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EGR 403 Introduction to Retirement Planning

EGR 403 Introduction to Retirement Planning. Part I - Basic Approach Part II - Determine Total Capital to Invest Part III - Saving Strategy Part IV - Investment Strategy. Click here for streaming audio to accompany presentation. Dr. Phillip R. Rosenkrantz IME Department, Cal Poly Pomona.

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EGR 403 Introduction to Retirement Planning

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  1. EGR 403 Introduction to Retirement Planning • Part I - Basic Approach • Part II - Determine Total Capital to Invest • Part III - Saving Strategy • Part IV - Investment Strategy Click here for streaming audio to accompany presentation Dr. Phillip R. Rosenkrantz IME Department, Cal Poly Pomona EGR 403 Retirement Planning - Part III

  2. Part III - Saving • Estimate pension income and, if necessary, adjust your total assets needed. • Estimate your rate of return for investments. • Determine your annual savings goals needed to accumulate your target asset amount. Use gradients to balance out your savings plan. • Play with the numbers until you are happy with the plan. EGR 403 Retirement Planning - Part III

  3. Pension Plans • Pension plans can be a very important part of your retirement plan. • Plans are typically based on four things: • Your age at retirement • Length of service to the company • Your final salary level • Surviving spouse options EGR 403 Retirement Planning - Part III

  4. Pension Plan Basics - 1 • The older you are when you retire, the higher your monthly pension. This is because your life expectancy is shorter. • Rule of thumb: You will receive 2% of your final salary level for each year of service. • 55 years old with 30 years of service = 60% • 65 years old with 20 years of service = 40% EGR 403 Retirement Planning - Part III

  5. Pension Plan Basics - 2 • Many companies: points system where age plus years of service must be greater than or equal to 85. • Some organizations have a minimum retirement age with provisions for special early retirement that are not always favorable. • General Motors: 60, (55 years for special early) • CSU: 50 years + min 5 years of service EGR 403 Retirement Planning - Part III

  6. CSU Retirement Plan “2% at 55”Benefit = Highest salary x % from table EGR 403 Retirement Planning - Part III

  7. Adjusting Total Investment Income Needed • Suppose you need $130,000 you live on at retirement • Suppose you estimate your salary at retirement to be $100,000/year and you have worked there 20 years. • Est. pension is 2% x $100,000 = $40,000 • Adjusted amount needed from investments is $130,000 - $40,000 = $90,000 EGR 403 Retirement Planning - Part III

  8. Adjusting Total Investment Assets Needed • Using the previous example for return on investment assets, your revised total investment assets needed would be: • For 5% return: $90,000 / 0.05 = $1,800,000 • For 9% return: $90,000 / 0.09 = $1,000,000 EGR 403 Retirement Planning - Part III

  9. Estimate Savings Goals - 1 • Determine your target investment return during your working years. This is a target number over your investing lifetime: • 8% or lower: Not too difficult • 8% - 12%: Very possible • 12% or higher: Risky and not likely • The higher returns involve more risk and study. If you are not going to be an active investor, use a lower return. EGR 403 Retirement Planning - Part III

  10. Estimate Savings Goals - 2 • Now you can estimate savings needed • A first estimate can be made by calculating the uniform series of savings needed to generate the target investment amount at a reasonable rate of return • Example: using 9%, 20 years, and target assets of $1,000,000. Annual savings = $1,000,000 (A/F, 9%, 20) = $1,000,000 (0.0195) = $19,500/year or $1625/month EGR 403 Retirement Planning - Part III

  11. Estimate Savings Goals - 3 • Using this initial calculation, you can play with the numbers and develop a plan that is realistic: • Examples: • Same but using 12% ($13,900/yr or $1158/mo) • 10%, 25 years ($10,200/yr or $850/mo) • 10%, 30 years ($6080/yr or $507/mo) • Use gradients to make plan more realistic EGR 403 Retirement Planning - Part III

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