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

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

3. Retirement Age Assumption 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

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

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

6. Reasons to View Early Retirement Skeptically 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

7. Life Expectancy 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

8. Replacement Ratio Approach 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

9. Replacement Ratio Approach 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

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

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

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

13. Inflation Assumption 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

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

15. Investment Considerations 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

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

17. True/False Questions 1.To establish the proper life expectancy, planners must take a close look at the client’s personal and family health history. 2.To maintain a preretirement standard of living during retirement, the average individual needs approximately 50 to 70 percent of his or her preretirement income. 3.Two common methods of determining the amount of income needed at retirement are the ratio method and the expense method.

18. True/False Questions 4.Defined-benefit plans typically have a significant benefit reduction for early retirement. 5.Commuting and clothing expenses typically decrease at retirement. 6.Because of Medicare medical expenses typically decrease in retirement. 7.Time diversification theories tend to support the strategy of investing more and more aggressively as an individual ages.

19. Chapter 21 Review 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

20. Chapter 21 Review (cont.) 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