PORTFOLIO ASSESSMENT

Portfolio Assessment

Portfolio Assessment

Introduction

The retirement plan is the process of funds allocation in the reasonable and profitable securities so that profits could be yielded over a fixed time period and a certain level of money is accumulated up till the time of retirement. The primary agenda for saving funds for retirement is to accomplish a certain level of monetary funds so that the requirement of employment becomes an option rather than a basic need (McGrattan, E. R., and Prescott, E. C., 2011, p. 1-34).

Portfolio Investment

The primary concern of retirement is related to saving and investment, however, it is also very much important that what element makes up your investment. The funds set aside for retirement are always invested in form of a portfolio. Portfolio investment is referred to as investment practice in diversified range of financial assets such as stocks, bonds, money market instruments, mutual funds, etc. (Sornarajah, M., 2010, p. 8).

Calculation

In order to calculate the retirement income of the main earner in my case, the required information for answering this question is given below:

The current age of main income earner is 55 years old

The age at which the main income earner would like to retire is 60 years old.

The annual income they would like to have in retirement is $ 720,000 per year.

The expected number of years of retirement is 87 years.

The average rate of return on investment is 8% per years as investor is risk averse.

This information can be used to calculate the annual savings during the working years of the main income earner required to finance the desired retirement income by using the Formula for future value, which is as follow:

FV = PV(1 + i)^n

Where, FV= Future Value, PV = the original principal amount, i = Interest rate per year, n = the number of compounding periods

FV = 720,000 (1+ .08)*(1+ .08)*(1+ .08)*(1+ .08)*(1+ .08)

FV = $1057916.215

OR

FV = 720,000 (1+.08) ^5

= $ 1057916.215

i.e. |_____|______|______|______|______|

0        1         2         345

As per formula of FV from Time Value of money, $ 1057916.215 is the amount that the main earner of my family can save within five years from retirement at the given rate of return of 8% and an annual income of $ 720,000. Based on this data, we can calculate the annual savings during the working years of the main income earned by using the formula for PMT i.e. principal amount, which is given below:

PMT = (I (PV (I+1)^n + FV)) / ((i + 1)^n -1)

Where, FV= Future Value, PV = the original principal amount, i = Interest rate per year, n = the number of compounding periods

PMT = (.08 (720,000 (.08+1)^82)) / ((.08+1)^82 - 1)

PMT = $ 57858.85

i.e. |_____|______|______|______|______|

0        1         2         345

(McGraw-Hill, 2007, n.d.)

Risks associated to Retirement Plan

There are many risks associated to retirement portfolio as the entire investment is made in financial markets therefore; some of the biggest threats that could lead to decoration of the returns and annual savings of the retirement portfolio are as follow:

Inflation

Every one in developing and developed countries is exposed to most basic economical risk of ...