Retirement Planning

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Why Retirement Planning Starts Now

Key idea

The sooner you save/invest, the more compounding works for you (time value of money).

First rule of retirement investing

Diversification.
As retirement approaches, rebalance toward safer investments to protect against large losses.

Retirement Planning Is Your Responsibility

What retirement changes

Income shifts from wages to:
- employer-based retirement benefits,
- personal savings/investments,
- Social Security (or similar system),
- possibly part-time work.

Modern reality

Many employer plans are voluntary; contribution and investment risk sit with the employee.
Bottom line: you are responsible for meeting your retirement needs.

Income replacement guideline

Many planners estimate you need about 80–100% of pre-retirement gross income (including Social Security) to maintain lifestyle.
Others may accept 60–70% depending on desired lifestyle.

How it’s funded

Wage earners pay a payroll tax each paycheck (often capped for the Social Security portion).
Self-employed individuals pay both “sides” of the payroll tax (lecture emphasis).

Estimating Your Retirement Savings Goal (Nest Egg)

Retirement nest egg

Total accumulated savings/investments needed to support retirement lifestyle.

High-level steps (worksheet logic)

Estimate annual income needed in retirement (today’s dollars).
Estimate annual income from Social Security + pensions (today’s dollars).
Compute annual shortfall that must come from your savings/investments.
Convert annual shortfall into a lump sum needed at retirement (PV of an annuity).
Subtract the future value of current retirement savings.
Convert remaining gap into required annual (or monthly) saving.

Illustration (Erik Example Logic)

Given (lecture story):

Current salary: $50,000
Retirement income goal: 70% → $35,000/year (today’s dollars)
Social Security: $13,200/year
Pension: $5,800/year
Social Security + pension = $19,000/year
Additional needed = $16,000/year (today’s dollars)

Nest egg math (lecture results):

Needed at retirement for the shortfall: $238,040 (using assumption of returns 3% above inflation and 20 years of income need)
Current retirement savings: $37,000
Future value of current savings at 3% over 27 years: $82,188
Remaining nest egg needed: 238,040 – 82,188 = 155,852
Required annual saving to reach $155,852 in 27 years at 3%: $3,828/year
If already saving $2,000/year in 401(k), additional needed: $1,828/year (~$153/month)

Employer Plans and Advice

Employer-sponsored plans

Often offered to recruit/retain employees.
Participation tends to be higher at larger firms (lecture observation).

Using advice

Some plans offer one-on-one advice or managed allocations for a fee.
Good advice considers total household retirement assets, not just one account.

Living in Retirement Without Running Out of Money

The 3 drivers of “how long will my money last?”

Nest egg size
Rate of return earned
Amount withdrawn each year

Withdrawal calculation (PV annuity idea)

If you want a nest egg PV to last t years at return r, annual withdrawal PMT is:

PMT = PV ÷ PVA factor(r, t)

Lecture example:

PV = 250,000; r = 6%
- 20 years: PVA factor = 11.4699 → PMT = 250,000 ÷ 11.4699 = 21,796 (~$1,816/month)
- 30 years: factor = 13.7648 → PMT = 18,162 (~$1,513/month)

Annuities (Lecture Idea)

What it does

Exchange a lump sum (part of nest egg) for a promise of regular payments, often for life.
Insurance company manages funds and sends monthly distributions per contract.

Key Terms & Definitions

Term	Definition
Retirement nest egg	Total savings/investments needed at retirement
Income replacement rate	% of pre-retirement income needed in retirement
Rebalancing	Adjusting portfolio mix (often safer as retirement nears)
Withdrawal plan	Systematic withdrawals from retirement assets
Annuity	Contract exchanging lump sum for scheduled payments

Exam Tips

✅ Retirement planning is mostly time value of money + budgeting logic.
✅ Know the income replacement rule of thumb (80–100%).
✅ Be able to explain the three factors that determine how long money lasts.
✅ Be comfortable using annuity ideas to compute savings or withdrawals.

Practice Problems

Problem 1: Income shortfall

You want $48,000/year in retirement (today’s dollars). Social Security + pension is $30,000/year.
Find: shortfall.

Solution: 48,000 – 30,000 = 18,000 per year.

Problem 2: Withdrawal amount (given factor)

Nest egg is $400,000. If the PVA factor is 12.5, what annual withdrawal does this support?
Solution: 400,000 ÷ 12.5 = 32,000 per year.