Download - Slides_Lesson 18 Slides
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WelcometoLesson 18oftheFundamentalsofPersonalFinancialPlanning. Thislesson
maybeadoozy!Butitalsomaybethemostvaluableinthesenseofcalculatingyour
retirementneeds.
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Disclosure! This isaverysimplemethodofcalculatingyourretirementneedsand/or
collegesavings.
Thereareplentyofissuestoconsidersuchasthestaticnumbersandratesofreturns.
Whenusingthismethodology,youmustusecorrectinputs donotexpectthistobean
endall,beall,solution.
Ifyoure
using
this
as
your
guiding
star:
you
need
to
actually
grow
your
money
at
the
stated
ratesofreturnORhigher,oryouwillfail.
Ifinflationishigherthanyoucalculate,youmayhaveissues.
Whenusingsimplecalculationslikethis,marketvolatilitycanhaveaneffect.
Forretirement,thewithdrawalratemethodologymaynotproperlyassumeforinflation.
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Idebated foraverylongtimeonbalancemakingthislessoneasybutstillvaluable. I
decidedtotakeabitofaleapandwillbeteachingsomevaluablestuff.
Thewebsitelistedontheslideshouldprovideaveryturnkeycalculatorthatyoucanuse
forcomplicatedcalculations.Youllneedtouseyourstandardcalculatorstoforsimple
calculations.
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Ifyouareadvancedenough,youcanuseanHP12ccalculator ortheTI12b. Theyreboth
financialcalculatorsandcanaccomplishwhatyouneedbutteachinghowtousethemmay
beawholeotherlesson. Iamavoidingtheminordertomakethiseasierforyouthe
student.
Onlyuse
the
hp 12c
or
ti
12b
if
you
are
familiar
with
it.
IF
you
have
never
used
them,
pleasedonotattempttonow.
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ForthosethatarefamiliarwiththeHP12canditsReverse PolishNotation,youwillonly
need touseitforn,I,pv,pmt,andfv. Nothingelse.
Again,ifyouhaventusedthiscalculatorbefore,thisisnotthedaytostart.
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Ok! Sotheprevious lessonscoveredthebackgroundonhowtoarriveatthesenumbers.
Inthislesson,wewillbefiguringouthowtousethesenumbers.
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Theresreally2questionstothat wearetryingtoanswerforthisexercise. Thesetwo
questionsarebasicallythetwostepsinvolvedwithcalculatinghowmuchyouneed.
Eachgoalwillhavetwophasesofpartstotheirlife theaccumulationuptothegoal,and
thedistributionoffundswhileinthatgoal. Forsomethinglike4yearscollegeplanningfor
a6year
old,
the
accumulation
period
may
be
12
years
(from
now
until
age
18)
and
the
distributionperiodwouldbethe4yearstheyareincollege.
Forretirementplanning,theaccumulationperiodisthetimebeforeretirementandthe
distributionplanningwouldbetheyearsinretirement.
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Whencalculatingthingsforyoursituation,youwillneedtoknowafewthingsupfront.
These arejustassumptionsfornow.
Youllneedtofigureoutanassumptionthatyouwanttouseforagrowthratethatyour
investmentscangenerate. Pleasenotethatyoushouldprobablyuseadifferentrateof
returnwhile
youre
accumulating.
This
is
not
required,
but
it
is
prudent.
It
may
not
be
prudenttoassumesomethinglikea10%rateofreturnwhileinretirementsincetherisk
associatedwiththatmaybetoohigh.
Itsimportanttoknowthatplanningforalowerrateofreturn,butaimingforahigherrate
ofreturn,maybebeneficialsinceitsunlikelyyoullbedisappointedifyouhavemore
money. Onthecontrary,planningforahigherrateofreturnthanachievedwouldalmost
certainlyresultindisappointment.
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The firstquestionweneedtoanswerishowmuchmoneydoIneedwhenmygoal
begins?.
Forthis,allweneedtodoisfigureoutwhatcostslooklikeTODAYandthenfactorinflation
intothatnumber. Youmayhearmesaythingslikeinflateafigureortodaysdollars.
Todaysdollars
means
what
it
COSTS
today.
If
we
inflate
afigure,
that
means
were
simplyadjustingtodayscostforfutureinflation. Asarecap,wedothisbecauseifcollege
costsare$5,000ayearintodaysdollars,theywillhaveahighernominalcostlaterinthe
future.
Thesecondstepistofigureoutwhatthevariousdistributionscenariolookslikebased
uponthatannualcostbeingyourpaymentfromyourinvestment.
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Insteadofreviewingall thetechnicalaspects,Ithinkthebestwaytolearnthiswouldbeto
gothroughanexample andworktheexampletoananswer. Wellgostepbystepsothat
youshouldbeabletowriteyourownsituationasanexampleandreplaceyournumbers
withthisexamplesnumbers.
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So, wefirstmustfigureoutthedistributionmodescenario.
Steponeistoinflatetodayscoststothefuture.
