Chapter 2 - Retirement Funding Flashcards
Usually the time beginning after education and ending at retirement.
This is the complete time period available to work and earn in order to save for retirement.
The period of time a person is expected to be in the work force.
Period during which one earns, saves, and accumulates for retirement.
Generally this period is 30-40 years, but has been decreasing due to advanced education and early retirement.
Work Life Expectancy (WLE)
Period of time remaining to save for future goals.
This is typically the time period in which a financial planner has to develop strategies and savings goals because this period begins when they show up at our desk.
The work period that remains at a given point in time before retirement.
The number of years a client has remaining to save for retirement.
Although most individuals expect to retire at 65, the median age is 62.
Remaining Work Life Expectancy (RWLE)
The time period beginning at retirement and ending at death.
The time period planned for by the financial planner and the retiree during the work life.
Keep in mind that life expectancy is increasing.
Planning to age 90 or beyond may be a reasonable assumption.
Consider family history and current health as well as life expectancy tables.
Retirement Life Expectancy (RLE)
25-35 10-13% of Income
35-45 13-20% of Income
45-55 20-40% of Income
Savings Amount
25 Year Old = .2:1
65 Year Old = 16:1
Investment Benchmark
The estimate of the percentage of an individual’s income earned prior to retirement needed during retirement.
Wage Replacement Ratio (WRR)
The Top-Down Approach (Far from Retirement):
1. Uses percentages and common sense.
2. Uses more estimates and is more efficient for younger individuals because of the uncertainty of future income and expenditures.
The Bottom-Up Approach (Close to Retirement):
1. Determines which preretirement expenses and expenditures will persist during the retirement years.
2. Reviews each current expense and is more accurate for older individuals as the expenses are not as likely to change as much.
Methods for Calculating WRR
The process of calculating the amount of investment capital needed at retirement.
It uses both objective and subjective criteria to determine retirement income needs.
There are three methods for analyzing capital needs.
Capital Needs Analysis
- Basic Annuity Model
- Capital Preservation Model
- Purchasing Power Preservation Model
Capital Needs Analysis
The annuity method is the simplest way to determine retirement needs yet is the least conservative method.
The annuity method assumes the individual saves for a period of time, begins taking distributions at retirement, and then dies with a zero accumulation balance on the projected life expectancy date.
Annuity Model
The capital preservation model assumes that at life expectancy, as estimated in the annuity model, the client has exactly the same account balance as he started with at retirement.
Provides the amount that will mathematically provide the “annuity method” amount at date of death.
Capital Preservation Model
The purchasing power preservation model assumes that the client will have a capital balance of equal purchasing power at life expectancy as he did at retirement.
Provides the amount that will mathematically provide the inflation - adjusted “annuity method” capital needs at the date of death.
Purchasing Power Model
