Average retirement saving
48% 55 or older have less than $100,000
1/3rd less than 25,000
2016 Retirement Confidence Survey:
21% of Americans are confident in being able to retire
Social security supplies only 39% of pre retirement income
Planning for retirement if you have 20 years
Emergency fund of 3-6 months
Contribute enough to 401K to get match
Consider consolidating accounts and have a diversified portfolio of assets and tax type
If you have 10 years
Brainstorm big ticket financial items
Review estate documents for wills, POA, living will, health care proxy, revocable trusts
Reallocate investment portfolio with focus on PER risk, and expenses
5 years out
Identify retirement needs and wants, make sure you can meet needs easily
5 year plan to increase funds
Explore social security option and double check earnings reported
Run tax projections to make sure taking advantage or IRAs
Trends in Retirement
- Defined benefit plans (monthly income) are less likely. Being replaced by defined contribution plans, which have risks borne by employees
- Increased planning for longevity (most people not prepared)
- Expansion of employer-sponsored financial wellness initiatives (more happy employee benefits company)
- Expansion of plan distribution options- More interest in these types of vehicles
Chapter 1 review
- Identify three trends
- Challenges associated with shift from defined benefit to defined contribution
- -Defined benefits plans are becoming more rare
- Expansion of interest in distribution assets
- expansion of employee sponsored financial wellness programs
- Increased focus on longevity - Instead of a plan that focuses on income in defined benefit plans, employers are shifting to defined contribution which requires employees to take more responsibility,
Six steps to retirement
EGADIM (EGAD I Made it)
- Establishing and defining client-planner relationship
- Gathering client data including goals
- Analyzing and evaluating the client’s financial status
- Developing and presenting recommendations
- Implementing recommendations
- Monitoring the implemented recommendations as necessary
If any changes need to be made return to step 2
Role of retirement counselor
Make recommendations based on client’s needs, goals, attitudes and resources
Trust is gained through- integrity, ability to provide technical advice, experience, and concern for client
Should mutually understand the scope of services being offered
Accomplished by:
-Identifying the services to be offered
-disclosing counselor compensation
-client and counselor relationships
-establish duration of engagement
-any other info to define and limit scope
Chapter 2 Review
Six Steps of retirement planning
- Establish and define client relationship
- Gathering client data
- Analyze and evaluate financial situation
- Develop/present recommendations
- Implementing recommendations
- Monitor recommendations and make changes if needed
Gathering client Data (step 2)
Should gather the following info:
- Family info and basic
- Assets, liabilities and net worth
- future employment and comp
- info on owned business
- insurance situation
- current retirement plans, savings and investments
- anticipated retirement date/children college
- current health
- risk tolerance (should revisit occasionally)
Statement of Financial Position (balance sheet)
Assets, liabilities, net worth
Assets should include things not fully paid for and shown at FMV
Long term liabilities are included on BS, Short term on Cash Flow statement
Different Types of assets
Cash and cash equivalents
Invested assets
Use Assets
Cash Flow Statement
Cash inflows - Cash outflows= net Cash Flow
Represents a period of time (BS represents a specific date)
Determining Goals
Goals help measure success overtime and prevent underachievement
Should also PRIORITIZE and SPECIFY when they will occur #SMARTGoals
Foundation goals- Goals that are needs based
Lifestyle or discretionary goals tend to be wants and fall behind foundation goals
Hierarchy of Financial Goals
Bottom to top:
- Basic Needs
- Safety (insurance, wills, emergency funds)
- Managing finances- Credit card, mortgage and other debts
- Esteem- Increased savings for discretionary goals
- Self actualization
Chapter 3 Questions
1. Identify and describe three components of financial position
- Describe the cash flow statement and the equation that defines it
- What two qualities should retirement goals have to make them useful
- Assets- Include cash/cash equivalents, Invested assets and use assets
Liabilities- Long term liabilities, usually short term are only put on cash flow statement
Net worth= Assets- Liabilities
- Cash flow statement= Inflows-outflows= net cash flow
Determines whether you are a net saver or spender
- They should be specific as to how much and when they are to be achieved.
