Chapter 15
Introduction to Retirement
Planning
Retirement Planning
 One of the main goals for many individuals is
long-term financial security and independence
 This goal is realized when a person is financially
secure enough to live at a desired comfort level
without the need for employment income
5-2
Basic Factors Affecting Retirement Planning
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Work life expectancy (WLE)
Remaining work life expectancy (RWLE)
Retirement life expectancy (RLE)
Basic savings concepts
Inflation
Investment returns
Annual income needs
Wage replacement ratio (WRR)
Retirement income sources
Qualitative factors
5-3
Work Life Expectancy
 Work life expectancy (WLE) is the period a
person is in the work force, generally about 30 to
40 years
 Remaining work life expectancy (RWLE) is the
work period that remains at a certain point in time
prior to retirement
5-4
Retirement Life Expectancy (RLE)
 Retirement life expectancy (RLE) is the period
beginning at retirement and extending until death
 The RLE is the period of retirement that must be
funded
5-5
Important Savings Concepts in
Retirement Planning
 Savings amount
 Savings rate
 Timing of savings
 Investment decisions
 Impact of inflation
5-6
Timing of Savings
 The earlier a person begins saving for retirement,
the greater the number of future compounding
periods available before retirement
 The greater number of compounding periods
leads to a lower required savings rate and a
larger accumulation of capital at retirement
5-7
Defining the Retirement Goal
 Balancing increasing retirement income
needs with decreasing retirement income
 Planning for retirement—pretax or after tax
5-8
The Wage Replacement Ratio
(WRR)
 The WRR is an estimate of the amount of annual
income needed at retirement to properly fund the
period called the retirement life expectancy (RLE)
 The WRR is calculated by dividing the amount of
money needed on an annual basis in retirement
by the preretirement income
5-9
Calculating the WRR
 Top-down approach
• Used with younger clients where expenditure
patterns are likely to change dramatically over
time
 Budgeting approach
• Used with older clients because, as a person
nears retirement, it is possible to examine the
actual expenditure patterns of the person
5-10
The Sources of Retirement Income
 Social Security
 Private pension plans
 Personal savings
 Work
5-11
Qualitative Factors in Retirement
 Voluntary versus involuntary retirement
 Loss of self-esteem
 Boredom
 Decision to relocate
5-12
Factors That Negatively Affect Retirement
Planning
FACTORS
IMPACT
Reduced WLE
Insufficient savings period
Increased RLE
Increase capital needs
Reduced family reliance
Fewer alternatives in retirement
Reduced ability to work
Fewer alternatives in retirement
Planned too late
Fewer compounding periods
Low savings rate
Inability to meet capital requirements
Inflation
Purchasing power reduction
Poor earnings rate and asset
allocation
Inability to meet capital requirements
Capital Needs Analysis
 The process of calculating the amount of
investment capital needed at retirement to
maintain the preretirement lifestyle and
mitigate the effect of inflation during the
retirement years
 Three methods—basic annuity method,
the capital preservation model, and the
purchasing power preservation model
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Capital Needs Analysis (cont.)
 Basic annuity method—retirement account has a
zero balance at the end of life expectancy
 Capital preservation model—retirement account
at the end of life expectancy is equal to the
account balance at the beginning of retirement
 Purchasing power preservation model—
retirement account at the end of the life
expectancy has the same purchasing power as
the account balance at the beginning of
retirement
5-15