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Welcome ©2014, College for Financial Planning, all rights reserved. Expectations of Students • • • • Time/energy commitment Read assignments before class Tested on all LOs This course will enable you to: o be eligible to sit for the CFP® Certification Examination o better serve clients/ grow your business o be successful on the College’s end-ofcourse examination 1-2 For Optimal Performance The quality of your Internet-streamed session depends on your connection: Reboot your PC before each session to refresh memory. Directly connect to the Internet. Delete cookies and temporary Internet files each week. Close other programs while attending your live online class. Before each session, in your live class, go to Meeting then Audio Setup Wizard to adjust your settings. These steps resolve 90% of issues. 1-3 Housekeeping Items 1. Professor information in eCampus 2. 3. 4. 5. 6. 7. Tutorial Status changes Text chat Files for Students Recordings Access Poll Layout 1-4 CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Session 1 Retirement Savings – Calculating Lump Sum Needs, Serial and Level Payments ©2014, College for Financial Planning, all rights reserved. Session Details Module 1 Chapter(s) 3 LOs 1-3 1-4 Analyze a given situation to calculate the lump sum amount needed for retirement (PVAD). Analyze a given situation to calculate either the serial payment or level payment needed in order to reach a lump sum amount needed for retirement. 1-6 Saving for Retirement Three main calculations you need to know – 1. How to calculate the lump sum needed at the beginning of retirement in order to fund the retirement period 2. How to calculate the level savings amount needed to reach the lump sum amount 3. How to calculate the serial payment amount needed (increases each year for inflation) to reach the lump sum amount 1-7 Determining Required Savings 1. Offset annual need with Social Security and pension plan benefit, if appropriate 2. Adjust annual retirement income need for inflation 3. Calculate capital needed on day one of retirement as goal 4. Calculate the required savings to accumulate needed capital by day one of retirement 1-8 Inflation-Adjusted Yield Reflects two percentage rates: • the inflationary growth rate of income to be generated by the fund • the investment return rate Formula: 1 In v e stm e n t re tu rn 1 1 0 0 1 In fla tio n 1-9 Retirement Funding Example George and Nancy wish to retire when George attains age 65. He is 46 this year. They estimate they will need $36,000 in today’s dollars in addition to Social Security. They want to assume an after-tax rate of return of 10% and inflation of 3%. They have no savings at this time, and they want the income until George is 95. a. What level payment will they need to deposit every year to reach their goal? b. What is the required inflation-adjusted (serial) deposit one year from today? 1-10 Lump Sum Calculation (10BII+) Clear and check calculator for 1 pmt/yr. 1. Today $ Day one of retirement $ PV = 36,000, N=19, i =3, FV = $63,126 2. The $63,126 now becomes a payment, which will increase each year with inflation to maintain buying power (begin mode). pmt = 63,126, i = inflation adjusted 6.7961, N = 30, PV = $853,994 The lump sum of $853,994 will fund the 30-year retirement period. 1-11 Level Funding Calculation (10BII+) Clear and check calculator for 1 pmt/yr and “END” mode. 1. FV = 853,994, i = 10%, N = 19 2. Therefore, PMT = $16,693 Inflation is already reflected in the $853,994, so only the expected return of 10% is used for “i” in this calculation. 1-12 Serial Funding Calculation (10BII+) Clear and check calculator for 1 pmt/yr, end mode. 1. Deflate (because inflation will be taken into account with the serial payment): Today $ Day one of retirement FV = 853,994, N = 19, i = 3, then PV = 487,021 2. Find payment: FV = 487,021, N = 19, i = 6.7961, then PMT = 13,304 3. Inflate by 3% to reach the end of first year payment: $13,304 x 1.03 = $13,703 (End of second year payment would be $13,703 x 1.03 = $14,114.) 1-13 Level and Serial Compared • First year level payment is $16,693. • First year serial payment is $13,703. • Serial payments will start out lower, but over time the serial payment will become higher than the level payment. 1-14 Practice Problem 1 The Smiths, both age 40, have analyzed their current living expenses and estimated their retirement income need, net of expected Social Security benefits, to be $22,000 in today’s dollars. They are confident that they can earn a 6% after-tax return on their investments, and they expect inflation to average 4% over the long term. They want to plan for a 30-year retirement period beginning at age 65. Determine the lump-sum amount the Smiths will need at the beginning of retirement to fund their retirement income needs. 1-15 Practice Problem 2 Bill and Mary Parker are projected to need a lump-sum retirement fund of $4,353,036 in 25 years. Their assets will amount to $4 million on the first day of the retirement year, leaving $353,036 to be saved over the pre-retirement period. Assuming an inflation rate of 4% and an after-tax return of 6%, calculate the Parkers’ annual serial (increasing) savings requirement. 1-16 Practice Problem 3 The Simpsons need to save an additional $300,000 (in retirement year 1 dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a level annual savings amount to build this fund. What level annual savings amount will the Simpsons need to deposit at the end of each year during their 20-year preretirement period? 1-17 CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Session 1 End of Slides ©2014, College for Financial Planning, all rights reserved.