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Chapter 15

Chapter 15. Introduction to Retirement Planning. Retirement Planning. One of the central missions for individuals is long-term financial security and independence.

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Chapter 15

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  1. Chapter 15 Introduction to Retirement Planning Chapter 15: Retirement Planning

  2. Retirement Planning • One of the central missions for individuals is long-term financial security and independence. • This goal is realized when a person is financially secure enough to live at his or her desired comfort level without the need for employment income. Chapter 15: Retirement Planning

  3. Basic Factors Affecting Retirement Planning • Work Life Expectancy (WLE) • Retirement Life Expectancy (RLE) • Basic savings concepts • Inflation • Investment returns • Annual income needs • Wage replacement ratio (WRR) • Retirement income sources • Qualitative factors Chapter 15: Retirement Planning

  4. Work Life Expectancy • Work life expectancy (WLE) is the period of time a person is in the work force, generally about 30 to 40 years. • Remaining work life expectancy (RWLE) is the work period that remains at a certain point in time prior to retirement. Chapter 15: Retirement Planning

  5. Retirement Life Expectancy (RLE) • Retirement life expectancy (RLE) is the time period beginning at retirement and extending until death. • The RLE is the period of retirement that must be funded. Chapter 15: Retirement Planning

  6. Important Savings Concepts in Retirement Planning • Savings amount • Savings rate • Timing of savings • Investment decisions • Impact of inflation Chapter 15: Retirement Planning

  7. Timing of Savings • The earlier a person begins saving for retirement, the greater the number of future compounding periods available before retirement. • The greater number of compounding periods leads to a lower required savings rate and a larger accumulation of capital at retirement. Chapter 15: Retirement Planning

  8. Defining the Retirement Goal • Balancing increasing retirement income needs with decreasing retirement income • Planning for retirement – pretax or after tax Chapter 15: Retirement Planning

  9. The Wage Replacement Ratio (WRR) • The WRR is an estimate of the amount of annual income needed at retirement to properly fund the period called the retirement life expectancy (RLE). • The WRR is calculated by dividing the amount of money needed on an annual basis in retirement by the preretirement income. Chapter 15: Retirement Planning

  10. Calculating the WRR • Top-down approach • Used with younger clients where expenditure patterns are likely to change dramatically over time. • Budgeting approach • Used with older clients because as a person nears retirement, it is possible to examine the actual expenditure patterns of the person. Chapter 15: Retirement Planning

  11. The Sources of Retirement Income • Social Security • Private pension plans • Personal savings Chapter 15: Retirement Planning

  12. Qualitative Factors in Retirement • Voluntary vs. involuntary retirement • Loss of self esteem • Boredom • Decision to relocate Chapter 15: Retirement Planning

  13. Factors that Negatively Affect Retirement Planning Chapter 15: Retirement Planning

  14. Capital Needs Analysis • The process of calculating the amount of investment capital needed at retirement to maintain the preretirement lifestyle and mitigate the impact of inflation during the retirement years. • Three methods: basic annuity method, the capital preservation model, and the purchasing power preservation model. Chapter 15: Retirement Planning

  15. Capital Needs Analysis • Basic annuity method: Retirement account has zero balance at end of life expectancy. • Capital preservation model: Retirement account at end of life expectancy is equal to account balance at beginning of retirement. • Purchasing power preservation model: Retirement account at end of life expectancy has same purchasing power as account balance at beginning of retirement. Chapter 15: Retirement Planning

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