: In current dollars, estimate the amount of money needed each year to live on in retirement, and then calculate the lump sum present value using a real interest rate.

oUse PVA for this calculation

on = the amount of years you will be alive in retirement

oFor your interest rate, use an r that you think you will be earning on your investments after inflation during the retirement years (e.g., a real interest rate)

you can use whatever you think is best - just explain why you picked the r you did

e.g., you can use 2% to be ultra-conservative (and place the burden of saving more capital on yourself), or 3% to estimate the average of all financial investments, or 7% because you want to invest in stocks, etc.

Remember, you are estimating a real interest rate.If you pick 7% as your real r, then you will need to earn approximately 10-12% nominal r on your investments.

Step 3: In current dollars, estimate the amount of Social Security payments received each year as retirement income.Calculate a lump sum present value of these SS payments using the real interest rate.

oUse PVA for this calculation

oThe SS website reports monthly numbers - make sure you account for this in your calculations

the easiest way is to multiply the estimated benefit by 12 and use that number as your FV

on = the amount of years you will be alive in retirement

oUse the same r you used in Step 2

If you want to include Social Security, estimates can be found at http://www.socialsecurity.gov/OACT/quickcalc/index.htmlor from your most recent earnings benefit statement sent to you from the SSA.If you use the calculator, when asked, pick that your estimated benefit will be reported in today's dollars. If you are using SS, you must get a number from one of these places.You cannot $100,000use an example number reported in the class notes.

If you do not want to include SS payments in your plan, put 0.

Please note: Social Security is the name of a government program, so it is a proper noun and must be capitalized to maximize your grammar points.

Step 4: In current dollars, estimate the amount of other annual pension payments received from Defined Benefit pension plans as retirement income and calculate the lump sum present value.

oUse PVA for this calculation

on = the amount of years you will be alive in retirement

oUse the same r you used in Step 2

oOnly include numbers in this step if you currently work for a company that offers a DB pension, or if you plan on being a teacher, government worker, railroad worker, in the military, etc.

Find out what the current formula for DBs are for the company you want to work for, and include that as your estimate.Otherwise, put 0 for this step.

Step 5: Calculate the future value of assets which you own today that will be cashed in and added to the retirement nest egg at retirement.

Include the current value of any assets, including Defined Contribution pension plans, here.Assets which you may want to include are your home, rental property, and/or stock portfolio. Calculate the future value using a calculated real interest rate.

oUse FV for this calculation

You need a separate FV calculation for every asset you are planning to cash in at retirement.For example, if you have a 401(k) and a stock portfolio, you will need two FVs, one for the 401(k) and one for the portfolio.

on = the number of years until you retire

or should be a real interest rate based on the nominal interest rate you are currently earning on your investment.For example, if you have a 401(k) and it has been averaging a nominal return of 8% for the past 3 years, use the real interest rate formula to calculate the real rate of return to use in your FV for the 401(k).

Do not tell me here that you will have a stock portfolio at retirement worth X amount if you do not already have a stock portfolio worth X amount.This step is only for assets that you currently have.

Only include the value of your home in this step if you plan on selling your home at retirement and using the money to live on.

If you do not have any assets currently, put 0 for this step.

Step 6: Calculate your financial retirement gap as Step 6 = Step 2 - Step 3 - Step 4 - Step 5.

oThis step tells you if you need to save any more for retirement, or if you will generate enough income from SS, DBs, and the current value of your assets.If your answer for this step is 0 or <0, you can stop because you will have enough income; you will not need to complete the next two steps.

oTo recap, Step 2 is the total amount of money you need invested the day you retire, Step 3 is the income you will be receiving from SS, Step 4 is the income you will be receiving from DBs, and Step 5 is the value of your assets.

oIf you do not have enough income from SS and/or pensions and/or assets to meet your retirement needs, you have a financial retirement gap and must invest more on your own.

Step 7:Calculate the additional amount to save for retirement.

oUse FVA if you are currently contributing on a regular basis to a 401(k), Roth IRA, or stock portfolio.

Use a real interest rate based on the nominal interest rate you are currently earning, and n = the number of years until you retire

After your FVA calculation, subtract the answer from the answer to Step 6, and if you have a positive number, use PVP to determine the additional amount to invest

oIf you are not currently investing for retirement, use PVP on the answer from Step 6.

n = the number of working years until you retire

r = the real interest rate you think you will earn on your investments from now until the day you retire

oDo not include any investments here with an FVA if you are not currently making any investments.However, you may discuss how your PVP answer is X, and you would like to invest that money in XYZ.

Step 8:Calculate your retirement savings ratio.Add up the amount you are personally contributing to retirement on a regular basis (assets in Step 5 and the answer of Step 7), and divide that by your "current" income.Then, assuming your income rises with the average inflation rate, your retirement savings will also rise at the rate of inflation, maintaining the required standard of living.

oFor "current income" you may use the income you estimate you will be making when you begin to invest for retirement.In fact, you probably want to use a post-graduation number here or else your plan may not be considered realistic for the purposes of this project.

For example, if you calculate in Step 7 that you need to invest $7,000 a year for retirement, and you are currently making $10,000, do not use $10,000 in Step 8, because that is clearly not realistic.Instead, estimate your post-graduation income and use that number here.