Planning for Retirement Needs

1. Planning for Retirement Needs Retirement Needs Analysis: Preliminary Concerns – Chapter 21

2. Retirement Age Life Expectancy Expected Standard of Living During Retirement (replacement ratio vs. expense method) Inflation Assumption Return on Investment Preliminary Concerns

3. 65 is not a magic number Average age is 62 Client’s goals are individual and unique Some enjoy work and don’t want to stop Retirement Age Assumption

4. Achieved financial goals Chose different lifestyle Corporate downsizing with or without “golden handshakes” Health Personal Caregiving Death or retirement of spouse Problems at work Reasons Clients’ Choose Early Retirement

5. Forty-five (45) percent of current retirees retired earlier then they had planned!! Early Retirement

6. Social Security full retirement age increasing—affects benefit reductions Impact on pension benefits Increased exposure to Inflation Loss of health insurance (COBRA = 18 months) Loss of status Reasons to View Early Retirement Skeptically

7. Look at life expectancy at age 65 One-half of clients will outlive the life expectancy tables Personal and family health history Consumer web sites Add years or have a second set of assets Life Expectancy

8. Need 60% - 80% to live in same manner Reduced expenses Eliminate FICA taxes Increased standard deduction Exclusion of some (or all) of social security benefits from tax base State and local tax breaks Deductible medical expenses Reductions in work related expenses Replacement Ratio Approach

9. Reduced expenses (cont.) Elimination of the mortgage expense Absence of dependent children Senior citizen discounts No longer saving for retirement Fewer automobiles Age related reductions in spending Increase expenses Medical Travel/lifestyle Replacement Ratio Approach

10. Focus on actual projected expenses Appropriate for those nearing retirement Expense Method

11. $2,000 in 1980 = $5,000 today Small change = dramatic impact Inflation Assumption

12. Use “long term” rates not annual CPI Other factors Personal buying habits Services vs. goods Regional variations Medical inflation Inflation Assumption

13. FV = PV ( 1 + r ) n FV = target at retirement PV = dollar expenditures for the current standard of living r = rate of growth of PV n = number of years until retirement target Inflation Assumption

14. Identify portfolio makeup and look at historical returns Many adjust post-retirement investment return assuming more conservative portfolio Return on Investment

15. Be aggressive early—time diversification Use dollar cost averaging and buy and hold Limit investments in employer stock Seek tax efficiency in retirement investing Fixed income in tax advantaged plans Stock outside of tax advantaged plans Make the most of IRA and 401(k) opportunities Investment Considerations

16. replacement-ratio method risk tolerance dollar cost averaging Vocabulary

17. To establish the proper life expectancy, planners must take a close look at the client’s personal and family health history. To maintain a preretirement standard of living during retirement, the average individual needs approximately 50 to 70 percent of his or her preretirement income. Two common methods of determining the amount of income needed at retirement are the ratio method and the expense method. True/False Questions

18. Defined-benefit plans typically have a significant benefit reduction for early retirement. Commuting and clothing expenses typically decrease at retirement. Because of Medicare medical expenses typically decrease in retirement. Time diversification theories tend to support the strategy of investing more and more aggressively as an individual ages. True/False Questions

19. Retirement age Age 62 average Early because Health Earlier than expected Downsize Financially prepared Early is a problem SS retirement age Health care coverage Pension reductions Debt eliminates choice Life expectancy Use tables for age 65 not at birth Consider health Family history Add a few years Software for estimating How much Replacement ratio Expense method Chapter 21 Review

20. Reductions in taxes No FICA Increased standard deduction State tax relief Portion of SS tax free – (Page 21.11) Reductions in expenses Work related Dependent children Mortgage Increased expenses Medical Travel/leisure (early years) Inflation assumption Long term Higher for risk adverse Investment strategies Limit er stock Buy and hold Tax efficiency/bonds in tax deferred plans—stock outside Take more risk in early years Chapter 21 Review (cont.)