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A nest egg refers to the substantial amount of money or assets that an individual saves or investment for retirement. While these assets are marked for the long-term objectives, their maturity is mainly determined by the retirement age in one's country. For example, the current full benefit age for retirement is 66 years in America. To build a retirement nest egg, it is important to understand the quality of life one would like to lead and the cost of such lifestyles in future costs. It is also important to take into consideration economic changes such as inflation a how the inflation would affect the value of the currency and the cost of living. According to Cheremushkin (2012), good retirement savings should be adequate to guarantee the individual the quality of life he is living now or better when he finally retires.
Those within the age of 55 and 60 have a median a nest egg valued at $148,000 and this is equal to an annuity $310 inflation-protected annuity. Most Americans retirements may not have retirement savings such as 401 (k) plans or IRA (individual retirement accounts). Never the less, having defined benefits in plan such as the traditional pension is advisable. The nest egg does not take into consideration the fact that the retiree may not benefit from social security to provide their incomes. To have an adequate retirement nest egg, it is important to start saving early. For example, in this case, the client would start saving in the late 20s especially at 27 years of age (Borisov and Panin, 1997). The main goal s to contribute to the IRA or the employer-sponsored 401 (k) as these are the only contributing that prove the saver with tax-deferred earnings as well as benefits from the compounded savings
Approximated retirement nest egg
For the client a $5.1milion saving would be adequate considering the fact that the client would retire at 65 years of age and live another 30 years as the life expectancy in America is currently 80 years. The individual would use the $5.1 million over the next thirty years assuming the client would live to reach 95 years of age, is frugal and has no debts (Kramer, 2001). The client would need at least $5,174,529 for him to retire at 67 years of age assuming that he is currently 25 years of age and would retire at6 67 years of age while his annual household income is estimated at $100,000. Additionally, assuming that the client's current retirement savings is estimated at $100,000 while the client expects that the income would increase by 2% and he still expected to earn 90% of his income at retirement (VanDerhei, 2015). The life expectancy indicates that the client would live for 30 years after retirement. The model assumes that the investment retunes, inflation as well as social security would include 7% pre-retirement and only 4% in retirements while the inflation would be 2.9%
For the customer to have assets valued at $5,174,529, it is first important to ensure that the savings are allocated in such a way that the client would reach the desired savings plans. For example, the client has three options to choose from including stocks, bonds and cash. Without being too conservative or too ambitious with future earnings, a Monte Carlo simulations (Leobacher, 2006)
Apportioning the Retirement Nestegg
Fixed income securities (Treasury bonds)
The treasury bonds such as the government bonds refer to the government issued bonds in the client's currency (Chatterjee, 2008). The government issued bonds represented the safest bonds as the government is likely to issue more bonds to accommodate for the changes in the bond principles and interest payment.
The other investment is the mortgage-backed bonds or securities, the mortgage-backed securities are advisable for the client because he is still young and can experiment with various investment. To diversify further, the mortgage-backed security is advisable because the Principe amount would be paid down every month and there is no predetermined value that can be redeemed at a scheduled maturity date. The mortgage-backed security is also advisable because mortgage-backed securities pay both interest and part of the principle on a regular monthly basis. The client can re-invest the principle in the current interest rate environment.
Leveraging one's incomes
The first goal is to save a portion of incomes for future use. It is important to get out of debt that derails or consumer's the investor's funds. Secondly, the emergency fund would also be built. Paying the smaller debts and developing adequate momentum to pay off the larger debts can help in eradicating one's debt. For example, credit cards should be eliminated as their monthly payment can eat into the individual's retirement nest egg. The car loans or other loans that are likely to eat into the individual's salary and income should also be avoided on eliminated as a whole. Finally, the student loans should also be eliminated by paying it off or entering into an agreement with the payer. The second step is to have in place emergency funds from which unexpected expenses and debt obligations can be discharged. Eliminating the debt would free up the individual's budget for future savings.
For the nest egg, 15% of the individual's gross income would be saved towards retirements. For the sake of this client, the company provides a match on the 401 (k) contributions and so the individual would invest up to the company matching in the 401 (k). The remaining percentages would be invested in the Roth IRA (DiLellio and Ostrov, 2016). To diversify their investment portfolio, the individual would also invest good growth stock mutual funds (Plank, 2011). The compound growth can earn the investors a lot of money. Growth stock mutual fund can be one the market average but an investment in a compounded growth stock can earn an investor much more money. Therefore the individual has to start saving early.
Investing in the Aa1 bonds by the AA+ is also advisable for long-term investment. For example, AA+ or Aa1 ratings by the moody's and standard and poor (S&P) are advisable because of their creditworthiness. These bonds are of high grade and high quality. The bonds also have a strong capacity to pay due to low risk of default. Selling a share of any growth investment can help one lock in gains when the market is high when an individual is between the age of 25 years to 45 years and buying the conservative investment when the market is undergoing a decline. Never the, less, it is important to note that irrespective of the investment; the investor is still exposed to growth investment risks.
A retirement nest egg is only good if it's stable. Depending on the risk profile of an individual, the general affordability of the person as well as the investment objectives, one can choose to invest in a well-thought-out diversified portfolio to effectively grow the retirement nest egg. One can diversify investment portfolio by investing in bonds, units trust, and shares. Diversifying the portfolio can cushion an individual from sudden significant losses in case one or two of the investments fail. The second lesson is that long-term investment objectives are also important since the client is still young and it would take him a long time to build up adequate profits and overcome any economic downturn. To save and generate an adequate amount of money that can cover one's retirement needs need patience and creativity.
Borisov, N. and Panin, M. (1997). Adjoint Importance Monte Carlo Simulation for Gamma Ray Deep Penetration Problem. Monte Carlo Methods and Applications, 3(3).
Cheremushkin, S. (2012). Looking into the Black Box of Firm Valuation: A Monte-Carlo Simulation Model for Assessing the Riskiness of Debt and Tax Savings. SSRN Electronic Journal, 11(123).
Kramer, P. (2001). A Review of Some Monte Carlo Simulation Methods for Turbulent Systems. Monte Carlo Methods and Applications, 7(3-4).
Leobacher, G. (2006). Stratified sampling and quasi-Monte Carlo simulation of Levy processes. Monte Carlo Methods and Applications, 12(3).
VanDerhei, J. (2015). Retirement Savings Shortfalls. The Journal of Retirement.
Plank, K. (2011). Diversification Potential of Structured Securities. The Journal of Fixed Income, p.110309233227055.
DiLellio, J. and Ostrov, D. (2016). Optimal Strategies for Traditional versus Roth IRA/401(k) Consumption During Retirement. Decision Sciences, 48(2), pp.356-384.
Chatterjee, D. (2008). Fixed Income Securities - Bonds. SSRN Electronic Journal, 21(11).
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