Page 169 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes The answer to this question contains some good news and some bad news.
First, the bad news: There really is no single number that would guarantee everyone an adequate
retirement. It depends on many factors, including your desired standard of living, your expenses
(including any medical costs) and your target retirement age.
Now for the good news: It’s entirely possible to determine a reasonable number for your own
retirement needs. All it involves is answering a few questions and doing some number crunching.
Providing you plan ahead and estimate on the conservative side, it’s entirely possible for you to
accumulate a nest egg sufficient to last you through your golden years.
There are several key tasks you need to complete before you can determine what size of nest egg
you’ll need in order to fund your retirement. These include the following:

Decide the age at which you want to retire.
Decide the annual income you’ll need for your retirement years. It may be wise to estimate
on the high end for this number. Generally speaking, it’s reasonable to assume you’ll need
about 80% of your current annual salary in order to maintain your standard of living.
Add up the current market value of all your savings and investments.

Determine a realistic annualized real rate of return (net of inflation) on your investments.
Conservatively assume inflation will be 4% annually. A realistic rate of return would be
6-10%. Again, estimate on the low end to be on the safe side.

If you have a company pension plan, obtain an estimate of its value from your plan
provider.

Self Assessment

State True or False:
1. Retirement planning, in a financial context, refers to the allocation of finances for retirement.

2. Defined-benefit savings plans, which are supposed to guarantee participants a specified
monthly pension for the duration of their retirement years, actually do fail every now and
again.
3. By definition, social security programs are intended to provide a basic safety net - a bare
minimum standard of living for your pre-retirement age.
4. LTC stands for Late Transaction Cost.
5. Regardless of the challenges faced throughout your life, a secure nest egg will do wonders
for helping you cope.
9.4 Retirement Planning: Where will my Money Come From?

Now that we’ve outlined how to calculate the money you’ll need for retirement, we need to
figure our where that money will come from.

While employment income seems like the obvious answer, there are actually many sources of
funds you can potentially access to build your retirement nest egg. Once you lay them all out
clearly, you can then determine how much money you’ll need to save every month in order to
reach your retirement goals.
There are typically several sources of retirement savings for the average individual. These
include the following:

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