Retirement Planning Cash Flow Analysis Review

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Retirement PlanningCash Flow Analysis Review
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Inflation Adjusted Return
Inflation Adjusted Return IAR
((1i)/(1g))-1 IAR Approximation IAR i - g
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Funds Needed at Retirement(Liquidating Principal)
TL Equation 23-1 PV PMT(1i)((1-((1g)/(1i
))n)/(i-g)) Excel TVM Equation PV
-PV(IAR,n,PMT,,1) HP12C Calculator BEG, n n,
i IAR, PMT PMT, FV 0, PV gt PV
where PV Funds need to cover deficit at
retirement PMT Retirement-Income Deficit -- 1st
Yr n retirement period in years i interest
rate g inflation rate IAR Inflation Adjusted
Rate
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Funds Needed at Retirement(Liquidating
Principal)Example
Bob and Mary want to maintain their current
lifestyle over a 30-year retirement period. They
are currently spending 52,009 per year, but
they expect they will be spending 60,000 per
year when they retire in 5 years. During
retirement, they expect inflation will be 3.3
per year, and their investment rate of return
will be 6.5 per year. How much money will they
need when they retire to fund their retirement?
They plan on spending all of the money.
HP12C Calculator IAR 1.065 E 1.033 / 1 - 100 x
gt 3.0978 BEG, n 30, i 3.0978, PMT 60000,
FV 0 PV gt 1,197,272
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Funds Needed at Retirement(Without Liquidating
Principal)
TL Equation 23-2 PV PMT (PMT(1g)/(i-g)) Ex
cel TVM Equation PV (-PV((i-g),999,PMT(1g),,)
/(1g)) PMT HP12C Calculator Solve for PV of
payments beginning at end of year 1. END, n
999, i IAR, PMT PMT(1g), FV 0, PV gt
PV1 Adjust for ordinary annuity error. PV2 PV1
/ (1g) Add in payment at the beginning of year
1. PV PV2 PMT
where PV Funds need to cover deficit at
retirement PMT Retirement-Income Deficit -- 1st
Yr n retirement period in years i interest
rate g inflation rate IAR Inflation Adjusted
Rate
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Funds Needed at Retirement(Without Liquidating
Principal)Example
Bob and Mary want to maintain their current
lifestyle over a 30-year retirement period. They
are currently spending 52,009 per year, but
they expect they will be spending 60,000 per
year when they retire in 5 years. During
retirement, they expect inflation will be 3.3
per year, and their investment rate of return
will be 6.5 per year. How much money will they
need when they retire to fund their retirement?
They only want to spend the investment return --
not the principal.
HP12C Calculator Solve for PV of payments
beginning at end of year 1. END, n 999, i
3.0978, PMT 600001.033, FV 0, PV gt
2,000,775 Adjust for ordinary annuity error. PV2
2,000,775 / 1.033 1,936,859 Add in payment
at the beginning of year 1. PV 1,936,859
60000 1,996,859
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Funds Needed for Inflation Insurance(Liquidating
Principal)
TL Equation 23-3 PV PMT(1i)((1-((1g)/(1i))
n)/(i-g)) - PMT(1i)((1-(1/(1i))n)/i) Excel
TVM Equation -(PV(IAR,n,PMT,,1) -
PV(i,n,PMT,,1)) HP12C Calculator Solve for the
PV of an inflation protected payment BEG, n n,
i IAR, PMT PMT, FV 0, PV gt PV1 Solve for
the PV of a payment without inflation
protection BEG, n n, i IAR, PMT PMT, FV
0, PV gt PV2 Solve for the present value of the
inflation protection PV PV1 - PV2
Where PMT Income w/o inflation protection PV
Amount needed to cover deficit n Retirement
Period in Years i Return on Investments g
Savings growth rate. IAR Inflation Adjusted Rate
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Funds Needed for Inflation Insurance(Liquidating
Principal)Example
Bob and Mary expect to receive a fixed pension of
35,000 per year when they retire. During
retirement, they expect inflation to be 3.3,
their investment rate of return to be 6.5, and
their joint life expectancy to be 30 years. How
much money will they need to cover the pensions
decline in purchasing power? They expect to
spend all of the money.
