Retirement Planning

Question 1

Needs analysis

Answer 1

Step 1: Inflate the annual need in todays dollars
- solve for FV - use inflation as I/YR - N is years until retirement
Step 2: Determine lump sum needed at the beginning of retirement
- Solve for PV - BEG - N is years of retirement I/YR is real rate of return PMT is step 1

Question 2

Real return

Answer 2

• Use if question expresses need in todays dollars

(1+ after tax return / 1+ inflation rate) - 1 *100

Question 3

Inflation - assumption for retirement

Answer 3

• personal inflation will vary from real rate of inflation due to personal inflow/outflow
• in pre-retirement, salary might not keep up with inflation
• retirees may be more concerned than younger wage earners because medical expenses grow faster than goods and retirees have greater need for home service

Question 4

Retirement period and life expectancy - assumption for retirement

Answer 4

• expected starting date affects lump sum needed
• those in poor health may need to retire earlier
• period can be 30-40 years or more
• if married life of second to die is longer than table shows - add 5 to 10 years

Question 5

Lifestyle - assumption for retirement

Answer 5

• not all spend less in retirement
• 75% of current income is reasonable
• monitor for changes
• where the client lives, travel, LTC, part time work, extra care for sick, special needs

Question 6

Total return - assumption for retirement

Answer 6

• consistent with risk tolerance
• most prefer low risk in retirement
• with low return and high inflation, negative total return is possible

Question 7

Income sources - assumption for retirement

Answer 7

• reverse mortgage
• current retirement savings
• SSA
• equity from sale of home
• current investments
• future savings
• potential inheritances
• downsizing

Question 8

Financial needs

Answer 8

• living costs
  -charitable and beneficiary gifting objectives
• medical costs, LTC analysis (sell residence and buy into life care community)
• straight line return (annual growth rate) vs probability analysis (Monte carlo)
• pure annuity (highest payout, none for spouse) vs capital preservation ( joint/ survivor annuity or lumpsum)
• pension maximization application ( difference between pure life and joint life is used to fund LI for spouse)

Question 9

Alternatives to compensate for projected cash flow shortfalls

Answer 9

• saving more in each preretirement year
• increasing investment risks to achieve higher returns
• retiring later than expected or working part time in early years