Planning for Retirement Needs Determining Postretirement Monetary Needs–Case Study Chapter 22

Chapter 22: Calculations Financing desired retirement lifestyle Implementing savings schedule

Financing the Desired Lifestyle Adding up the current sources of income Determine required income Compare (Retirement income status) See if there is a shortfall (retirement income deficit). Determining which resources need inflation protection (risk of decline in purchasing power) Calculate the target amount—fund needed to cover RID plus DIPP

Case Study Facts (page in book) Joe is 55 wants to retire at 65 Joe’s salary is $54,000 First year need is 80% or $43,200 Resources: $42,884 Shortfall is $316

8% investment return 4 percent inflation rate Assumptions

Calculation of Shortfall Retirement Income Deficit (RID) With inflation deficit (RID) is $468 ($316 growth at 4% inflation) –25-year liquidation period ($7,717) –35-year liquidation period ($9,264) –Income only (not reducing principal) ($12,636)

Decline in Purchasing Power Fund (DIPP) Social Security and dividend income are inflation protected Defined-benefit plan is not

Calculation of Shortfall $20,000 pension needing inflation 25 years $146, years $213,363 Income only $399,667

Total Shortfall Liquidation MethodRetirement Income Deficit Fund Decline in Purchasing Power Fund Total Addition Assets needed at Retirement 25 Years$7,717$146,877$154, Years$9,264$213,363$222,627 Income Only$12,636$399,667$412,303

Implementing a Savings Schedule Level annual funding Total Annual Savings for 25 year payout - $9,881 Total Annual Savings for 35 year payout - $14,299 Total Annual Savings for Income Only - $26,353 Stepped-up annual funding $8,437, $12,149, $22,500 Joe is looking to save more than 20% of income

Other Options Work longer Betty gets a job Joe gets another job Change retirement income expectations Increase investment return

Software considerations Numbers are only an estimate and are outdated almost immediately Choosing appropriate assumptions Different software provides different results Clients doing it themselves using the “Ball Park Estimate” at ASEC (link at DOL)

True/False Questions 1.The retirement income status (RIS) is a methodology for determining whether an individual needs additional savings. 2.The retirement income deficit is derived by adjusting the RIS for inflation. 3.To have adequate income during retirement, an individual must save enough to make up the retirement-income deficit and have an additional amount to maintain the purchasing power of his or her pension. 4.Social security benefits are protected from a decline in purchasing power in retirement

True/False Questions 5.The “Ball Park” estimator is a calculator used to indicate the present value of an annuity in a defined benefit plan. 6.Joe and Serina have determined that their required income needs in the first year of retirement is $83,000. They are prepared financially for retirement if it turns out that with all their assets they can purchase a fixed joint life annuity with a payout of $83,000 a year.

Chapter 22 Review Process –Compare need with income sources –Identify income without inflation protection Inflation protection –Social Security yes –Pensions no Ball park estimate Software calculations –Only an estimate –Recalculate often –Wide range of results –Chose assumptions carefully