HP12C Calculator Solve for the PV of an
inflation protected payment BEG, n 30, i
3.0978, PMT 35000, FV 0, PV1 gt
698,409 Solve for the PV of a payment without
inflation protection BEG, n 30, i 6.5, PMT
35000, FV 0, PV2 gt 486,762 Solve for the
present value of the inflation protection PV
698,409 - 486,762 211,647
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Funds Needed for Inflation Insurance(Without
Liquidating Principal)
TL Equation 23-4 PV PMT(1((1g)/(i-g))) -
PMT(1i)(1/i) Excel TVM Equation PV
-((PV(IAR,999,PMT,,1)PMT) - (PV(i,999,PMT,,1)PMT
)) HP12C Calculator Solve for the
non-liquidating PV of an inflation protected
payment BEG, n 999, i IAR, PMT PMT, FV 0,
PV gt PV1 PV2 PV1 PMT Solve for the
non-liquidating PV of a payment that doesn't have
inflation protection BEG, n 999, i i, PMT
PMT, FV 0, PV gt PV3 PV4 PV3 PMT, Solve
for the non-liquidating present value of the
inflation protection PV PV2 - PV4
Where PMT Income w/o inflation protection PV
Amount needed to cover deficit n Retirement
Period in Years i Return on Investments g
Savings growth rate. IAR Inflation Adjusted Rate
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Funds Needed for Inflation Insurance(Without
Liquidating Principal)Example
Bob and Mary expect to receive a fixed pension of
35,000 per year when they retire. During
retirement, they expect inflation to be 3.3,
their investment rate of return to be 6.5, and
their joint life expectancy to be 30 years. How
much money will they need to cover the pensions
decline in purchasing power? They only want to
spend the investment return -- not the principal.
HP12C Calculator Solve for the non-liquidating
PV of an inflation protected payment BEG, n
999, i 3.0978, PMT 35000, FV 0, PV1 gt
1,164,834 PV2 1,164,834 35,000
1,199,834 Solve for the non-liquidating PV of a
payment without inflation protection BEG, n
999, i 6.5, PMT 35000, FV 0, PV3 gt
573,462 PV4 573,462 35000 608,461 Solve
for the non-liquidating present value of the
inflation protection PV 1,199,834 - 608,461
591,372
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Retirement Value of Fixed Periodic Contribution
Excel TVM Equation -FV(i,n,PMT,,) HP12C
Calculator END, n n, i i, PMT PMT, PV 0,
FV gt ?
Where PMT Income w/o inflation protection PV
Amount needed to cover deficit n Retirement
Period in Years i Return on Investments
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Retirement Value of Fixed Periodic
ContributionExample
Bob and Mary plan on setting aside 10,000 a year
for the next 5 years. If their investment rate
of return is be 8.5 per year. How much money
will they have accumulated at the end of the
5-year period?
HP12C Calculator END, n 5, i 8.5, PMT
-10,000, PV 0, FV gt 59,254
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Retirement Value of Increasing Periodic
Contribution
Excel TVM Equation FV(i,n,,(PV(IAR,n,PMT,,0)/(1
g))) HP12C Calculator Solve for the PV of fixed
payment END, n n, i IAR, PMT PMT, PV 0,
PV gt PV1 Adjust for calculation error PV2
PV1 / (1g) Solve for FV of Lump-Sum
Amount END, n n, i i, PMT 0, PV PV2, FV
gt ?
Where PMT Income w/o inflation protection PV
Amount needed to cover deficit n Retirement
Period in Years i Return on Investments g
Savings growth rate. IAR Inflation Adjusted Rate
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Retirement Value of Increasing Periodic
ContributionExample
Bob and Mary plan on building a retirement fund
over the next 5 years. They want to set aside
10,000 this year and the increase that amount by
5 for each of the next 4 years. If their
investment rate of return is be 8.5 per year.
