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Chapter 15
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Chapter 15

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  1. Chapter 15 • Introduction to Retirement Planning

  2. Retirement Planning • One of the main goals for many individuals is long-term financial security and independence • This goal is realized when a person is financially secure enough to live at a desired comfort level without the need for employment income

  3. Basic Factors Affecting Retirement Planning • Work life expectancy (WLE) • Remaining work life expectancy (RWLE) • Retirement life expectancy (RLE) • Basic savings concepts • Inflation • Investment returns • Annual income needs • Wage replacement ratio (WRR) • Retirement income sources • Qualitative factors

  4. Work Life Expectancy • Work life expectancy (WLE) is the period 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

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

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

  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

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

  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

  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

  11. The Sources of Retirement Income • Social Security • Private pension plans • Personal savings • Work

  12. Qualitative Factors in Retirement • Voluntary versus involuntary retirement • Loss of self-esteem • Boredom • Decision to relocate

  13. Factors That Negatively Affect 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 effect of inflation during the retirement years • Three methods—basic annuity method, the capital preservation model, and the purchasing power preservation model

  15. Capital Needs Analysis (cont.) • Basic annuity method—retirement account has a zero balance at the end of life expectancy • Capital preservation model—retirement account at the end of life expectancy is equal to the account balance at the beginning of retirement • Purchasing power preservation model—retirement account at the end of the life expectancy has the same purchasing power as the account balance at the beginning of retirement