EGR 403 Retirement Planning - Part III 1 EGR 403 Introduction to Retirement Planning Part I - Basic Approach Part II - Determine Total Capital to Invest Part III - Saving Strategy Part IV - Investment Strategy Dr. Phillip R. Rosenkrantz IME Department, Cal Poly Pomona Click here for streaming audio to accompany presentation

EGR 403 Retirement Planning - Part III 2 Part III - Saving Estimate pension income and, if necessary, adjust your total assets needed. Estimate your rate of return for investments. Determine your annual savings goals needed to accumulate your target asset amount. Use gradients to balance out your savings plan. Play with the numbers until you are happy with the plan.

EGR 403 Retirement Planning - Part III 3 Pension Plans Pension plans can be a very important part of your retirement plan. Plans are typically based on four things: –Your age at retirement –Length of service to the company –Your final salary level –Surviving spouse options

EGR 403 Retirement Planning - Part III 4 Pension Plan Basics - 1 The older you are when you retire, the higher your monthly pension. This is because your life expectancy is shorter. Rule of thumb: You will receive 2% of your final salary level for each year of service. –55 years old with 30 years of service = 60% –65 years old with 20 years of service = 40%

EGR 403 Retirement Planning - Part III 5 Pension Plan Basics - 2 Many companies: points system where age plus years of service must be greater than or equal to 85. Some organizations have a minimum retirement age with provisions for special early retirement that are not always favorable. –General Motors: 60, (55 years for special early) –CSU: 50 years + min 5 years of service

EGR 403 Retirement Planning - Part III 6 CSU Retirement Plan “2% at 55” Benefit = Highest salary x % from table

EGR 403 Retirement Planning - Part III 7 Adjusting Total Investment Income Needed Suppose you need $130,000 you live on at retirement Suppose you estimate your salary at retirement to be $100,000/year and you have worked there 20 years. Est. pension is 2% x $100,000 = $40,000 Adjusted amount needed from investments is $130,000 - $40,000 = $90,000

EGR 403 Retirement Planning - Part III 8 Adjusting Total Investment Assets Needed Using the previous example for return on investment assets, your revised total investment assets needed would be: –For 5% return: $90,000 / 0.05 = $1,800,000 –For 9% return: $90,000 / 0.09 = $1,000,000

EGR 403 Retirement Planning - Part III 9 Estimate Savings Goals - 1 Determine your target investment return during your working years. This is a target number over your investing lifetime: –8% or lower: Not too difficult –8% - 12%: Very possible –12% or higher: Risky and not likely The higher returns involve more risk and study. If you are not going to be an active investor, use a lower return.

EGR 403 Retirement Planning - Part III 10 Estimate Savings Goals - 2 Now you can estimate savings needed –A first estimate can be made by calculating the uniform series of savings needed to generate the target investment amount at a reasonable rate of return –Example: using 9%, 20 years, and target assets of $1,000,000. Annual savings = $1,000,000 (A/F, 9%, 20) = $1,000,000 (0.0195) = $19,500/year or $1625/month

EGR 403 Retirement Planning - Part III 11 Estimate Savings Goals - 3 Using this initial calculation, you can play with the numbers and develop a plan that is realistic: Examples: –Same but using 12% ($13,900/yr or $1158/mo) –10%, 25 years ($10,200/yr or $850/mo) –10%, 30 years ($6080/yr or $507/mo) Use gradients to make plan more realistic