Planning for long term and short term
financial goals
John Davies, Ch E. retired

Why do I have to plan and manage for my
financial future?
Student loans repayment
 Save for emergencies
 Long term financial independence


Consolidate your loans.

Federal student loans
 www.loanconsolidation.ed.gov
 Save 0.25% with automatic loan payments from bank
account

Private student loans
 Search the web for consolidation opportunities
 Banks
 Credit Unions

Some advisors suggest having two savings
accounts for emergencies

One for periodic expenses
 Insurance payments
 Automobile repairs
 Medical deductibles

One for emergencies




Loss of a job
Death of a spouse
Major repairs to a home
This fund should be equal to 6 to 12 times monthly
expenses


Save for the time you no longer can or want to
work
Save for a down payment on a house




How will your salary change over your
working career?
What will be your annual expenses when you
retire?
How many years do you need to plan for living
in retirement?
How much savings will be required to provide
your retirement?
Summary of Discounting Factors
Equation
Description
End of Period Cash Flow
Discrete Discounting
End of Period Cash Flow,
Continuous Discounting
Continuous or Uniform
Cash Flow, Continuous
Discounting
Single Payment, Present
Worth
Single Payment,
Compound Amount
Uniform Series, Present
Worth
(1+i)-n
e-r n
(1+i)n
er n
(1  i)n  1
i(1  i)n
er n  1
1  e r n
or
e r n (e r  1)
er  1
er n  1
1  e -r n
or
r
re r n
To Find
P
Given
F
F
P
P
A
A
P
Uniform Series, Capital
Recovery
i(1 i)n
(1  i)n  1
er  1
e r n (e r  1)
or
1  e -r n
er n  1
r
re r n
or
rn
1  e r n
e 1
F
A
Uniform Series,
Compound Amount
A
F
Uniform Series, Sinking
Fund
(1  i)n  1
i
i
(1  i)n  1
er n  1
r
r
er n  1
P
G
Gradient Series, Present
Worth
[1 - (1  ni)(1  i)-n ]
i2
A
G
(1  i)  (1  ni )
i[(1  i)n  1]
P
A1, j or c, ij or rc
Gradient Series
Conversion to Uniform
Series
Geometric Series,
Present Worth
er n  1
er  1
er  1
er n  1
e r n  1  n(e r  1)
e r n (e r  1) 2
1
n
 rn
r
e  1 e 1
P
A1, j or c, i=j or r=c
1  (1  j)n (1  i) n
i j
n
(1  i)
1  e ( c  r )n
er  ec
n
er
e (r c )n 1
1  e (c-r)n
or
r c
(r  c )e (r c )n
n
F
A1, j or c, ij or rc
(1  i)n  (1  j)n
i j
n-1
n(1+i)
er n  ec n
er  ec
ner(n-1)
er n  ec n
r -c
rn
ne
F
Geometric Series,
Future Worth
n


e rn  1  n e r  1
re rn e r  1
1
n
 rn
r
e  1 e 1


A1, j or c, i=j or r=c
P = Present Worth, F = Future Worth, A = annual amount, A1 = annual amount 1st year of geometric series, G = gradient amount, i = discount or interest rate, r = continuous discount or interest rate,
j = discrete compounding geometric growth rate, c = continuous compounding geometric growth rate Relationship of i to r and j to c: ieffective = er – 1 and jeffective = ec – 1
r = ln(1 + ieffective) and c = ln(1 + jeffective)



Assume starting salary of $60K/year.
Long term average salary increases including
promotions/job changes equal 5 to 8%
What will your annual salary be in 35 years?

Use single payment compound amount formula:
 𝐹𝑆 = 𝑆𝑆(1 + 𝑖)𝑛
 𝐹𝑆 = 60000(1 + 5%)35

$331,000 to $887,100
TABLE 3 — Section 1(c) — Unmarried Individuals (other than Surviving
Spouses and Heads of Households)
If Taxable Income Is:
The Tax Is:
Not over $8,925
10% of the taxable income
Over $8,925 but not over $36,250
$892.50 plus 15% of the excess over
$8,925
Over $36,250 but not over $87,850
$4,991.25 plus 25% of the excess over
$36,250
Over $87,850 but not over $183,250
$17,891.25 plus 28% of the excess over
$87,850
Over $183,250 but not over $398,350
$44,603.25 plus 33% of the excess over
$183,250
Over $398,350 but not over $400,000
$115,586.25 plus 35% of the excess over
$398,350
Over $400,000
$116,163.75 plus 39.6% of the excess
over $400,000
TABLE 1 — Section 1(a) — Married Individuals Filing Joint Returns and
Surviving Spouses
If Taxable Income Is:
The Tax Is:
Not over $17,850
10% of the taxable income
Over $17,850 but not over $72,500
$1,785 plus 15% of the excess over
$17,850
Over $72,500 but not over $146,400
$9,982.50 plus 25% of the excess over
$72,500
Over $146,400 but not over $223,050
$28,457.50 plus 28% of the excess over
$146,400
Over $223,050 but not over $398,350
$49,919.50 plus 33% of the excess over
$223,050
Over $398,350 but not over $450,000
$107,768.50 plus 35% of the excess over
$398,350
Over $450,000
$125,846 plus 39.6% of the excess over
$450,000
2013 Federal Tax Tables for Taxable Income
Single Tax Payer
Marginal
Tax Rate
10%
15%
25%
28%
33%
35%
39.6%
Taxable
Income
Minimum
0
>$8,925
>$36,250
>$87,850
>$183,250
>$398,350
>$400,000
Married Tax Payers
Taxable
Effective Taxable Taxable
Income
Tax Rate Income Income
Maximum
Range Minimum Maximum
$8,925
0 to 10%
0 $17,850
$36,250
10 to 14% >$17,850 $72,500
$87,850 14% to 20% >$72,500 $146,400
$183,250 20% to 24% >$146,400 $223,050
$398,350 24% to 29% >$223,050 $398,350
$400,000
29% >$398,350 $450,000
>29% >$450,000
Effective
Tax Rate
Range
0 to 10%
10 to 14%
14 to 19%
19 to 22%
22 to 27%
27 to 28%
>28%



