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The financial planning process for retirement
1. Review your savings and investments
2. Estimate your retirement income
3. Calculate your replacement ratio
4. Estimate your expenses
5. Anticipate the effect of inflation
6. Use professionals wisely
3-month T-bill
Treasury bill annual returns (1996-2005)
5.2% 5.2% 5.1%
4.7%
6.0%
4.1%
1.7%
1.2%1.4%
3.2%
0%
1%
2%
3%
4%
5%
6%
7%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
CitiCorp Corporate Bond Index
Long-term bond annual returns (1996-2005)
2.5%
5.6%
8.7%9.4%
10.9%
9.3%8.6%
-1.6%
3.3%
10.2%
-3%
-1%
1%
3%
5%
7%
9%
11%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
S&P 500 Index
Common stock annual returns (1996-2005)
4.9%
10.9%
28.7%
-22.1%
-11.9%
21.0%
28.6%
33.4%
23.0%
-9.1%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Comparison: Annualized rates of return (1996-2005)
6.6%
9.1%
2.5%
3.6%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
T-Bills Stocks Bonds Inflation
High-grade convertibles
High-grade preferred stock
Balancedmutual funds
Insured bank accounts
Treasurysecurities
EE and HHbonds
Certificatesof deposit
High-grademunicipal bonds
High-gradecorporate bonds
Money market funds
Blue chip stocks Growth mutual funds
Speculative stocks
Collectibles
Futures contracts
Real estateinvestment properties
Puts andcalls
Limited partnerships
Incr
easi
ng R
isk
/ Pot
entia
l Ret
urns
Investments: Risk/reward pyramid
Step two
Estimate your retirement income Your City Pension DROP (statement and DROP calculator) Social Security Deferred Compensation (monthly statements) Savings and investments Employment
Step three
Calculate your replacement ratio
A = Gross income in year before retirement Minus:
Taxes Work-related expenses Savings and investments
This is your net pre-retirement income Add taxes in retirement
B= Gross income in first year of retirement
Replacement ratio = B / A
Step four
Estimate your expenses
How do you spend your money currently?
Which expenses are likely to decrease in retirement?
Which expenses are likely to increase in retirement?
Step five
Anticipate the effect of inflation
Which expenses will be most affected by inflation?
How can you use a nest egg to overcome the impact of inflation?
Step six
Use professionals wisely
Which type of expert do you need?
How do you locate candidates?
How do you determine their competence?
How much can you expect to pay them?