Question

1. Create a retirement portfolio, assuming that you are 25 years old today and will retire at age 60.

2. You are allowed to make other realistic assumptions required to determine the amount at retirement, including your income levels and your savings potential.

3. You are required to show the glide path of the portfolio between age 45 and 60.

4. Your primary report should be a one-page word document and accompanied by supporting workings in an excel sheet.

5. Your excel sheet should also contain the portfolio composition between age 45 and 60.

6. This assignment is only to determine your retirement portfolio. So, you please do not show calculations for other intermediate goals including buying a house or funding child's education.

Answer 1

Facts given in the question:

• Retirement Portfolio to be prepared
• Present Age 25 years
• Retirement Age 60 years
• Change of strategy from the age of 46
• There is no intermediate goals

Assumption:
-- Steady investment of USD 60000 per annum with reinvestment of income till the age of 25 to 60

The goal in the allocation of investment assets is to get good return on money invested while managing the risk.

There is always one or another kind of risk in investments, e.g. share market has risk of fall or melt down like 2008 and 2020 where most of the asset class declined across the board including stocks, bonds, mutual funds, real estate etc.

But keeping money in savings account or fixed deposit, has a risk of inflation surpassing the paltry interest rates and gives negative return on money over the time.

Hence, one need to do smart asset allocation by keeping relatively good returns with minimum risk.

However, as higher the risk, higher the return over a period. Risk comes with rewards but can also go wrong way, therefore, risk taking capacity (tolerance) and longativity of investment, need to be acertained before starting a portfolio of investments.

There is common formula linked to age for target allocation of investments for retirement is 100-age= %s of stocks (equity). There are different versions and variations available to this formula.

There are some aggressive young investers who allocates even 100%s of allocated investment in stocks whereas some conservative young investers uses 70:30 ratio and allocates 70% in equity funds and 30% in debt funds.

If we assume that 70% of USD 60000 annual investment for 20 years in equity stocks giving an annual average growth of 12% and 30% of USD 60000 annual investments in debt mutual funds giving a fixed return of 6%.

Future Value of these investments at the age of 45 will be as under:
FV_n= PMT [ { (1+i)ⁿ - 1 } / i ]
FV = Future Value
n=Number of years
i=Annual rate of return
FV₂₀=60000x70% [{(1+12%)²⁰ - 1} / 12% = 3376194
FV₂₀=60000x30% [{(1+6%)²⁰ - 1} / 6% = 962124

Hence, the total value of steady 60000 annual investment from the afe of 25 to 45 will become 4338318 at the age of 45 years.

If we go on conservative method, the glide path of investments from the age of 45 should be of less risk and therefore, from the age of 46 to till the age of retirement, investment should be almost opposite to aggressive investments till the age of 45. In this case I assume two things here. We can use the realisation value of investments till the age of 45 for making new strategic portfolio and annual investment of 60000 will continue. However, as a conservative approach, I will allocate 60% of funds for debt funds and 40% of funds for equity funds. Also assuming that there is no increase in Net Expense (medical and maintenance etc.) as there should be increase in income too.

Hence, the amount realised from investment portfolio at the age of 45 and annual 60000 cash accruals for investments can be re-invested as under:
60% in low risk class of assets with lower but steady returns of 6% per annum
40% in medium risk stocks with relatively high return of 10% per annum

Value of invested amount of 4338318 after 15 years at the age of 60 with a strategy to invest 40% in equity giving 10% return and 60% to invest in debt funds giving 6% return, will be 13487111 as given in below spread sheet:

Working of investment portfolio value at the age of 60:
Value available to invest at the age of 45	43,38,318
40% to be invested in equity giving 10% return	17,35,327
Age	Investment	Return @10%	Closing value
46	17,35,327	1,73,533	19,08,860
47	19,08,860	1,90,886	20,99,746
48	20,99,746	2,09,975	23,09,721
49	23,09,721	2,30,972	25,40,693
50	25,40,693	2,54,069	27,94,762
51	27,94,762	2,79,476	30,74,238
52	30,74,238	3,07,424	33,81,662
53	33,81,662	3,38,166	37,19,828
54	37,19,828	3,71,983	40,91,811
55	40,91,811	4,09,181	45,00,992
56	45,00,992	4,50,099	49,51,091
57	49,51,091	4,95,109	54,46,200
58	54,46,200	5,44,620	59,90,820
59	59,90,820	5,99,082	65,89,902
60	65,89,902	6,58,990	72,48,892
60% to be invested in equity giving 6% return	26,02,991
Age	Investment	Return @6%	Closing value
46	26,02,991	1,56,179	27,59,170
47	27,59,170	1,65,550	29,24,720
48	29,24,720	1,75,483	31,00,204
49	31,00,204	1,86,012	32,86,216
50	32,86,216	1,97,173	34,83,389
51	34,83,389	2,09,003	36,92,392
52	36,92,392	2,21,544	39,13,936
53	39,13,936	2,34,836	41,48,772
54	41,48,772	2,48,926	43,97,698
55	43,97,698	2,63,862	46,61,560
56	46,61,560	2,79,694	49,41,254
57	49,41,254	2,96,475	52,37,729
58	52,37,729	3,14,264	55,51,993
59	55,51,993	3,33,120	58,85,112
60	58,85,112	3,53,107	62,38,219
	TOTAL (A)		1,34,87,111

Now, value of annual 60000 investment with same strategy of 40% in equity funds and 60% in debt funds will be as under:

(B) FV₁₅=60000x40% [{(1+10%)¹⁵ - 1} / 10% = 762540
(C) FV₁₅=60000x60% [{(1+6%)¹⁵ - 1} / 6% = 837935

Hence the total value of portfolio with steady annual investment of 60000 from the age of 25 till the retirement age of 60 with conservative approach of investment will be 15,087,586 (Total of results (A) , (B) and (C) given above)