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

2. EGR 403 Retirement Planning - Part II 2 Part II - Determine Total Capital to Invest Estimate Living Expenses Determine rate of growth needed on your retirement capital to meet your goal Determine Capital needed to invest

3. EGR 403 Retirement Planning - Part II 3 Determine Retirement Living Expenses Estimate living expenses –Use current lifestyle and expenses –Adjust for future plans and goals –Include annual and semi-annual expenses –Consider paying off your house Adjust for inflation by multiplying by (F/P, i%, n) where: –i = inflation rate and –n = years to retirement Multiply by Tax Multiplier

4. EGR 403 Retirement Planning - Part II 4 Tax Multiplier Non-tax income Living Expenses –$40,000 or less (1.10) –$60,000 or less (1.15) –$80,000 or less (1.20) –$100,000 or less (1.25) –Above $100,000 (1.30) –Add 0.05 if you have income from pension –Add 0.10 if you have part-time work income

5. EGR 403 Retirement Planning - Part II 5 Personal Inflation Estimate inflation and increases/decreases in expenses over the course of retirement. –3% - 3.5% is a reasonable historical average for inflation. –Adjust up or down based on your increases, decreases, or beliefs about inflation (e.g., in energy costs, food costs, etc.)

6. EGR 403 Retirement Planning - Part II 6 Example You estimate you will need $100,000 (accounting for inflation) to live when you retire and you will not have a pension: –$100,000 x 1.25 = $125,000 If part of the $100,000 will come from a pension, more will be taxable: –$100,000 x 1.30 = $130,000

7. EGR 403 Retirement Planning - Part II 7 Why living off of investments results in lower tax liability Suppose you own ten investments worth $50,000 each for a total of $500,000 They all go up 10% in value over the course of the year to a value of $55,000 each (total $550,000). You made $50,000!! You sell one of the investments to live on. Your taxable gain was only $55,000 - 50,000 = $5,000

8. EGR 403 Retirement Planning - Part II 8 Determine Total Investment Return Total Investment Return = Return on capital invested + Inflation Adjustment. Therefore Return on Capital Invested = Total Investment Return - Inflation –Example 1: Suppose you expect 3% inflation and also expect to get 8% on your investment return. Then you would figure 5% return on your capital (assets) invested. –Example 2: You expect 2% inflation and expect to get 11% on your investment return: Now you need to use 9% to determine your assets needed.

9. EGR 403 Retirement Planning - Part II 9 Determine Total Investment Assets Needed Now divide your estimated living allowance by the return on capital invested to estimate Total Investment Assets (recall: P = A / i) –Example 1: $125,000 is your living allowance. You figure 5% return on assets: $125,000 / (0.08 - 0.03) = $125,000 / 0.05 = $2,500,000 –Example 2: Same as above, but with 9% return: $125,000 / (0.11 - 0.02) = $125,000 / 0.09 = $1,388,889

10. EGR 403 Retirement Planning - Part II 10 In other words... If you expect to get 8% return on your retirement investments and expect a 3% inflation rate, you need $2,500,000 in assets invested to maintain your lifestyle. If you expect to get 11% return and only expect 2% inflation, then you need much less: $1,388,889.