105-10 Retirement Needs Analysis Flashcards
3 primary assumptions made in any retirement needs analysis
- anticipated annual rate of inflation
- projected rate of annual investment return
- client’s age at retirement and anticipated life expectancy
Rate of inflation
Since 1926, the CPI has averaged approximately 3% per year
Under the Rule of 72, this means prices double every 24 years (72/3)
Rate of inflation for retiree-seniors may well be higher than 3%/year because health care costs are rising in the U.S.
Financial Needs at Retirement
1st determine the lump-sum capital amount necessary to fund the projected income need over the entire retirement period
2-step calculation is required:
1) adjust or inflate the projected 1st-yr retirement income need to future dollars at the time of retirement
2) calculate the total retirement fund needed to meet the project income demands
Wage Replacement Ratio (WRR)
% of retirement needs
Retirement needs tend to be 60-80% of preretirement income to maintain the individual’s preretirement lifestyle
The savings rate required at age 25 to achieve a 60-80% WRR is ~10% of gross income
Capital Needs Analysis
The process of analyzing the accumulation of sufficient resources for retirement is called capital needs analysis or retirement needs analysis
Capital Preservation Approach vs. Capital Utilization Approach
Capital Preservation Approach: maintains the original capital balance need at the retirement date under the capital utilization approach for the entire life expectancy
Capital Utilization Approach - requires less capital than the CPA to be accumulated at a client’s projected date of retirement
Serial Payment Approach vs. Level Payment Approach
Serial Payment Approach: more realistic as it takes into account the effects of inflation
-an initial or 1st-year savings amount is calculated and then increased each year by inflation, anticipating an increase in the client’s income at the same rate
Level Payment Approach
**see calculations starting on page 155
