Wednesday 18 April 2007

What Shape is your Investment Life Cycle?

Some simple scenarios I've run on excel to illustrate various retirement situations that might arise depending on how much one saves, rate of salary increases, ROI, and % of final salary spent each year during retirement. They're only meant as rough indications of how these variables can effect the final outcome.
General assumptions used throughout:
* all figures are in today's $
* all % are real, after-tax rates eg. to get the 5% ROI you'd have to make maybe 10% gross return.
* a $40K starting salary at age 20
* starts working F/T at age 20
* works F/T until retirement at age 65
* salary increases x% pa until age 54, then remains constant
* earns 20% of age-20 salary when 18, 25% of age-20 salary when 19 (eg. casual work)
* saves y% of gross salary each year (ie. any debt repayments student loan/home loan are in addition to this)
* spends p% of final salary each year during retirement phase

The Scenarios

ROI x% y% p% Comments
A 5% 3% 10% 100% "Typical" situation. Comfortable retirement with all NW consumed by age 80.
B 5% 2% 10% 100% Lower rate of salary progression. There is actually a residual NW at age 80
in this case as final salary (and hence pension) is lower as a % of starting
salary and savings in early years were thus relatively higher.
C 5% 3% 15% 100% A "PAW" - saves 15% of gross salary. Has a high NW at age 65 so ends up with a
large residual amount at age 80. Could either leave a large estate, or could
spend more than 100% of final salary during retirement years. (see D below).
D 5% 3% 15% 150% As above, but spends 150% of final salary during the retirement phase.
E 5% 3% 20% 100% "Super Saver" - consistently socks away 20% of gross salary while working.
F 8% 3% 20% 100% High-risk, high-return (8% real ROI), super-saver. This is my model ;)
I can meet the 20% savings target and so far have met the 3% real salary rise
and 8% real ROI hurdles. This is the most uncertain model as it would need
everything to work out in order to achieve 3% real wage rises and 8% real,
after-tax ROI for the next 20 years.

Enough Wealth

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