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When inflatingtheannualcost,youshouldhavegottenanumberaround$31,588.15
Thisisjustwhatthelastyearcosts. LikeIsaidbefore,wechoosetheLASTyearsinceits
moreexpensivethanthefirstyear. Itbuffersinalltheinflationoverthe4years.
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Collegeplanningisasimple project theresonly4yearstoplanfor.
Ifwetakethatannualcostandmultiplyitby4,thenwecansafelyplanfor4years.
LikeImentionedbefore,wearefiguringfortheLASTyearinsteadofthefirstyear.
Therefore,multiplying
by
4should
give
us
more
than
enough
money
for
college
since
the
lastyearshouldbealmost2030%higherthanthe1st year.
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Ok. Sowehave figuredoutthatweneed$126,352in13years. Thenextquestionis how
doweaccumulatethatmuchmoney?
Whatdoweknow? (Seeslides)
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So,wegobackto ourcalculatorandusetheseasourinputsandwesolvetofigureouthow
muchweneedtosaveonanannualbasisinordertohave$126,352in13years.
Thisassumesthatwestartwithnothing. Thisalsoassumeswesaveastaticpaymentand
earnastaticreturn. Again,thisisaverysimplewayoflookingatthings.
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Didyouresolve thatMary&Steveneedtosave$5,878peryear?
Ifso,youdidthatcorrectly.
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IfthepreviousstepsdidNOTmakesense,pleasetakeamomentandrewind,andreview
them. Try toseethelogicbehindeachstep.
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LikeIsaidbefore,noticethedifferencebetweenthetwophases. Youneedto gotothe
futurefirst,understandwhatitlookslike,andthenfigureouthowtogettoDay1ofthe
future.
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Retirement isnotmuchdifferent. Youremerelyusingdifferentnumbersanddifferenttime
horizons.
Insteadofmultiplyingbythenumberofyearsofcollege,retirementhasamuchlargertime
horizon. Oneverysimplewaytofigureoutyourneedsistocalculatetheamountneeded
tobe
generated
from
your
investments
and
then
figure
out
alump
sum
that
can
provide
thattoyou usingawithdrawalrate.
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Seethisexample.
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Referencing thewordproblem,theseshouldbetheinputsyouextrapolatefromthetext.
2
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Using a$82,713.57neededincome,youwouldneedtoreferenceRobertswithdrawalrate
andbackintothelumpsumRobertneeds.
2
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Next, letsaskthequestion howmuchdoesRobertneedtosaveeachandeveryyear?
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Robert needstosave$2,357/month! Forsomepeople,thismaybealotofmoney. For
many,thismaybedoable.
Inreallife,wedonotknowRobertorhissituation. Ifheslookingtocompletelyreplacehis
incomeandhesmaking$35,000ayearrightnow,saving$2,357/monthmaybenearly
impossibleunless
he
has
someone
else
supporting
his
lifestyle.
Therefore,Robertwouldneedtoconsidereitherworkinglongerorspendinglessin
retirement. Ofcourse,Robertwouldwanttoconsiderhisotheravenuesofincome social
securitymaybehisonlyone.
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Inthepreviouscalculation,weassumedRobertdidnothaveanysavings. Wecanadjust
thecalculationtoallowforanysavingsRoberthasalreadydone. Theonethingtonoteis
thatanyFVandPVmustbeoppositedirections thatis,onemustbenegativeandthe
otherpositive. Thisisbecauseoftheaccountingprincipalthatyouaredepositingmoney
anditisreturnedintheoppositedirection. Youreessentiallygivingthemoney(anegative)
inorder
to
receive
money
back
(a
positive).
Ifthatdoesntmakesense,dontworry. JustrememberthatPVandFVmustbeopposites
onenegative,theotherpositive.
2
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If youwereableunderstandandfollowalong,thenyoushouldtakethenextstepandtryto
runotherscenarios. Ivelistedafewhere.
IfRoberthasahigherrateofreturn,thatshouldrequirelessmoneybeingsavedannually.
IfRoberthasalowerrateofreturn,thatwillincreasehisannualsavingsneed.
Ifhe
starts
with
alarger
sum
of
money,
that
would
decrease
his
annual
savings
need.
Orifhehasalowerincomeneedorlongertimetosave,thenthatwouldrequirealower
annualcontributionorrateofreturn.
Andlastly,ifhehasalowerwithdrawalrate thatwoulddramaticallyincreasehislump
sumfigureneededatday1ofretirement.
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So! Withallofthissaid,yourtakeawaywithallofthisisthatyoushouldbeabletowrite
yourownstory!
TakeRobertsexampleandyoucansafelyuseitasamodelforyourown. Iwanttorepeat
forprobablythe10th timethatthisisallaVERYsimplemethodoffiguringyourneeds. Its
betterthan
nothing
but
it
may
not
include
everything.
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Asalastreminder, rememberthatyoumayneedtoadjusteitheryourcollegeorretirement
costsbyfiguringforothersourcesofincomethatmayhelpreduceyouroutofpocket
needs.