EGR 403 Introduction to Retirement Planning

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EGR 403 Introduction to Retirement Planning

• Part I - Basic Approach
• Part II - Determine Total Capital to Invest
• Part III - Saving Strategy
• Part IV - Investment Strategy

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presentation
Dr. Phillip R. Rosenkrantz IME Department, Cal
Poly Pomona
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Part III - Saving

• Estimate pension income and, if necessary, adjust
  your total assets needed.
• Estimate your rate of return for investments.
• Determine your annual savings goals needed to
  accumulate your target asset amount. Use
  gradients to balance out your savings plan.
• Play with the numbers until you are happy with
  the plan.

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Pension Plans

• Pension plans can be a very important part of
  your retirement plan.
• Plans are typically based on four things
• Your age at retirement
• Length of service to the company
• Your final salary level
• Surviving spouse options

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Pension Plan Basics - 1

• The older you are when you retire, the higher
  your monthly pension. This is because your life
  expectancy is shorter.
• Rule of thumb You will receive 2 of your final
  salary level for each year of service.
• 55 years old with 30 years of service 60
• 65 years old with 20 years of service 40

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Pension Plan Basics - 2

• Many companies points system where age plus
  years of service must be greater than or equal to
  85.
• Some organizations have a minimum retirement age
  with provisions for special early retirement that
  are not always favorable.
• General Motors 60, (55 years for special early)
• CSU 50 years min 5 years of service

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CSU Retirement Plan 2 at 55Benefit Highest
salary x from table
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Adjusting Total Investment Income Needed

• Suppose you need 130,000 you live on at
  retirement
• Suppose you estimate your salary at retirement to
  be 100,000/year and you have worked there 20
  years.
• Est. pension is 2 x 100,000 40,000
• Adjusted amount needed from investments is
  130,000 - 40,000 90,000

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Adjusting Total Investment Assets Needed

• Using the previous example for return on
  investment assets, your revised total investment
  assets needed would be
• For 5 return 90,000 / 0.05 1,800,000
• For 9 return 90,000 / 0.09 1,000,000

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Estimate Savings Goals - 1

• Determine your target investment return during
  your working years. This is a target number over
  your investing lifetime
• 8 or lower Not too difficult
• 8 - 12 Very possible
• 12 or higher Risky and not likely
• The higher returns involve more risk and study.
  If you are not going to be an active investor,
  use a lower return.

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Estimate Savings Goals - 2

• Now you can estimate savings needed
• A first estimate can be made by calculating the
  uniform series of savings needed to generate the
  target investment amount at a reasonable rate of
  return
• Example using 9, 20 years, and target assets of
  1,000,000.
• Annual savings 1,000,000 (A/F, 9, 20)
  1,000,000 (0.0195) 19,500/year or 1625/month

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Estimate Savings Goals - 3

• Using this initial calculation, you can play with
  the numbers and develop a plan that is realistic
• Examples
• Same but using 12 (13,900/yr or 1158/mo)
• 10, 25 years (10,200/yr or 850/mo)
• 10, 30 years (6080/yr or 507/mo)
• Use gradients to make plan more realistic