section 1 - The American College Online Learning Center

5. Inflation(2) The expense method becomes more viable after age 50.(3) Budget method provides slightly more accurate assumption.a. Look to determine a long-term inflation rate (3.5–4 percent can be used).b. Think about it as a “raise” each year of retirement that is needed to coverretirement costs.c. Some software programs allow for different inflation rates for different typesof expenses.6. How does a retirement calculator work?a. Conduct a financial inventory.(1) Social Security estimates(2) Retirement plan summary plan descriptions(3) Other sources of income (personal savings, etc.)b. Compare what the client has to what they need.(1) Identify retirement income shortfall(2) Find the retirement needc. Figure out what assets are not inflation protected. For example, Social Security isinflation protected, but defined-benefit plan retirement benefits are not inflationprotected.d. We need to pick a retirement age and figure out how much we need to save eachyear until retirement to meet all of our retirement income needs.e. Living on interest only in retirement and not spending down assets is veryexpensive, requiring the individual to save a tremendous amount more to fundthe same type of retirement lifestyle.LO 2-3-2: Identify tools and approaches to making an evaluation offinancial preparedness for retirement1. After evaluating a client’s retirement income needs and evaluating retirement resources,the next step is to make a preliminary determination of whether they will be able to meettheir goals. (Video: Identify tools and approaches to making an evaluation of financialpreparedness for retirement: Littell, McLellan, Lemoine)a. The first step may be simply using past experience to eyeball the client’s situationand “back of the envelope” simple calculations to identify whether the client willhave a chance of meeting his/her goals.(1) The advisor can begin to get a feel for what types of software tools will benecessary and appropriate for this specific situation.(2) However, many clients have never done an actual calculation to determinetheir retirement preparedness.b. Do-it-yourself tools(1) Online calculators are one way to get a ballpark estimate, but they arelimited tools that do not allow much customizing for unique situations.(2) Very few clients are capable of using these tools to calculate theirretirement readiness.2.17