Retirement Planning Types of Retirement Research Paper

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To get a reasonable return on a corporate these days, one must sacrifice investment quality, at which point it makes more sense to purchase a higher-quality equity.

With respect to asset classes among equities, diversification is the most important objective. With that in mind, all three categories should be represented. Historically, the large caps are the most reliable of the three asset classes, with the lowest risk. These are companies with large markets and they operate in the U.S. so there is little information asymmetry with respect to these stocks. Since the other two classes are higher-risk, they should carry with them a premium. It is worth remembering, however, that most U.S. large caps have a lot of exposure to foreign markets. Rather than investing in a Chinese company you know nothing about to get access to China's growth, you would do just as well to invest in Starbucks or Wal-Mart, both of whom have tied much of their growth plans in the next few years on China. It is also worth noting that it is easier to invest in foreign stocks that have ADRs in the U.S., or in mutual funds, as this reduces the information asymmetry.

Given that reality of globalization in U.S. large caps, and the information asymmetry, not to mention foreign exchange rate exposure, the focus of the portfolio should be on U.S. stocks. Thus, a recommended allocation should be 50% large cap, 30% small cap and 20% foreign stocks. This is an aggressive asset allocation, but working with a fifty-year time horizon an aggressive allocation can be made. The risk is high for an all-equity plan, but the time horizon has historically been large enough that an average growth rate will be achieved.

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It would require the United States to enter a sustained period of economic catastrophe for this portfolio not to experience growth. It is worth remembering that during such a period interest rates on debt will be rock bottom as well, offering little or no gain in nominal terms, much less real.

This asset allocation delivers high growth potential. If we assume 7% as an average annual return for this portfolio, the initial investment only needs to be $20,560, with no subsequent investments. If an initial investment of $2,000 is assumed, with additional deposits into the account of 5% more per year, then the portfolio only needs to earn 4.8%, which is well within the range of what an equity portfolio can expect to earn. This is, of course, a nominal return. The portfolio needs to accommodate around 2% inflation per year for a real return. Thus, if the portfolio proposed earns 7% nominal, that is 5% real, which is enough to just break the $1,100,000 mark in future dollars.

There should also be contingencies. First and foremost, the plan should have greater contributions than the ones assumed above. The client will be able to afford larger contributions during peak working years, and therefore will have a larger portfolio. Certainly, the portfolio will be tracked regularly. It is also worth remembering that as we get closer to retirement, the portfolio will begin to shift to lower-risk securities, so the higher levels of deposits will also account for this shift, and the corresponding lower returns that such a shift will bring about. The portfolio allocation should shift when the account gets with 15 years of retirement, and by 5 years to retirement the fund should already have its $1.1.....

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