Excel Finance Class 33: Full Life Retirement Plan PV Annuity & FV Annuity PV & PMT FunctionsIntroduction
Welcome to Excel in Finance video clip number 33. In this lesson, we’ll explore Chapter 5, specifically annuity cash flows, focusing on retirement planning. Our goal is to determine how much we need to save each month for a full retirement where we aim to have $3,000 a month available for living expenses.
Estimates and Assumptions
It’s important to note that all the numbers discussed are estimates. We can’t predict with certainty whether we’ll achieve a 6% return in retirement or a 10% return during our working years. However, these estimates are based on historical averages and can serve as a reasonable starting point for our retirement planning.
Future Cash Flows and Present Value
To begin our retirement planning, we need to calculate the present value of future cash flows. These cash flows represent the $3,000 we want to receive each month during our retirement years. The present value calculation helps us determine how much we should have saved by the time we retire.
Excel Functions for Present Value
We’ll utilize Excel functions to perform the present value calculation. In our previous video, we discussed how to use these functions. Here, we apply them to find the present value of future positive cash flows, taking into account the time periods and interest rates.
Consideration of Time
The time period is a significant factor in retirement planning. Starting early allows us to contribute smaller amounts in the beginning and more substantial sums as we approach retirement. We’ll explore how different timeframes can impact our savings requirements.
Total Contributions and Withdrawals
We’ll calculate the total contributions made during our working years and the total withdrawals during retirement. Understanding these figures will show the difference between our savings and the interest earned over time.
Leaving an Inheritance
If you wanted to leave your children $80,000, you could simply input that amount into the calculations. However, we won’t consider this scenario here. For this analysis, we’ll assume that there is no need for an inheritance.
Present Value of Future Cash Flows
When calculating the present value of future cash flows, we consider whether this is an end or average annuity. In this case, we’ll treat it as an average annuity, which means we can leave out a step in our calculations. To meet our goal of having $3,000 per month in retirement, we would need approximately $500,000 saved up when we retire.
Changing the Perspective
Let’s shift our perspective a bit. Rather than focusing on the present value, we can treat our desired retirement savings as the future value we want to achieve. By reversing this perspective, we can calculate how much we need to save each month during our working years to reach our retirement goal.
Excel Functions for Future Value
To calculate the required monthly savings, we’ll use Excel functions for future value, specifically the PMT function. We need to determine the monthly contribution required to reach our retirement savings goal.
Impact of Time
Time plays a crucial role in our savings plan. Starting early allows us to contribute smaller amounts initially and gradually increase our savings as we approach retirement. The longer the time horizon, the less we need to save each month.
Total Contributions and Withdrawals
Calculating the total contributions and withdrawals over the course of our working years and retirement helps us understand the difference between our savings and the interest earned over time. The total contributions represent the amount we paid in during our working years, while the withdrawals indicate how much we receive during retirement.
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