Chapter 2: Retirement Planning Accumulations and Distributions Flashcards
RWLE
Remaining Work Life Expectancy
WRR
Wage Replacement Ratio
RLE
Retirement Life Expectancy
Work Life Expectancy
the period of time a person is expected to be in the workforce. Usually 30 to 40 years.
Remaining Work Life Expectancy
the work period that remains at a given point in time prior to retirement
Retirement Life Expectancy
the total amount of time expected during retirement.
Begins at retirement and ends at death.
Savings Rate for
Ages 25-35
10% - 13%
Savings Rate for
Ages 35-45
13% - 20%
Savings Rate for
Ages 45 - 55
20% - 40%
Retirement Needs Analysis
The process of determining how much money a person needs to accumulate to be financially independent during retirement
Wage Replacement Ratio (WRR) calculation
WRR =
Expenses in Retirement
/
Pre-Retirement Income
An appropriate WRR for most people
WRR of 70% - 80%
Top Down Approach
WRR Calculation Method:
Begin with 100% of pre-retirement income and adjust the percentage up or down depending on the expenses that may be eliminated or added.
This approach is less precise than the Botton-Up method.
Bottom-Up Approach
(aka “budgeting approach”)
WRR Calculation Method:
Examines each category of expense to determine whither it will increase, decrease or remain the same during retirement.
A more precise approach to calculating WRR.
Used for people who are very near to retirement.
Retirement Funding (aka capital needs analysis)
is the process of determining how much money a person needs to accumulate to be financially independent during retirement.
The Annuity Method
Is the simplest way to determine retirement needs and is based on the pure annuity concept.
the two methods for calculating The Annuity Method
- 4-step approach
- uneven cash flow approach
As WLE Increases
RLE Decreases
As RLE Increases
WLE Decreases
Retirement Capital is made up of what?
Investments and Savings
Taxable Accounts
Banks, Brokerages, Savings Accounts, Income
Tax Advantaged Accounts
IRAs
Qualified Plans
Annuities
Tax-Deferred Income
Increasing Expenses During Retirement Include:
Vacation / Travel
Hobbies
Second Home
Healthcare
Gifts to family
Higher costs due to inflation
Decreasing Expenses During Retirement include:
Savings
FICA
Mortgage, once concluded
Lower Income = Lower Tax
Automobile Costs
Work Related Expenses
Cost of insurance
Step 1 of the 4 Step Method
Determine the funding amount in today’s dollars
Step 2 of the 4 Step Method
Inflate Step 1 to the Beginning of Retirement
Step 3 of the 4 Step Method
Determine the funding need at retirement
(use Beg. key)
Step 4 of the 4 Step Method
Determine the annual savings amount
Calculation for the real rate of return
Ri = 1+ ROR on Invest / 1+ Inflation -1 *100
example:
ROR 6%
Inflation 3%
1+6% = 1.06
1+3% = 1.03
1.06 / 1.03 = 1.0291-1 = 0.0291 * 100 = 2.9126
