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Welcome

Welcome. Expectations of Students. Time/energy commitment Read assignments before class Tested on all LOs This course will enable you to: be eligible to sit for the CFP ® Certification Examination better serve clients/ grow your business

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Welcome

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  1. Welcome

  2. Expectations of Students • Time/energy commitment • Read assignments before class • Tested on all LOs • This course will enable you to: • be eligible to sit for theCFP® Certification Examination • better serve clients/grow your business • be successful on the College’s end-of-course examination

  3. For Optimal Performance

  4. Housekeeping Items  • Professor information in eCampus • Tutorial • Status changes  • Text chat • Files for Students • Recordings • Access Poll Layout    

  5. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 1Retirement Savings – Calculating Lump Sum Needs, Serial and Level Payments

  6. Session Details

  7. Saving for Retirement Three main calculations you need to know – • How to calculate the lump sum needed at the beginning of retirement in order to fund the retirement period • How to calculate the level savings amount needed to reach the lump sum amount • How to calculate the serial payment amount needed (increases each year for inflation) to reach the lump sum amount

  8. Determining Required Savings • Offset annual need with Social Security and pension plan benefit, if appropriate • Adjust annual retirement income need for inflation • Calculate capital needed on day one of retirement as goal • Calculate the required savings to accumulate needed capital by day one of retirement

  9. Inflation-Adjusted Yield Reflects two percentage rates: • the inflationary growth rate of income to be generated by the fund • the investment return rate Formula:

  10. Retirement Funding Example George and Nancy wish to retire when George attains age 65. He is 46 this year. They estimate they will need $36,000 in today’s dollars in addition to Social Security. They want to assume an after-tax rate of return of 10% and inflation of 3%. They have no savings at this time, and they want the income until George is 95. • What level payment will they need to deposit every year to reach their goal? • What is the required inflation-adjusted (serial) deposit one year from today?

  11. Lump Sum Calculation (10BII+) Clear and check calculator for 1 pmt/yr. • Today $  Day one of retirement $PV = 36,000, N=19, i =3, FV = $63,126 • The $63,126 now becomes a payment, which will increase each year with inflation to maintain buying power (begin mode). pmt = 63,126, i = inflation adjusted 6.7961, N = 30, PV = $853,994 The lump sum of $853,994 will fund the 30-year retirement period.

  12. Level Funding Calculation (10BII+) Clear and check calculator for 1 pmt/yr and “END” mode. • FV = 853,994, i = 10%, N = 19 • Therefore, PMT = $16,693 Inflation is already reflected in the $853,994, so only the expected return of 10% is used for “i” in this calculation.

  13. Serial Funding Calculation (10BII+) Clear and check calculator for 1 pmt/yr, end mode. • Deflate (because inflation will be taken into account with the serial payment): Today $  Day one of retirement FV = 853,994, N = 19, i = 3, then PV = 487,021 • Find payment: FV = 487,021, N = 19,i = 6.7961, then PMT = 13,304 • Inflate by 3% to reach the end of first year payment: $13,304 x 1.03 = $13,703 (End of second year payment would be $13,703 x 1.03 = $14,114.)

  14. Level and Serial Compared • First year level payment is $16,693. • First year serial payment is $13,703. • Serial payments will start out lower, but over time the serial payment will become higher than the level payment.

  15. Practice Problem 1 The Smiths, both age 40, have analyzed their current living expenses and estimated their retirement income need, net of expected Social Security benefits, to be $22,000 in today’s dollars. They are confident that they can earn a 6% after-tax return on their investments, and they expect inflation to average 4% over the long term. They want to plan for a 30-year retirement period beginning at age 65. Determine the lump-sum amount the Smiths will need at the beginning of retirement to fund their retirement income needs.

  16. Practice Problem 2 Bill and Mary Parker are projected to need a lump-sum retirement fund of $4,353,036 in 25 years. Their assets will amount to $4 million on the first day of the retirement year, leaving $353,036 to be saved over the pre-retirement period. Assuming an inflation rate of 4% and an after-tax return of 6%, calculate the Parkers’ annual serial (increasing) savings requirement.

  17. Practice Problem 3 The Simpsons need to save an additional $300,000 (in retirement year 1 dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a level annual savings amount to build this fund. What level annual savings amount will the Simpsons need to deposit at the end of each year during their 20-year preretirement period?

  18. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 1End of Slides

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