Welcome
©2013, College for Financial Planning, all rights reserved.
Expectations of Students
• Commitment of time and energy
• Read the assignments prior to class
• This course will help you:
o grow your business
o be successful on the
College’s end-ofcourse examination
1-2
Housekeeping Items
1. Professor contact information
 2.3.
4.
5.6.
7.

Lobby & Welcome e-mail
Tutorial in Lobby
Status changes
Text chat
Files for students
Recordings
Access Poll Layout
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1-3
Chartered Retirement Planning CounselorSM
Professional Designation Program
Module 1
The Retirement Planning
Process &
Meeting Multiple Financial
Objectives
©2013, College for Financial Planning, all rights reserved.
Learning Objectives
1–1: Describe the six steps of the retirement planning process
and what each contributes to the entire process.
1–2: Describe the two key financial statements in which client
data are reflected.
1–3: Articulate the pros and cons of retirement income
replacement percentages.
1–4: Explain the methods for determining retirement period
income and expenses, and pre-retirement savings needs.
1–5: Calculate the future value of a current sum, the present
value of an annuity due (PVAD), and the payment required
in a present value of an ordinary annuity (PVOA).
1–6: Describe the problem of multiple financial objectives and a
method for meeting each.
1-5
Video
Play Video
• LOs as Your GPS
• 5:00 minutes
• Play video from
Video Layout
Text chat or
other questions
1-6
Questions to Get Us Warmed Up
1-7
Learning Objectives
1–1: Describe the six steps of the retirement planning process
and what each contributes to the entire process.
1–2: Describe the two key financial statements in which client
data are reflected.
1–3: Articulate the pros and cons of retirement income
replacement percentages.
1–4: Explain the methods for determining retirement period
income and expenses, and pre-retirement savings needs.
1–5: Calculate the future value of a current sum, the present
value of an annuity due (PVAD), and the payment required
in a present value of an ordinary annuity (PVOA).
1–6: Describe the problem of multiple financial objectives and a
method for meeting each.
1-8
Six Steps of the Retirement Planning Process
• Establish and define the
•
•
•
•
•
relationship with the client
Gather client data
Analyze and evaluate the
client’s financial status
Develop and present
retirement planning
recommendations and/or
alternatives
Implement the retirement
planning recommendations
Monitor the retirement
planning recommendations
1-9
Statement of Financial Position
• A personal balance sheet
•
•
•
as of a specific date
Assets
o Cash/Cash equivalents
o Invested assets
o Use assets
Liabilities
o Mortgage loan balance
o Auto loan balance
o Credit card balances
Net worth
(Assets – Liabilities)
1-10
Income Statement
• A personal cash flow statement of income, expenses,
•
•
•
and the resulting surplus or deficit for a period of time
Income
o Salary, investment income, miscellaneous inflows,
etc.
Expenses
o Mortgage payments, taxes,
insurance, utilities/household
expenses, food, medical/dental,
clothing/personal care, etc.
Surplus/Deficit
(Income – Expenses)
1-11
Learning Objectives
1–1: Describe the six steps of the retirement planning process
and what each contributes to the entire process.
1–2: Describe the two key financial statements in which client
data are reflected.
1–3: Articulate the pros and cons of retirement income
replacement percentages.
1–4: Explain the methods for determining retirement period
income and expenses, and pre-retirement savings needs.
1–5: Calculate the future value of a current sum, the present
value of an annuity due (PVAD), and the payment required
in a present value of an ordinary annuity (PVOA).
1–6: Describe the problem of multiple financial objectives and a
method for meeting each.
1-12
Pros & Cons of Income Replacement Percentages
• Rough guide—e.g., use 80% of
•
•
•
•
pre-retirement income
Help assess reasonableness of
client’s goals
Most useful for young clients as a
guide
Ratios should be viewed as rules
of thumb
Persons approaching retirement
within 20 years need thorough
analysis of current and anticipated
retirement expenses to establish
reasonable retirement income
needs
1-13
Pros & Cons of Income Replacement Percentages
Palmer Study
$20,000
Retirement Income:
% of Pre-retirement
income
89%
$70,000
76%
$80,000
77%
$90,000
78%
Pre-retirement
Income
1-14
Learning Objectives
1–1: Describe the six steps of the retirement planning process
and what each contributes to the entire process.
1–2: Describe the two key financial statements in which client
data are reflected.
1–3: Articulate the pros and cons of retirement income
replacement percentages.
