Financial planners may make broad assumptions when building a retirement plan for their clients. This exercise is
Question:
Financial planners may make broad assumptions when building a retirement plan for their clients. This exercise is intended to show one danger in making a blind general assumption when designing a retirement plan.
On the attached Excel worksheet, you are presented with three scenarios for a $1,000,000 portfolio where your client annually liquidates $50,000 for their retirement needs. Each portfolio has annual investment returns of 6.76% and the following portfolio volatility (as measured by standard deviation):
- A Base Portfolio - 0.0% standard deviation.
- Portfolio A and Portfolio B - 12.8% standard deviation.
Notice that Portfolio A and B have the same average annual returns and volatility (in fact, they are mirror images of each other), but have dramatically different results on your retiring client.
Critically compare these three portfolios and what accounts for the differing results. As a retirement planning consultant, what conclusions can you draw from your comparison.
Computer Organization and Design The Hardware Software Interface
ISBN: 978-0124077263
5th edition
Authors: David A. Patterson, John L. Hennessy