Fun.4.PPT.11 - Michael A Dalton | James F Dalton | Joseph M...

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Michael A. Dalton | James F. Dalton | Joseph M. Gillice | Thomas P. Langdon
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Fundamentals of Financial Planning © 2014 Money Education Chapter CHAPTER 11: RETIREMENT PLANNING ACCUMULATIONS & DISTRIBUTIONS
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Fundamentals of Financial Planning © 2014 Money Education Chapter REMAINING WORK LIFE EXPECTANCY (RWLE) Work life expectancy (WLE) is the period of time a person is expected to be in the work force. The remaining work life expectancy (RWLE) is the work period that remains at a given point in time before retirement. 3 11
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Fundamentals of Financial Planning © 2014 Money Education Chapter RETIREMENT LIFE EXPECTANCY (RLE) Retirement life expectancy (RLE) is the time period beginning at retirement and extending until death. Proper planning is needed because if the retired individual lives longer than he and his financial planner prepared for, there is a risk of running out of money. 4 11
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Fundamentals of Financial Planning © 2014 Money Education Chapter SAVINGS AND INVESTMENT ISSUES The Savings Amount If individuals do not begin saving at an early age, then they must save a greater amount of their gross earnings to compensate for the missed years of contributions and compounding of investment returns. 5 11
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Fundamentals of Financial Planning © 2014 Money Education Chapter BENCHMARK FOR INVESTMENT ASSETS AS A PERCENTAGE OF GROSS PAY Age Investment Assets as a Ratio to Gross Pay Needed at Varying Ages 25 0.20 : 1 30 0.6 – 0.8 : 1 35 1.6 – 1.8 : 1 45 3 – 4 : 1 55 8 – 10 : 1 65 16 – 20 : 1 6 11
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Fundamentals of Financial Planning © 2014 Money Education Chapter SAVINGS RATE The savings rate identifies the average savings amount in the U.S. based on consumption. It is a percentage of disposable personal income. 7 11
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Fundamentals of Financial Planning © 2014 Money Education Chapter TIMING OF SAVINGS Lori saves $2,500 a year from age 25 until age 34 (inclusive) and invests the money in an account earning eight percent annually. Lori stops investing at age 34, but does not withdraw the accumulation until age 65. Lori’s accumulation at age 65 is $393,588 even though she only deposited $25,000. In contrast, Peter saves $2,500 a year from age 35 until age 65 inclusively and invests in a similar account to Lori, earning eight percent annually. Even though Peter saved $52,500 more than Lori, he will have accumulated $85,223 less than Lori at age 65. The deposits and balance at age 65 for Lori and Peter are presented on the following slide. 8 11
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Fundamentals of Financial Planning © 2014 Money Education Chapter TIMING OF SAVINGS Accumulation at age 65, Ordinary Annuity 9 11 Lori Peter Total Invested (10 years) $25,000 $77,500 (30 years) Balance at Age 65 $393,588 $308,365 Earnings Rate 8% 8%
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Fundamentals of Financial Planning © 2014 Money Education Chapter ACCUMULATION OF UNEQUAL DEPOSITS OVER VARYING TIME PERIODS 10 11
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Fundamentals of Financial Planning © 2014 Money Education Chapter INVESTMENT DECISIONS It is important to have a historical perspective of investment returns and risks for a wide variety of asset classes.
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