10 - Chapter 10 Retirement Planning Accumulations and...

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Copyright© 2011 Money Education, LLC Chapter 10 Chapter 10 Retirement Planning Accumulations and Distributions Remaining Work Life Expectancy (RWLE) Copyright© 2011 Money Education, LLC Chapter 10 2 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. Retirement Life Expectancy (RLE) Copyright© 2011 Money Education, LLC Chapter 10 3 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.
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Savings and Investment Issues Copyright© 2011 Money Education, LLC Chapter 10 4 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. Benchmark for Investment Assets as a Percentage of Gross Pay Copyright© 2011 Money Education, LLC Chapter 10 5 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 Savings Rate Copyright© 2011 Money Education, LLC Chapter 10 6 The savings rate identifies the average savings amount in the U.S. based on consumption. It is a percentage of disposable personal income.
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Timing of Savings Copyright© 2011 Money Education, LLC Chapter 10 7 The earlier a person saves, the greater the number of future compounding periods available prior to retirement. Time / Savings Example (Accumulation at Age 65, Ordinary Annuity) Sheila Justin Total Invested (10 years) $25,000 $77,500 (30 years) Balance at Age 65 $393,588 $308,365 Earnings Rate 8% 8% Investment Decisions Copyright© 2011 Money Education, LLC Chapter 10 8 It is important to have a historical perspective of investment returns and risks for a wide variety of asset classes. Historical Returns, Inflation-Adjusted Returns, & Standard Deviation of Asset Classes (1932-2006) Asset Class Historical Returns Inflation- Adjusted Returns Standard Deviation Real Return After-Tax & Inflation Small-Capitalization Stocks 13% 10% 33% 6.1% Small-Capitalization Stocks 10% 7% 20% 4% Fixed-Income Securities (Corporate) 6% 3% 9% 1.2% Treasury 5.5% 2.5% 5.5% 0.9% Consumer Price Index (CPI) 3% N/A 3.1% N/A Managing Retirement Distribution Copyright© 2011 Money Education, LLC Chapter 10 9 There are several approaches that can be utilized to reduce the risks of outliving retirement accumulation. Two of the more common are: 1. 4% per year approach: Limit withdrawals from the
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