1–4: Explain the methods for determining retirement period
income and expenses, and pre-retirement savings needs.
1–5: Calculate the future value of a current sum, the present
value of an annuity due (PVAD), and the payment required
in a present value of an ordinary annuity (PVOA).
1–6: Describe the problem of multiple financial objectives and a
method for meeting each.
1-15
Time Value of Money Tips
• Clear calculator before each problem
• Generally you are given
•
•
three variables and solve
for a fourth variable
Do not confuse an annuity
due (payments at beginning)
with an ordinary annuity
(payments at end)
Check for reasonableness
1-16
HP-10BII Keystrokes
P/YR
PV
FV
PMT
I/YR
N
P/YR
BEG/END
Gold, DISP, number









Compounding periods
Present value
Future value
Periodic payment
Annual interest rate
# of compounding periods
Years x compounding periods
Annuity Due or Ordinary Annuity
Set # decimal places
1-17
Determining Retirement Income & Expenses
• Analyze current living
•
•
•
expenses
Adjust for expenses that will
increase, decrease or end,
which will appear based
upon the client’s goals
Housing—may decrease
with mortgage paid, but real
estate taxes, utilities,
insurance, and upkeep
continue
Parking, dry-cleaning,
apparel, and education may
decrease
1-18
Determining Retirement Income & Expenses
• Will your clients spend less
•
•
•
•
or more during retirement?
Expenditures for Social Security
and retirement plans may
disappear
Total income taxes may
decrease
with earned income reduction
Health care may dramatically
increase
Travel and recreation costs
escalate
1-19
Determining Retirement Income & Expenses
Capital preservation
• Living off of cash flow
• Not reducing principal
• Need $25,000 assuming 5% return: 25,000/.05 =
$500,000 would provide the income needed
• Few clients have sufficient assets to allow that strategy
Capital utilization
• Draws off yield and
principal
• Eventually, principal
balance is exhausted
(TVM calculation
under LO 1-5)
1-20
Determining Retirement Income & Expenses
Income from Assets
• Rental income
• Dividends
• Interest
Evaluate life expectancy—
may well be into the 90s
• Use averages just as starting point
• Make adjustments based on client’s personal health,
habits (e.g., smoking, drinking, exercise, current fitness)
and family history
• Add 5 to 10 years for good measure
• With couples, base the estimate on the life of the
individual expected to live longer
1-21
Determining Retirement Income & Expenses
• Employer-sponsored retirement plans
• Social Security
• Earned income—may delay retirement, work part-time
or begin own business
o Can increase benefit from retirement plan and Social
Security by delaying retirement
o After attaining Social Security’s full retirement age,
earned
income does not reduce the benefit paid
o Need to include expenses
pertaining to work—e.g.,
taxes, transportation, apparel
o Reduce number of years
retirement must be financed
1-22
Retirement Needs Analysis
Analyze expenses to
determine a budget
• Consider additional discretionary
expenses,
such as travel
• Dream fulfillment costs money
Inflation
• At 3.5% inflation, purchasing
power of $100 reduces to about
half in 20 years
Health care issues
• 65-year-old couple may have
$240,000 unreimbursed medical
expenses throughout retirement
1-23
How Much Money Will Be Needed?
After reviewing the underlying issues and
areas of concern, two primary questions must
be addressed
1. How much money will be needed to fund the
retirement budget?
2. How much of the retirement nest egg can safely
be withdrawn
year-by-year?
1-24
Funding Calculation
1. Present value serial payment calculation
o Step 1: find the inflated value of one year’s
retirement income need (stated in today’s dollars)
o Step 2: Calculate the present value (annuity due;
PVAD) of all the annual retirement income
payments, which will increase each year (a serial
payment to deal with inflation)
2. Set the calculator to BEGIN mode
(PVAD)
3. Use an inflation-adjusted rate of
return when calculating the PVAD
1-25
Funding Calculation Example
Step 1
Find the inflated value of $75,000 in 15 years:
1. 15 N; 3.5 I (or I/YR, depending on the
calculator); 75,000 PV;
solve for FV = $125,651 (rounded).
2. So the equivalent value of $75,000,
inflated for 15 years at 3.5%,
is $125,651. This becomes the
starting income payment for
the second step.
