Planning for long term and short term financial goals
John Davies, Ch E. retired


Why do I have to plan and manage for my financial future?

Student loans repayment


Save for emergencies
Long term financial independence


Consolidate your loans.

Federal student loans
 www.loanconsolidation.ed.gov
 Save 0.25% with automatic loan payments from bank account

Private student loans
 Search the web for consolidation opportunities
 Banks
 Credit Unions


Some advisors suggest having two savings accounts for emergencies


One for periodic expenses

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Insurance payments
Automobile repairs
Medical deductibles
One for emergencies



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Loss of a job
Death of a spouse
Major repairs to a home
This fund should be equal to 6 to 12 times monthly expenses


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Save for the time you no longer can or want to work
Save for a down payment on a house


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
How will your salary change over your working career?
What will be your annual expenses when you retire?
How many years do you need to plan for living in retirement?
How much savings will be required to provide your retirement?

Equation
To Find Given
P
F
P
A
F
A
P
F
P
A
P
A
F
G
Description
Single Payment, Present
Worth
Single Payment,
Compound Amount
Uniform Series, Present
Worth
Uniform Series, Capital
Recovery
Uniform Series,
Compound Amount
Uniform Series, Sinking
Fund
Gradient Series, Present
Worth
Summary of Discounting Factors
End of Period Cash Flow
Discrete Discounting
(1+i)
(1+i)
-n n
(1
 i) n i ( 1


1 i ) n
( 1 i(1
 i) n
 i ) n

1
(1
 i) n 
1 i i
( 1
 i ) n 
1
[1 (1
 ni)(1
 i)
-n
] i 2
(1
 i) n i [( 1

 i ) n
( 1


1 ] ni )
End of Period Cash Flow,
Continuous Discounting e e e r n e r n ( e r

1

1 )
or
1
 e r e

 r n
1 e r n
( e r e r n

1 )

1 e r
or
1


1 e r n e
-r n r n e e r n r r e r n e r n

1

1

1

1

1
 e r n
( e r n ( e r

1 ) 2

1 )
Continuous or Uniform
Cash Flow, Continuous
Discounting e r n re
 r n
1
or
1
 e re r n r n

1
or
1
 r e
 r n e r n r

1 e e r n rn r

 re
1
1 rn

 e n r
 e
 r
1


1
 e r
1

1
 n e r n 
1 e
-r n r
A
P
G
A
1
Gradient Series
Conversion to Uniform
Series
, j or c, i
 j or r
 c Geometric Series,
Present Worth
1

( 1
 j ) n ( 1
 i )
 n i
 j e e r
1
 r
1

1
 e ( c
 r ) n
 e c e r n n

1
( r e

( r
 c ) n

1 c ) e ( r
 c ) n
or
1
 r
P A
1
, j or c, i=j or r=c n
( 1
 i ) n e r n
F A
1
, j or c, i
 j or r
 c Geometric Series,
Future Worth
( 1
 i ) n i


( j
1
 j ) n e r n e r

 e e c n c e r n r

c e c n
F A
1
, j or c, i=j or r=c n(1+i) n-1 ne r(n-1) ne rn
P = Present Worth, F = Future Worth, A = annual amount, A
1
= annual amount 1 st
year of geometric series, G = gradient amount, i = discount or interest rate, r = continuous discount or interest rate,
j = discrete compounding geometric growth rate, c = continuous compounding geometric growth rate Relationship of i to r and j to c: i effective
= e r – 1 and j effective
= e c – 1
r = ln(1 + i effective
) and c = ln(1 + j effective
) e (c-r)n
 c

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

Assume starting salary of $60K/year.
Long term average salary increases including promotions/job changes equal 5 to 8%
What will your annual salary be in 35 years?

Use single payment compound amount formula:
 𝐹𝑆 = 𝑆𝑆(1 + 𝑖) 𝑛
 𝐹𝑆 = 60000(1 + 5%) 35

$331,000 to $887,100

TABLE 3 — Section 1(c) — Unmarried Individuals (other than Surviving
Spouses and Heads of Households)
If Taxable Income Is:
Not over $8,925
Over $8,925 but not over $36,250
Over $36,250 but not over $87,850
The Tax Is:
10% of the taxable income
$892.50 plus 15% of the excess over
$8,925
$4,991.25 plus 25% of the excess over
$36,250
Over $87,850 but not over $183,250
Over $183,250 but not over $398,350
Over $398,350 but not over $400,000
Over $400,000
$17,891.25 plus 28% of the excess over
$87,850
$44,603.25 plus 33% of the excess over
$183,250
$115,586.25 plus 35% of the excess over
$398,350
$116,163.75 plus 39.6% of the excess over $400,000

TABLE 1 — Section 1(a) — Married Individuals Filing Joint Returns and
Surviving Spouses
If Taxable Income Is:
Not over $17,850
Over $17,850 but not over $72,500
Over $72,500 but not over $146,400
The Tax Is:
10% of the taxable income
$1,785 plus 15% of the excess over
$17,850
$9,982.50 plus 25% of the excess over
$72,500
Over $146,400 but not over $223,050
Over $223,050 but not over $398,350
Over $398,350 but not over $450,000
Over $450,000
$28,457.50 plus 28% of the excess over
$146,400
$49,919.50 plus 33% of the excess over
$223,050
$107,768.50 plus 35% of the excess over
$398,350
$125,846 plus 39.6% of the excess over
$450,000

