Financial Focus: Retirement Planning Success — from today to tomorrow (Part 1)

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Professor Anthony Rivieccio MBA PFA

This semester I am teaching a group of students about Retirement Planning. My own definition, in short, is to say; You would like to live tomorrow ( the future) like you do today, but without work income.

A bit sadly, this class is more of a ” Retirement Employee Benefits” class. So, they are learning the ” Retirement Products & Services”, employees can use on the job. They are also learning about ” Retirement products” outside of their job.

While of course products are important, it doesn’t in full detail the “number crunching” involved in how to answer true retirement questions, like a simple example: “How much do I have to save for my Retirement? And for how long? And at what interest rate? I am “carving out” a piece of the syllabus to talk about this piece of retirement planning.

Now I have to remember not to give them too much information . Yesterday’s formulas have now been converted into a zillion software and cloud based retirement calculator or planning programs. I must admit , most of them are good, which makes teaching yesterday’s formulas a bit difficult. But I would add that if one knows how to understand the variables and math regarding ” The Annuity Method”, one can at least start a founding of understand at what they’ll need to get to their own ” retirement tomorrow’s”, today.

So what is the Annuity Method?

Well, in theory it is composed of many variables in your life and it is a 4 part number crunching process.

Let’s start with the variables first!

The variables need to determine are :
Today’s Salary
Social security in today’s dollars
Work Life Expectancy ( how much longer do you plan on working)
Inflation, today & tomorrow’s
Retirement Life Expectancy ( how long you plan to live in Retirement)
Interest rate of Savings, today & tomorrow

Based on these variables you can number crunch into what is called ” The Annuity method”. This method relates to the time value of money. This approach is designed to determine the amount of money that must be accumulated at Retirement and the amount of money that needs to be saved each year until retirement

Step one is to determine the amount, in today’s dollars , that a person will need when they retire.
So to determine the funding amount in today’s dollars you need the following variables. These variables will help you determine the ” annual amount needed”

  • Today’s Salary
  • Social Security, in today’s dollars

Step two determines the needs in future dollars for the first year of retirement. We must Inflate the needs to the 1st year of Retirement The variables needed for this purpose would be:

  • Retirement needs today
  • Work life expectancy
  • Inflation

Step three calculates the amount of money that needs to be accumulated at Retirement age. To determine the needs at retirement age we need:

  • 1st year Retirement need
  • Retirement Life Expectancy

Step four calculates the amount of money needed to be saved each year to accumulate the funds determined. To determine the annual savings, we need as variables :

  • Amount needed at Retirement age
  • Work life expectancy.
  • Savings rate
  • inflation rate

So now that we understand the variables above, what is the math ( or the sugar bowl) we will use to stir the ” eggs” into the ” pot” and be prepared to ” cook”.

Join us for an example, part 2 , next week.

Professor Anthony Rivieccio, MBA PFA, is the founder and CEO of The Financial Advisors Group, celebrating its 24th year as a fee-only financial planning firm specializing in solving one’s financial problems.

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