Save up and retire? Or make your own business as retirement plan?
Lately a couple of friends and I came across the topic of retirement in our free time. I personally don’t have any retirement plan in mind, mainly because I haven’t yet to start a career. But I stumbled upon and example in my CFA Level 1 study that makes me think: wow, people who plan their retirement are smart!
Here is the example I read. I substitute the name as Ming, ‘coz Ming is a Smart name.
Ming is planning his retirement and estimates that he’ll need $300,000 by the time he reaches the age of 65. Ming’s currently 50 years old and has found a fixed rate annuity that guarantees 8% interest for 15 years. How much should Ming invest today to meet his retirement savings goal? For this we need to calculate the present value of $300,000.
PV = 300,000 / (1+0.08)^15 = $94,572
This future value calculation gives Ming a good ballpark of how much he should be investing right now. Ming made a smart decision to invest part of the $100,000 in a fixed annuity, part in a money market account, and part in an equity vehicle like a mutual fund or equity-indexed annuity. This diversification would provide added security and give Ming a shot at beating his $300,000 mark.
Ming is one smart mature man who know how to use his money! Having worked in the Risk Management industry for a couple month now, I like how he diversify his investment, and “give a shot” at beating his goal. There is no guarantee Ming will be rich after making these smart investment decisions, he might become as poor as you and I after 15 years, but it’s a decision that he takes absolute control, and I solute him in making such decision.
…It’s funny how I get so intrigued by a text book example.
