Chapter 15: Retirement Planning Chapter 15 Introduction to Retirement Planning

Chapter 15: Retirement Planning

Chapter 15

Introduction to Retirement Planning


2005 Kaplan Financial

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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.



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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



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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.



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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.



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Important Savings Concepts in Retirement Planning

Savings amount Savings rate Timing of savings Investment decisions Impact of inflation



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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.



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Defining the Retirement Goal

Balancing increasing retirement income needs with decreasing retirement income

Planning for retirement – pretax or after tax



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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.



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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.



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The Sources of Retirement Income

Social Security Private pension plans Personal savings



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Qualitative Factors in Retirement

Voluntary vs. involuntary retirement

Loss of self esteem Boredom Decision to relocate



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Factors that Negatively Affect Retirement Planning

Factors Impact

Reduced WLE Insufficient savings period

Increased RLE Increase capital needs

Reduced family reliance Fewer alternatives in retirement

Reduced ability to work Fewer alternatives in retirement

Planned too late Fewer compounding periods

Low savings rate Inability to meet capital requirements

Inflation Purchasing power reduction

Poor earnings rate and asset allocation

Inability to meet capital requirements



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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.



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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.

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Chapter 15: Retirement Planning Chapter 15 Introduction to Retirement Planning