32,898 Without considering the random variability in growth rates, extend the wo
ID: 2651711 • Letter: 3
Question
32,898
Without considering the random variability in growth rates, extend the worksheet in Figures 16.18 to 30 years. Confirm by using the constant annual salary growth rate and the constant annual portfolio growth rate. Tom can expect to have a 30- year portfolio of $627,937. What would Toms annual investment rate have to increase to in order for his portfolio to reach a 30-year, $1,000,000 goal?
Incorporate the random variability of the annual salary growth rate and the annual portfolio growth rate into a simulation model. Assume that Tom is willing to use the annual investment rate that predicted a 30-year, $1,000,000 portfolio in part 1. Show how to simulate Toms 30-year financial plan. Use results from the simulation model to comment on the uncertainty associated with Tom reaching the 30-year, $1,000,000 goal. Discuss the advantages of repeating the simulation numerous times.
What recommendations do you have for employees with a current profile similar to Toms after seeing the impact of the uncertainty in the annual salary growth rate and the annual portfolio growth rate?
Assume that Tom is willing to consider working 35 years instead of 30 years. What is your assessment of this strategy if Toms goal is to have a portfolio worth $1,000,000?
Discuss how the financial planning model developed for Tom Gifford can be used as a template to develop a financial plan for any of the companys employees.
Finacncial Analysis- Portfolio Projection Age 25 Current Salary $34,000.00 Current Portfolio $14,500.00 Annual Salary Growth rate 5% Annual investment rate 4% Annual Portfolio Growth Rate 10% Begginning New Portfolio Ending Year age Portfolio Salary Investment Earnings Portfolio 1 25 14,500 34,000 1,360 1,518 17,378 2 26 17,378 35,700 1,428 1,809 20,615 3 27 20,615 37,485 1,499 2,136 24,251 4 28 24,251 39,359 1,574 2,504 28,329 5 29 28,329 41,327 1,653 2,91632,898
Explanation / Answer
Beginning New Portfolio Ending Year Age Portfolio Salary Investment Earnings Portfolio 1 25 14500 34000 1360 1518 17378 2 26 17378 35700 1428 1809 20615 3 27 20615 37485 1499 2136 24251 4 28 24251 39359 1574 2504 28329 5 29 28329 41327 1653 2916 32898 6 30 32898 43394 1736 3377 38010 7 31 38010 45563 1823 3892 43725 8 32 43725 47841 1914 4468 50107 9 33 50107 50233 2009 5111 57227 10 34 57227 52745 2110 5828 65165 11 35 65165 55382 2215 6627 74008 12 36 74008 58152 2326 7517 83851 13 37 83851 61059 2442 8507 94801 14 38 94801 64112 2564 9608 106973 15 39 106973 67318 2693 10832 120498 16 40 120498 70684 2827 12191 135517 17 41 135517 74218 2969 13700 152185 18 42 152185 77929 3117 15374 170677 19 43 170677 81825 3273 17231 191181 20 44 191181 85916 3437 19290 213908 21 45 213908 90212 3608 21571 239088 22 46 239088 94723 3789 24098 266975 23 47 266975 99459 3978 26896 297850 24 48 297850 104432 4177 29994 332021 25 49 332021 109653 4386 33421 369828 26 50 369828 115136 4605 37213 411647 27 51 411647 120893 4836 41406 457889 28 52 457889 126938 5078 46043 509009 29 53 509009 133284 5331 51167 565508 30 54 565508 139949 5598 56831 627937 Portfolio Earnings: 10% on Beginning Portfolio for full year plus average portfolio investment of current year in Year 1, Beginning Portfolio = 14500 and current year portfolio investment is $1360 So Portfolio growth = 14500 x 10% + 1360/2 x 10% =1450 +68 = 1518 Annual Portfolio growth rate 7.97% Beginning New Portfolio Ending Year Age Portfolio Salary Investment Earnings Portfolio 1 25 14500 34000 2710 1585 18795 2 26 18795 35700 2845 2022 23662 3 27 23662 37485 2988 2516 29166 4 28 29166 39359 3137 3073 35376 5 29 35376 41327 3294 3702 42372 6 30 42372 43394 3458 4410 50241 7 31 50241 45563 3631 5206 59078 8 32 59078 47841 3813 6098 68989 9 33 68989 50233 4004 7099 80092 10 34 80092 52745 4204 8219 92515 11 35 92515 55382 4414 9472 106401 12 36 106401 58152 4635 10872 121907 13 37 121907 61059 4866 12434 139208 14 38 139208 64112 5110 14176 158494 15 39 158494 67318 5365 16118 179977 16 40 179977 70684 5633 18279 203889 17 41 203889 74218 5915 20685 230489 18 42 230489 77929 6211 23359 260060 19 43 260060 81825 6521 26332 292913 20 44 292913 85916 6848 29634 329394 21 45 329394 90212 7190 33299 369883 22 46 369883 94723 7549 37366 414799 23 47 414799 99459 7927 41876 464602 24 48 464602 104432 8323 46876 519801 25 49 519801 109653 8739 52417 580958 26 50 580958 115136 9176 58555 648689 27 51 648689 120893 9635 65351 723674 28 52 723674 126938 10117 72873 806665 29 53 806665 133284 10623 81198 898485 30 54 898485 139949 11154 90406 1000045 Annual Investment must increase from 4% to 7.97% in orn 30 yearsder to have 1,000,000 1 Uncertainity involved in the annual investment rate expected to increase from 4% to 7.97%, that is almost double. 2 Uncertainity also involved in the growth rate of his salary and growth rate of the Portfolio. Recommendation: Increase Number of Years portfolio. Try to invest the the portfolio amount in more profitable ways so to give portfolio return more than 10% Annual Portfolio growth rate 3.67% Beginning New Portfolio Ending Year Age Portfolio Salary Investment Earnings Portfolio 1 25 14500 34000 1249 1512 17262 2 26 17262 35700 1312 1792 20365 3 27 20365 37485 1377 2105 23848 4 28 23848 39359 1446 2457 27752 5 29 27752 41327 1519 2851 32121 6 30 32121 43394 1594 3292 37008 7 31 37008 45563 1674 3784 42466 8 32 42466 47841 1758 4335 48559 9 33 48559 50233 1846 4948 55353 10 34 55353 52745 1938 5632 62923 11 35 62923 55382 2035 6394 71352 12 36 71352 58152 2137 7242 80731 13 37 80731 61059 2244 8185 91160 14 38 91160 64112 2356 9234 102749 15 39 102749 67318 2474 10399 115621 16 40 115621 70684 2597 11692 129911 17 41 129911 74218 2727 13127 145765 18 42 145765 77929 2863 14720 163349 19 43 163349 81825 3007 16485 182840 20 44 182840 85916 3157 18442 204439 21 45 204439 90212 3315 20610 228364 22 46 228364 94723 3481 23010 254855 23 47 254855 99459 3655 25668 284178 24 48 284178 104432 3837 28610 316625 25 49 316625 109653 4029 31864 352518 26 50 352518 115136 4231 35463 392212 27 51 392212 120893 4442 39443 436097 28 52 436097 126938 4664 43843 484604 29 53 484604 133284 4898 48705 538207 30 54 538207 139949 5142 54078 597427 31 55 597427 146946 5400 60013 662840 32 56 662840 154293 5670 66567 735077 33 57 735077 162008 5953 73805 814835 34 58 814835 170108 6251 81796 902882 35 59 902882 178614 6563 90616 1000061 Because of increase of time of service life by 5 years his target amount 1 million can be attain only with the 3.67% instead of 4%. This reduces the risk.
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