Case Problem 1

1. Without considering the random variability in growth rates, extend the worksheet in Figure 16.18 to 30 years. Confirm that by using the constant annual salary growth rate and the constant annual portfolio growth rate, Tom can expect to have a 30-year portfolio of $627,937. What would Toms annual investment rate have to increase to in order for his portfolio to reach a 30-year, $1,000,000 goal?

2. Incorporate the random variability of the annual salary growth rate and the annual portfolio growth rate into a simulation model. Assume that Tom is willing to use the annual investment rate that predicted a 30-year, $1,000,000 portfolio in part 1. Show how to simulate Toms 30-year financial plan. Use results from the simula to comment on the uncer tainty associated with Tom reaching the 30-year, $1,000,000 goal. Discuss the advantages of repeating the simulation numerous times.

3. What recommendations do you have for employees with a current profile similar to Toms after seeing the impact of the uncertainty in the annual salary growth rate andthe annual portfolio growth rate?

4. Assume that Tom is willing to consider working 35 years instead of 30 years. What is your assessment of this strategy if Toms goal is to have a portfolio worth $1,000,000?

5. Discuss how the financial planning model developed for Tom Gifford can be used as a template to develop a financial plan for any of the companys employees.tion model