slides_lesson 18 slides

7/28/2019 Slides_Lesson 18 Slides

1/28

WelcometoLesson 18oftheFundamentalsofPersonalFinancialPlanning. Thislesson

maybeadoozy!Butitalsomaybethemostvaluableinthesenseofcalculatingyour

retirementneeds.


2/28

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.


3/28

Idebated foraverylongtimeonbalancemakingthislessoneasybutstillvaluable. I

decidedtotakeabitofaleapandwillbeteachingsomevaluablestuff.

Thewebsitelistedontheslideshouldprovideaveryturnkeycalculatorthatyoucanuse

forcomplicatedcalculations.Youllneedtouseyourstandardcalculatorstoforsimple

calculations.


4/28

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.


5/28

ForthosethatarefamiliarwiththeHP12canditsReverse PolishNotation,youwillonly

need touseitforn,I,pv,pmt,andfv. Nothingelse.

Again,ifyouhaventusedthiscalculatorbefore,thisisnotthedaytostart.


6/28

Ok! Sotheprevious lessonscoveredthebackgroundonhowtoarriveatthesenumbers.

Inthislesson,wewillbefiguringouthowtousethesenumbers.


7/28

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.


8/28

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.


9/28

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.


10/28

Insteadofreviewingall thetechnicalaspects,Ithinkthebestwaytolearnthiswouldbeto

gothroughanexample andworktheexampletoananswer. Wellgostepbystepsothat

youshouldbeabletowriteyourownsituationasanexampleandreplaceyournumbers

withthisexamplesnumbers.


11/28

So, wefirstmustfigureoutthedistributionmodescenario.

Steponeistoinflatetodayscoststothefuture.


12/28

When inflatingtheannualcost,youshouldhavegottenanumberaround$31,588.15

Thisisjustwhatthelastyearcosts. LikeIsaidbefore,wechoosetheLASTyearsinceits

moreexpensivethanthefirstyear. Itbuffersinalltheinflationoverthe4years.


13/28

Collegeplanningisasimple project theresonly4yearstoplanfor.

Ifwetakethatannualcostandmultiplyitby4,thenwecansafelyplanfor4years.

LikeImentionedbefore,wearefiguringfortheLASTyearinsteadofthefirstyear.

Therefore,multiplying

by

4should

give

us

more

than

enough

money

for

college

since

the

lastyearshouldbealmost2030%higherthanthe1st year.


14/28

Ok. Sowehave figuredoutthatweneed$126,352in13years. Thenextquestionis how

doweaccumulatethatmuchmoney?

Whatdoweknow? (Seeslides)


15/28

So,wegobackto ourcalculatorandusetheseasourinputsandwesolvetofigureouthow

muchweneedtosaveonanannualbasisinordertohave$126,352in13years.

Thisassumesthatwestartwithnothing. Thisalsoassumeswesaveastaticpaymentand

earnastaticreturn. Again,thisisaverysimplewayoflookingatthings.


16/28

Didyouresolve thatMary&Steveneedtosave$5,878peryear?

Ifso,youdidthatcorrectly.


17/28

IfthepreviousstepsdidNOTmakesense,pleasetakeamomentandrewind,andreview

them. Try toseethelogicbehindeachstep.


18/28

LikeIsaidbefore,noticethedifferencebetweenthetwophases. Youneedto gotothe

futurefirst,understandwhatitlookslike,andthenfigureouthowtogettoDay1ofthe

future.


19/28

Retirement isnotmuchdifferent. Youremerelyusingdifferentnumbersanddifferenttime

horizons.

Insteadofmultiplyingbythenumberofyearsofcollege,retirementhasamuchlargertime

horizon. Oneverysimplewaytofigureoutyourneedsistocalculatetheamountneeded

tobe

generated

from

your

investments

and

then

figure

out

alump

sum

that

can

provide

thattoyou usingawithdrawalrate.


20/28

Seethisexample.

2


21/28

Referencing thewordproblem,theseshouldbetheinputsyouextrapolatefromthetext.

2


22/28

Using a$82,713.57neededincome,youwouldneedtoreferenceRobertswithdrawalrate

andbackintothelumpsumRobertneeds.

2


23/28

Next, letsaskthequestion howmuchdoesRobertneedtosaveeachandeveryyear?

2


24/28

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.

2


25/28

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


26/28

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.

2


27/28

So! Withallofthissaid,yourtakeawaywithallofthisisthatyoushouldbeabletowrite

yourownstory!

TakeRobertsexampleandyoucansafelyuseitasamodelforyourown. Iwanttorepeat

forprobablythe10th timethatthisisallaVERYsimplemethodoffiguringyourneeds. Its

betterthan

nothing

but

it

may

not

include

everything.

2


28/28

Asalastreminder, rememberthatyoumayneedtoadjusteitheryourcollegeorretirement

costsbyfiguringforothersourcesofincomethatmayhelpreduceyouroutofpocket

needs.

slides_lesson 18 slides

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