Thursday, April 17, 2008

Asset Allocation & Diversification within Assets - example using Retirement Plan

Here we are again, at the example of my retirement plan. As stated in an earlier post, this thing consist of 3 Parts.

Part 1 - The amount required per year during retirement to cover expenses
1. Take your current expenses / expected retirement expenses in current value of $ and calculate the pre-tax amount of $ needed.
Pre-tax amount of $ = the amount of gross salary / profits needed before the government gets their cut

2. Take the pre-tax amount of $ needed and calculate the future value of pre-tax amount of $ needed.
"Future value" = factoring in inflation, ie. $1 today can buy much more than $1 in 20 years time.

Part 2 - The asset allocation of my investments DURING retirement to generate Part 1 AND the total amount of $ needed for retirement investment
This is where I allocate my investment $ into asset classes which I'm familiar with and their respective average returns per annum.

Part 3 - The asset allocation of my investments to GENERATE Part 2's total amount of $ needed for retirement investment.
As per part 2 - asset allocation. Please note that this Excel sheet leverages on another sheet that extrapolates my EPF + EPF invested in Mutual Funds returns.

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