Single Tax Payer Married Tax Payers
Taxable Taxable Effective Taxable Taxable Effective
Marginal
Tax Rate
10%
Income Income
Minimum Maximum
0 $8,925
Tax Rate
Range
0 to 10%
Income Income Tax Rate
Minimum Maximum Range
0 $17,850 0 to 10%
15% >$8,925 $36,250 10 to 14% >$17,850 $72,500 10 to 14%
25% >$36,250 $87,850 14% to 20% >$72,500 $146,400 14 to 19%
28% >$87,850 $183,250 20% to 24% >$146,400 $223,050 19 to 22%
33% >$183,250 $398,350 24% to 29% >$223,050 $398,350 22 to 27%
35% >$398,350 $400,000 29% >$398,350 $450,000 27 to 28%
39.6% >$400,000 >29% >$450,000 >28%

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Assume you adopt a savings plan of always saving 15 to 30% of your annual salary.
Assume you pay an average tax rate of 35%
(includes state, federal and payroll taxes)
First year after tax and after savings spendable income
$21,000 -- $30,000
Spendable income at end of working life
$115,900 -- $443,600


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Life expectancy 85 years
Career length 35 years
Age now 22
28 years in retirement
Plan for 30

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Assume living expenses in first year of retirement will be 80% of expenses prior to retirement
Assume living expenses increase 3% per year
Assume investments earn 5% per year throughout career and during retirement.
Assume retirement funds will be taxed at 25%

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Based on our assumptions of 80% of your spendable income the last year you worked and a 25% tax rate: 𝑘%∗𝑆𝐼
𝐴
1
=
1−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
80%∗115900
𝐴
1
=
1−25%
The range of A considering
1
= 123600 values we have been
$123,600 -- $473,200


Calculate the savings value required at the end of career to fund years after retirement by using the geometric series present worth equations

Two equations—


If interest rate not equal to rate of increase in expenses:
1− 1+𝑗 𝑛
1+𝑖
−𝑛
𝑃𝑊 = 𝐴
1 𝑖−𝑗
If interest rate equals rate of increase in expenses: 𝑃𝑊 = 𝑛
𝐴
1
1+𝑖

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Expected withdrawal first year = 123600
Interest rate on investment = 5%
Expected increase in withdrawals each year = 3%
Number of years of withdrawals = 30
1− 1+𝑗 𝑛
𝑃𝑊 = 𝐴
1
1− 1+3% 𝑖−𝑗
30
123600
1+𝑖
−𝑛
1+5%
5%−3%
Range of PW values
$2,709,200 -- $10,372,200
=
−30
= 2709200



Use the geometric series future worth formula to calculate the first year savings
Two equations—

If interest rate on savings not equal to growth rate of savings:
1 + 𝑖 𝑛 − 1 + 𝑗 𝑛
𝐹𝑊 = 𝐴
1 𝑖 − 𝑗

If interest rate on savings equals growth rate of savings:
𝐹𝑊 = 𝐴
1 𝑛 1 + 𝑖 𝑛−1

FW required $2,709,200 to $10,372,200
Assumptions for working career:


35 year career
Interest rate earned on savings = 5%




Amount saved each year increases at same rate as salary increases =5%
𝐹𝑊 = 𝐴
1 𝑛 1 + 𝑖 𝑛−1
2709200 = 𝐴
1
35 1 + 5%
Solve for A
1
: A
1
= $14,700
30−1

FW required $2,709,200 to $10,372,200
Range of initial savings to achieve the FW required:
$14,700 --$33,600
What if you delay saving by 5 years
Range of first year of savings:
$21,900--$54,200

First Year Salary, $/yr
Annual Rate of Increase, %/yr
Years in workforce
Salary at End of Career
60,000
5%
35
331,000
60,000
5%
35
331,000
60,000
8%
35
887,100
60,000
8%
35
887,100
Savings rate, % of income
First Year spendable income, $
At Retirement spendable income, $
Spendable income 1st yr retirement, $
Withdrawal from savings, $
Savings Balance required at retirement, $
15%
30,000
165,500
132,400
176,500
3,868,800
30%
21,000
115,900
92,720
123,600
2,709,200
15%
30,000
443,600
354,880
473,200
10,372,200
30%
21,000
310,500
248,400
331,200
7,259,700
Necessary savings first yr of career, $
Actual Savings first yr of career, $
21,000
9,000
14,700
18,000
33,600
9,000
23,500
18,000



Make repaying loans and saving for emergencies and long term financial health a priority
Use automatic savings plans to take the money out of your paycheck .


Take advantage of matching programs at your employer


401(k) many employers match a certain percentage of your contributions
Stock purchase plans-employers may offer stock at discounted prices

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Seek the advise of a financial planner
Make use of tax advantaged flexible spending accounts
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Health care spending accounts
Dependent care savings accounts
Transportation spending accounts

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401k plans typically have limited choices.

Seek investments that meet your personal risk profile.
Work with a financial planner
Read investment magazines, newsletters, websites for investment advise
Establish an investment account



Use other retirement savings plans if employer doesn’t offer plans

IRA

Roth IRA
Consider using Roth IRA and/or Roth 401(k) if available

After tax savings


Your current tax rate may be lower than your retirement tax rate
Earnings are tax free


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Review your plan and progress at least annually
Make required adjustments