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What will your portfolio be worth in 10 years? In 20 years? When you stop working? The Human Resources Department at Tri-State Corporation was asked to develop a financial planning model that would help employees address these questions. Tom Gifford was asked to lead this effort and decided to begin by developing a financial plan for himself. Tom has a degree in business and, at the age of 25, is making $34,000 per year. After two years of contributions to his companyâ€™s retirement program and the receipt of a small inheritance, Tom has accumulated a portfolio valued at $14,500. Tom plans to work 30 more years and hopes to accumulate a portfolio valued at $1,000,000. Can he do it?

FIGURE

FINANCIAL PLANNING WORKSHEET FOR TOM GIFFORD

Managerial Report

Play the role of Tom Gifford and develop a simulation model for financial planning. Write a report for Tomâ€™s boss and, at a minimum, include the following:

1. Without considering the random variability in growth rates, extend the worksheet in Figure to 30 years. Confirm that 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 Tomâ€™s annual investment rate have to increase to in order for his portfolio to reach a 30-year, $1,000,000 goal?

2. 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 Tomâ€™s 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.

3. What recommendations do you have for employees with a current profile similar to Tomâ€™s after seeing the impact of the uncertainty in the annual salary growth rate and the annual portfolio growth rate?

4. Assume that Tom is willing to consider working 35 years instead of 30 years. What is your assessment of this strategy if Tomâ€™s goal is to have a portfolio worth $1,000,000?

5. 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 companyâ€™s employees.

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