How much money will they have accumulated at the
end of the 5-year period?
HP12C Calculator Solve for the PV of fixed
payment END, n 5, i 3.33, PMT 10000, FV
0, PV gt 45,364 Adjust for calculation
error PV2 45,364 / (1.05) 43,204 Solve for
FV of Lump-Sum Amount END, n 5, i 8.5, PMT
0, PV 43204, FV gt 64,964
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Level annual funding
TL Equation 23-5 PMT FV/(((((1i)n)-1)/i)(1
i) Excel TVM Equation PMT -PMT(i,n,0,FV,1) H
P12C Calculator END, n n, i i, PV 0, FV
FV, PMT gt PMT
Where PMT Level Annual Funding FV Target
Amount n Years until Retirement i Return on
Investments
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Level annual fundingExample
Bob and Mary have determined that they need
650,000 at retirement to fund their retirement.
How much money do they need to set aside each
year to achieve that goal if they they have 20
years until they retire and they expect their
investment rate of return to be 8.5.
HP12C Calculator END, n 20, i 8.5, PV 0,
FV 650000, PMT gt 13,436
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Stepped-Up Annual Funding I (Based on Real
Future Value of Need)
TL Equation 23-6 PMT (FV(i-g))/((1-((1g)/(1i
))n)((1i)(n))) Excel TVM Equation PMT
PMT(IAR,n,0,PV(g,n,0,FV,0),0)(1g) HP12C
Calculator Calculate the real future value of
the target amount discounting the nominal future
value by the inflation rate. END, i g, n n,
PMT 0, FV FV, PV gt PV1 Calculate the first
serial payment amount. END, i IAR, n n, PV
0, FV PV1, PMT gt PMT PMT PMT (1g)
Where PMT Stepped-up Annual Funding FV
Target Amount n Years until Retirement i
Return on Investments g Savings growth
rate. IAR Inflation Adjusted Rate
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Stepped-Up Annual Funding I Example
Bob and Mary have determined that they need
650,000 at retirement to fund their retirement.
They want to use a stepped-up (5 per year)
annual funding approach to save this money. How
much money do they need to set aside this year if
they they have 20 years until they retire and
they expect their investment rate of return to be
8.5 per year.
HP12C Calculator Calculate the present value of
the target amount discounting by the growth
rate. END, i 5, n 20, PMT 0, FV 650000,
PV gt 244,978 Calculate the first serial payment
amount. END, i 3.33, n 20, PV 0, FV
244978, PMT gt 8,812 PMT 8,812 1.05 9.253
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Stepped-Up Annual Funding II(Based on Present
Value of Need)
TL Equation 23-6 PMT (FV(i-g))/((1-((1g)/(1i
))n)((1i)(n))) Excel TVM Equation PMT
PMT(IAR,n,PV(i,n,0,FV,0),0,0)(1g) HP12C
Calculator Calculate the present value of the
target amount discounting by the return on
investment rate. END, i i, n n, PMT 0, FV
FV, PV gt PV1 Calculate the first serial payment
amount. END, i IAR, n n, PV PV1, FV 0,
PMT gt PMT PMT PMT (1g)
Where PMT Stepped-up Annual Funding FV
Target Amount n Years until Retirement i
Return on Investments g Savings growth
rate. IAR Inflation Adjusted Rate
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Stepped-Up Annual Funding II Example
Bob and Mary have determined that they need
650,000 at retirement to fund their retirement.
They want to use a stepped-up (5 per year)
annual funding approach to save this money. How
much money do they need to set aside this year if
they they have 20 years until they retire and
they expect their investment rate of return to be
8.5 per year.
HP12C Calculator Calculate the present value of
the target amount discounting by the return on
investment rate. END, i 8.5, n 20, PMT 0,
FV 650000, PV gt 127,150 Calculate the first
serial payment amount. END, i 3.33, n 20, PV
127150, FV 0, PMT gt 8,812 PMT 8,812
1.05 9.253