Saving for retirement Suppose you have decided to set up a personal pension fund

Question

Saving for retirement

Suppose you have decided to set up a personal pension fund for your retirement. You just turned 25. You expect to retire at age 65 and believe it is reasonable to count on living at least 20 years after retirement. Furthermore, you wish to have an annual income of $100,000 during your retirement starting when you turn 65, and that upon receipt of the twentieth payment, the entire capital sum would have been distributed. You have been offered two investment plans by your financial adviser: (1) an

Explanation / Answer

Part A:

At the age of 65, The Present value of investment should be atleast = PV(6%,20,-100,000,0)+100,000 = 1,246,992 (Assume conservative investment after 65yrs as liquidity required and 6% in calculation)

So if investment made in aggressive portfolio, the annual payments should be =PMT(12%,40,0,-1,246,992)= 1,625

So if investment made in conservative portfolio, the annual payments should be =PMT(6%,40,0,-1,246,992)= 8,057

Part B:

Investment strategy recommended will depend on the risk appetite. Considering the long term investment horizon (40yrs), it will be recommended to invest in Aggressive portfolio as equities do well in long term

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