1-26
Funding Calculation Example
Step 2
Calculate the PVAD of 25 years of payments, using a first payment
amount of $125,651, and factoring both inflation (3.5%) and the
rate of return (7%) (i.e., a serial payment). This requires two steps:
First, determine the inflation-adjusted interest rate, then calculate
the serial payment PVAD. To determine the inflation-adjusted interest
rate, do the following:
1. ([1.07 ÷ 1.035] – 1) × 100, which becomes
([1.0338] – 1) × 100 = (.0338) × 100 = 3.3816.
2. So, the inflation-adjusted interest rate is 3.3816.
This is what we will use to calculate the PVAD
for the sum required at the beginning of retirement.
3. 25 N; 3.3816 I (or I/YR); 125,651 PMT [0 FV];
PVAD = $2,168,725 (rounded).
Your answer may vary slightly depending
on the exact interest rate entered.
1-27
Variability in Retirement Planning Assumptions
• Traditional planning uses
•
•
•
straight-line returns
o i.e., the same rate
continues throughout the
retirement period
Two significant areas of
variability
o Inflation
o Investment return
Monte Carlo analysis can help
gauge variability of investment
returns
Stress testing adds greater
reality to the process
1-28
Learning Objectives
1–1: Describe the six steps of the retirement planning process
and what each contributes to the entire process.
1–2: Describe the two key financial statements in which client
data are reflected.
1–3: Articulate the pros and cons of retirement income
replacement percentages.
1–4: Explain the methods for determining retirement period
income and expenses, and pre-retirement savings needs.
1–5: Calculate the future value of a current sum, the present
value of an annuity due (PVAD), and the payment required
in a present value of an ordinary annuity (PVOA).
1–6: Describe the problem of multiple financial objectives and a
method for meeting each.
1-29
Multiple Financial Objectives
• Problem of competing
•
•
•
•
•
goals
Housing
Children’s education
Emergency funds
Care of elderly parents
or disabled children
May require
establishing separate
investment accounts to
meet different needs
1-30
When Client’s Funds Are Insufficient
Reduce retirement income need
• Delay retirement
• Reduce the cost of the retirement lifestyle
• Reduce or eliminate bequests to the children
Increase the resources available
• Do part-time work
• Spend less and save
more prior to retirement
• Invest personal retirement
savings more aggressively
1-31
Make It the Client’s Plan
• Client must take ownership of the retirement plan
• Plan make sense to the client
• Plan must use assumptions that client understands and
•
•
•
agrees to
Client must perceive the plan as serving his or her best
interests
Client must recognize the
need to fund other
financial goals
Required funding must
be a realistic goal that
client can maintain
1-32
Factors Impacting the Decision to Retire
The decision to retire involves much
more than monetary issues.
Additional considerations are:
• Social
• Cultural
• Interpersonal/relational
• Life fulfillment
The planner needs to uncover what
will make retirement meaningful to
the client
• May or may not be retirement
in the traditional sense
1-33
12-
Retirement Funding Decisions
• Social Security: Does it make more sense to
•
•
wait for full retirement age or to start benefits
at age 62?
o Health
o Lifestyle choices
o Financial differential
o Additional sources
of income
Medicare eligibility
Employer-sponsored
retirement income plans
121-34
Question 1
Jack and Jill have had a combined gross salary of
$87,000 in 201X. Other cash inflows amounted to
$9,800. Their fixed cash outflows were $28,300,
and their variable cash outflows were $64,700.
What was the net cash flow for 201X?
a.
b.
c.
d.
$6,000 deficit
$3,800
$30,100
$68,500
1-35
Question 2
Which of the following is an expense that typically
goes down during retirement?
a.
b.
c.
d.
medical expenses
dental expenses
expenditures on travel
food and housing costs
1-36
Question 3
Billy wants a retirement income of $65,000
protected against 3% inflation. He assumes a 9%
rate of return and wants to have the income for 30
years. How much capital will be required to
provide Bill this much income at the first of each
year? (Be sure your calculator is set for four
decimal places.)
a.
b.
c.
d.
$667,788
$727,888
$911,700
$964,809
1-37
Question 4
The process of data gathering is the second step
in the retirement planning process. All of the
following are examples of data to be gathered
except
a.
b.
c.
d.
the client’s ability to purchase health insurance.
the balances in retirement accounts.
income sources and amounts.
investment risk tolerance.
1-38
Question 5
All of the following are considered foundation
financial goals except
a.
b.
c.
d.
helping grandchildren with college.
food, clothing, and shelter.
emergency funds.
life, health, and automobile insurance.
1-39
Chartered Retirement Planning CounselorSM
Professional Designation Program
Module 1
End of Slides
©2013, College for Financial Planning, all rights reserved.