 201X. Other cash inflows amounted to $9,800. Their fixed cash outflows were $28,300, and their variable cash outflows were $64,700. What was the net cash flow for 201X? • $6,000 deficit • $3,800 • $30,100 • $68,500

36. Question 2 Which of the following is an expense that typically goes down during retirement? • medical expenses • dental expenses • expenditures on travel • food and housing costs

37. Question 3 Billy wants a retirement income of $65,000 protected against 3% inflation. He assumes a 9% rate of return and wants to have the income for 30 years. How much capital will be required to provide Bill this much income at the first of each year? (Be sure your calculator is set for four decimal places.) • $667,788 • $727,888 • $911,700 • $964,809

38. Question 4 The process of data gathering is the second step in the retirement planning process. All of the following are examples of data to be gathered except • the client’s ability to purchase health insurance. • the balances in retirement accounts. • income sources and amounts. • investment risk tolerance.

39. Question 5 All of the following are considered foundation financial goals except • helping grandchildren with college. • food, clothing, and shelter. • emergency funds. • life, health, and automobile insurance.

40. Chartered Retirement Planning CounselorSM Professional Designation Program Module 1End of Slides