Assume you adopt a savings plan of always
saving 15 to 30% of your annual salary.
Assume you pay an average tax rate of 35%
(includes state, federal and payroll taxes)
First year after tax and after savings spendable
income
$21,000 -- $30,000
Spendable income at end of working life
$115,900 -- $443,600





Life expectancy 85 years
Career length 35 years
Age now 22
28 years in retirement
Plan for 30




Assume living expenses in first year of
retirement will be 80% of expenses prior to
retirement
Assume living expenses increase 3% per year
Assume investments earn 5% per year
throughout career and during retirement.
Assume retirement funds will be taxed at 25%

Based on our assumptions of 80% of your
spendable income the last year you worked
and a 25% tax rate:

𝐴1 =

𝐴1 =


𝑘%∗𝑆𝐼
1−𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
80%∗115900
1−25%
= 123600
The range of A1 values we have been
considering
$123,600 -- $473,200

Calculate the savings value required at the end
of career to fund years after retirement by
using the geometric series present worth
equations

Two equations—
 If interest rate not equal to rate of increase in expenses:
𝑃𝑊 =
1− 1+𝑗 𝑛 1+𝑖 −𝑛
𝐴1
𝑖−𝑗
 If interest rate equals rate of increase in expenses: 𝑃𝑊 =
𝐴1
𝑛
1+𝑖




Expected withdrawal first year = 123600
Interest rate on investment = 5%
Expected increase in withdrawals each year = 3%
Number of years of withdrawals = 30
1− 1+𝑗 𝑛 1+𝑖 −𝑛
 𝑃𝑊 = 𝐴1
=
𝑖−𝑗
1− 1+3% 30 1+5% −30
123600
5%−3%


Range of PW values
$2,709,200 -- $10,372,200
= 2709200


Use the geometric series future worth formula
to calculate the first year savings
Two equations—

If interest rate on savings not equal to growth rate of
savings:
1+𝑖 𝑛− 1+𝑗 𝑛
𝐹𝑊 = 𝐴1
𝑖−𝑗

If interest rate on savings equals growth rate of
savings:
𝐹𝑊 = 𝐴1 𝑛 1 + 𝑖 𝑛−1
FW required $2,709,200 to $10,372,200
Assumptions for working career:
 35 year career
 Interest rate earned on savings = 5%
 Amount saved each year increases at same rate
as salary increases =5%

𝐹𝑊 = 𝐴1 𝑛 1 + 𝑖 𝑛−1
30−1
 2709200 = 𝐴1 35 1 + 5%
 Solve for A1: A1 = $14,700
FW required $2,709,200 to $10,372,200
Range of initial savings to achieve the FW
required:
$14,700 --$33,600
What if you delay saving by 5 years
Range of first year of savings:
$21,900--$54,200
How much do you need saved at
Retirement?
First Year Salary, $/yr
60,000
60,000
60,000
60,000
5%
5%
8%
8%
35
35
35
35
331,000
331,000
887,100
887,100
15%
30%
15%
30%
30,000
21,000
30,000
21,000
At Retirement spendable income, $
165,500
115,900
443,600
310,500
Spendable income 1st yr retirement, $
132,400
92,720
354,880
248,400
Withdrawal from savings, $
176,500
123,600
473,200
331,200
3,868,800
2,709,200
10,372,200
7,259,700
21,000
14,700
33,600
23,500
9,000
18,000
9,000
18,000
Annual Rate of Increase, %/yr
Years in workforce
Salary at End of Career
Savings rate, % of income
First Year spendable income, $
Savings Balance required at retirement, $
Necessary savings first yr of career, $
Actual Savings first yr of career, $


Make repaying loans and saving for
emergencies and long term financial health a
priority
Use automatic savings plans to take the money
out of your paycheck .

Take advantage of matching programs at your
employer




401(k) many employers match a certain percentage
of your contributions
Stock purchase plans-employers may offer stock at
discounted prices
Seek the advise of a financial planner
Make use of tax advantaged flexible spending
accounts
 Health care spending accounts
 Dependent care savings accounts
 Transportation spending accounts

401k plans typically have limited choices.




Seek investments that meet your personal risk
profile.
Work with a financial planner
Read investment magazines, newsletters,
websites for investment advise
Establish an investment account

Use other retirement savings plans if employer
doesn’t offer plans



IRA
Roth IRA
Consider using Roth IRA and/or Roth 401(k) if
available



After tax savings
Your current tax rate may be lower than your
retirement tax rate
Earnings are tax free


Review your plan and progress at least
annually
Make required adjustments