Let's talk about the retirement sneads calculation now I'm going to be doing this on my HP 10 be to financial calculator any financial calculator will work if you're planning on sitting for the CFP exam try to do this on the calculator that is allowed on that exam.
That you have practice using the calculator that you can actually use when you need to we're going to do this I've created a hypothetical here we have Jack and Jill Jack and Jill are married and they need a hundred thousand dollars in today's dollars and they explan to be retired for 30 years this hundred thousands of net of any social security benefit and any other amounts that they've got they plan to retire in 35 years and we have some assumptions that we have to build in here I recognize that if you're actually working with clients this six percent after tax return on investments inflation four percent things like that you'll want to adjust as you progress through this planet we've got 35 years some years you may not have six percent return some years you might have more some less but you have to make those adjustments they could have a child that can change jobs they could do many different things and you constantly have to adjust.
Right now. This is just the first step we're going to get a better idea of what we need to do to help Jack and Jill prepare for the retirement they want.
Here's what we're going to do we take a hundred thousand dollars at retirement income deficit and in our handy-dandy financial calculator which should be set at one period per year we're going to put 100,000 and make that our present value.
If you're looking at your calculator those top five buttons in ayr that's your interest that could be inflation or return depending on how you're doing it or even interest on a credit card present value is PV payments needs to be coming to you or you could be making them to someone else and future value.
We're going to make this calculation and given the information we have here we first put one thousand dollars in as present value they have 30 years until retirement.
30 is are in the inflation was assumed at four percent.
We have four I why now a lot of times people be tricked up on well what's the pain I need to put something in here well in this case there is no payment all we're doing right now is trying to calculate the lump sum need at the beginning of retirement we're not making payments we're not receiving payments you just want to know what amount is needed in order to pay Jack and Jill $100,000 for 30 years in retirement.
Once we get all this plugged in we simply get the FV future value button and we get our total amount. This is the income deficit in the first year retirement.
In 30 years we will need three hundred and twenty four thousand dollars 324 thousand three hundred forty dollars we're not done.
We're still trying to get that lump sum needed at the beginning we know that we need 324 334 in payment each of those 35 years that's what inflation did to us.
Now we're looking at the adjustment for inflation here that formula is 1 plus R divided by 1 plus I with are being that return that six percent return and I being inflation the four percent inflation.
To make this calculation 1 plus R 1 point 0 6 1 plus I 1 point 0 4.
One point 06 / 1 point 0 4 minus 1 then x 100 gives us a 1.9 to 31 and it is very specific remember we're going to make adjustments later but we were going to be as precise as we can with the information we've got right now.
That's our interest rate and now the trick here is to make sure that you are in begin mode we want the lumps entity at the beginning of retirement.
We need to be in begin Oh on your financial calculator on my 10 be too it is going to be shift and then the button right below FV says in y ma are but in sort of a orangie bronze beginning / end.
I can switch between beginning or end if you don't see a BGN or b EEG I n depending on the calculator you've got your not and begin mode you're an endo make sure in your begin mode and then hit that PV. This is the present value of an annuity due and here that's going to be seven million dollars and with the let me calculate that in the in modo just to show you what the difference would be seven million three hundred forty-one thousand dollars if we were in mode which would be the amount that we would need a year later.
For one year Jack and Jill would have nothing they be eating cat food for the first year of retirement when we put it in begin mode we're saying that we want them to have this money day one at retirement and that gives us the seven million four hundred $82,000 number that you see on the screen.