1. Introduction to Retirement Planning
Chapter 15
Introduction to Retirement Planning
Chapter 15: Retirement Planning

2. Chapter 15: 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.
Chapter 15: Retirement Planning

3. 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
Chapter 15: Retirement Planning

4. Chapter 15: Retirement Planning
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.
Chapter 15: Retirement Planning

5. 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.
Chapter 15: Retirement Planning

6. Important Savings Concepts in Retirement Planning
Savings amount
Savings rate
Timing of savings
Investment decisions
Impact of inflation
Chapter 15: Retirement Planning

7. Chapter 15: Retirement Planning
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.
Chapter 15: Retirement Planning

8. Defining the Retirement Goal
Balancing increasing retirement income needs with decreasing retirement income
Planning for retirement – pretax or after tax
Chapter 15: Retirement Planning

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.
Chapter 15: Retirement Planning

10. Chapter 15: Retirement Planning
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.
Chapter 15: Retirement Planning

11. The Sources of Retirement Income
Social Security
Private pension plans
Personal savings
Chapter 15: Retirement Planning

12. Qualitative Factors in Retirement
Voluntary vs. involuntary retirement
Loss of self esteem
Boredom
Decision to relocate
Chapter 15: Retirement Planning

13. Factors that Negatively Affect Retirement Planning
Impact
Reduced WLE
Insufficient savings period
Increased RLE
Increase capital needs
Reduced family reliance
Fewer alternatives in retirement
Reduced ability to work
Planned too late
Fewer compounding periods
Low savings rate
Inability to meet capital requirements
Inflation
Purchasing power reduction
Poor earnings rate and asset allocation
Chapter 15: 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 impact of inflation during the retirement years.
Three methods: basic annuity method, the capital preservation model, and the purchasing power preservation model.
Chapter 15: Retirement Planning

15. 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.
Chapter 15: Retirement Planning