They should also be prioritize in order of basic needs , safety, managing finances, esteem and self actualization
Chapter 4: Analyzing client information to determine savings needs
Income Needs
Income needs often are not static throughout retirement and can be sometimes higher
Recommended that a budget is made analyzing with costs of living expenses estimated out
Paid off home is not expense fee with taxes, utilities insurance and repairs
Food, housing, transportation, apparel, personal care all typically fall in retirement
Health care as expected usually increases
Income replacement percentages
Most financial advisers state that retirees need 70% to 80% of pre-retirement income to support similar lifestyle
50% of workers believe they will need less than $500k to provide a comfortable retirement
Clients will vary greatly based on retirement goals
Most useful to young clients for long term planning
4 steps for determining a retirement savings need
- Calculate net annual retirement income needed- Subtract sources of inflation adjusted income (Social Security and Pension Benefits)
- Adjust income deficit for inflation over preretirement period- Determine income needed for first year of retirement
- Determine Total Retirement Fund Needed- Calculate lump sum on day one. This should generate annual income payment equal to income deficit, which will grow with inflation
- Determine Savings amount needed
- Annual level savings amount or
- Serial payment adjusted for inflation
Step 1: Calculate net annual retirement income need
Subtract inflation-adjusted (Social security and pension) income from total income need
Rare case would be this income is enough to satisfy all expenses
Income need - Social security = retirement income deficit
Step 2: Adjust income deficit for inflation over pre-retirement period
Adjusting today’s deficit for inflation
PV * (1 + inflation)^Years till retirement
Or on financial calculator need to enter
PV, N (years), I/YR (inflation
And solve for FV
If income deficit is 22,000 and there are 22 years till retirement. Inflation is expected to be 3% then
22,000 * (1.03)^22= 42,154 needed in year 1
Step 3: Determine total retirement fund needed
Using first year retirement amount to determine lump sum needed for entire term
If all assumptions are correct the retiree would have enough on an inflation adjusted period to retire
Serial payment would be each years payout
Final amount would be 0
This approach is called capital utilization
Calculation instructions:
1. Always have begin marked on calculator
- Use an inflation adjusted yield
(1 + ROR -1) X 100
(/1+ I )
After calculating this rate on the calculator just press i/yr to enter as the inflation-adjusted yield
If assuming 7% return and 3% inflation, inflation adjusted yield is 3.8835%. Taking that rate and the first year payout needed of $42,154, you can solve for the lump sum needed for a 30 year retirement.
42,154 pmt
30 N
3.8835 I/YR
Solve for PV= 768,064
Most use this capital utilization strategy that draws off yield and principal
Capital preservation
Living completely off of retirement assets without diminishing them
If you want the 768,064 after the 30 year period, you would discount it back
768064 FV
30 N
7 I/YR
PV= 100,898
$100,898 is what would be needed in savings to grow to 768,064 in 30 years assuming no inflation
Step 4: Determine Savings Amount Needed
Level savings approach
Take lump sum amount needed at retirement and calculate the needed amount to be saved per payment
Determine year one amount:
22,000 after inflation adjusted income
22 years till retirement 3% I/yr
22,000(13%)^22= 42,154
Determine total needed $42,154 Year 1m Annual return 7% Inflation 3% (1+7%)/ -1 X100= 3.8853% (1+3%) Inflation adjusted return is 3.8853% Use calculator and plug in 3.8853% I/yr 30 n (years till death) 42,154 PM (amount used in year 1) Solve for PV= $768,064 Total amount needed is $768,064
Determine Payment for annual level savings Calculator 768,064 FV (lump-sum begin) 22 n (years till retirement) 7 I/YR (return on savings per year) Solve for PMT in END mode
Payment would be $15,673
Non Calculator FV= PMT * (1 + R)^22 -1 / R 768,064= PMT * (1+.07)^22 -1 / .07 768,064= 49.0057x PMT= 15,673
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Module 2- Principles and Strategies When Investing for Retirement30
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Module 1 Chapter 1-338
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Module 4 Bridging The Income Gap33
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Module 3- Social Security26
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Module 5: Navigating Health Care28
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Module 7- Designing Optimal Retirement Income Streams43
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Module 8- Achieving Tax And Estate Planning Objectives In Retirement62
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Module 9- Fiduciary, Ethical And Regualtory Issues For Advisors28
