Welcome
©2014, College for Financial Planning, all rights reserved.
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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
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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



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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?
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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.
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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.
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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.)
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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.
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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.
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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.
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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?
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CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Session 1
End of Slides
©2014, College for Financial Planning, all rights reserved.