Chapter 10: Financial Calculations

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4 Terms

1
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What are the steps for calculating education expenses?

  1. Inflating the Cost of Education Today

    • Solve for FV

    • PMT = 0


  2. Inflation-Adjusting

    • Solve for PV

    • FV = 0

    • I/Y = 100*((1 + RoR / 1 + Inflation Rate)-1)

    • PMT = FV calculation from Step 1

    • N = Number of years/months/quarters of college


  1. Investing

    • Solve for PV or PMT

    • I/Y = RoR

    • FV = PV from Step 2



Note: Steps 1 and 2 are calculated in BGN Mode, and Step 3 is typically calculated in End Mode.

2
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How do you calculate the Capital Utilization Retirement Funding Method?

  1. Inflate the current income need to determine the required first-year retirement income using the assumed inflation rate and years until retirement.

  2. Calculate the total capital needed at retirement by determining the present value of the future income stream, using an inflation-adjusted return rate and accounting for continued inflation throughout retirement. This step assumes the account will be depleted (reach zero) by the end of the expected retirement period.

  3. If needed, calculate the required periodic savings by determining how much must be invested regularly to accumulate the needed retirement capital, factoring in assumed investment returns and any existing savings.


Basically the same as above


3
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How do you calculate the Capital Preservation Retirement Funding Method?

  1. Inflate the current income need to determine the required first-year retirement income using the assumed inflation rate and years until retirement.

  2. Calculate the total capital needed at retirement by determining the present value of the future income stream, using an inflation-adjusted return rate and accounting for continued inflation throughout retirement. This step assumes the account will be depleted (reach zero) by the end of the expected retirement period.

  3. Calculate an additional lump sum that needs to be invested on day 1 of retirement, which will grow into the value solved for in step 2 by the end of the client's life expectancy.


4
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Are mortgages calculated in beginning or end mode?

Remember: Mortgages are always in END mode because mortgages are paid in arrears!