Retirement planning has become a lucrative part of the financial planning career. In 2012 there were over $19 trillion in retirement assets. This can all be attributed the baby boomers reaching retirement age. A financial planner should be well versed in retirement planning.
There are many different sources for retirement income: social security, private/company retirement plans, personal retirement plans, and personal savings. Social security makes up 37% of all retirement income. With the uncertainty of social security it is important to have a retirement plan that will generate sufficient capital to maintain the current lifestyle.
Planning for retirement is one of the most important decisions a person can make. Making that decision early on will be most beneficial. The earlier a person starts saving, the more the power of compound interest will work in their favor. Beginning retirement early will reduce the amount of necessary contributions. For example, a person that begins saving for retirement at 25 to 35 will only have to contribute 10-13% of their income while a person who choses to begin saving for retirement at 35 to 45 will need to contribute 13-20%.
What I found most informative this week was the process of calculating the amount of investment assets needed for retirement. This is called capital needs analysis and is the base of all retirement calculations. There are different methods such as the annuity method, the capital preservation model, and the purchasing power preservation model.
A new concept that I learned is the wage replacement ratio (WRR). The WRR is an estimation of the percentage of income earned prior to retirement that will be necessary to maintain that lifestyle during retirement. The two methods to calculate the WRR are the top down approach and the bottom up approach. The top down approach uses percentages while the bottom up approach uses the pre-retirement expenses.
There are many different sources for retirement income: social security, private/company retirement plans, personal retirement plans, and personal savings. Social security makes up 37% of all retirement income. With the uncertainty of social security it is important to have a retirement plan that will generate sufficient capital to maintain the current lifestyle.
Planning for retirement is one of the most important decisions a person can make. Making that decision early on will be most beneficial. The earlier a person starts saving, the more the power of compound interest will work in their favor. Beginning retirement early will reduce the amount of necessary contributions. For example, a person that begins saving for retirement at 25 to 35 will only have to contribute 10-13% of their income while a person who choses to begin saving for retirement at 35 to 45 will need to contribute 13-20%.
What I found most informative this week was the process of calculating the amount of investment assets needed for retirement. This is called capital needs analysis and is the base of all retirement calculations. There are different methods such as the annuity method, the capital preservation model, and the purchasing power preservation model.
A new concept that I learned is the wage replacement ratio (WRR). The WRR is an estimation of the percentage of income earned prior to retirement that will be necessary to maintain that lifestyle during retirement. The two methods to calculate the WRR are the top down approach and the bottom up approach. The top down approach uses percentages while the bottom up approach uses the pre-retirement expenses.