Students:
Here is a little file that will let you take advantage of the article I wrote on September 24th 2007. The previous article was about saving a million dollars for your retirement. This current article and the attached file lets you 'financially engineer' your million to bring you the custom return of which you're dreaming. Here is the file you will need: Financial_Engineering
What is this exactly? When you retire, you will want to make the money that you have saved over your working career generate a cash flow -- so that you have income during your retirement! The problem is one of the following: Either you'll want to maximize your investment return while meeting certain cash flow requirements and risk constraints (i.e. how much you want to make per month during your retirement); or alternatively, you'll want to minimize the risk on an investment while maintaining a certain level of investment return. This process is referred to as "Financial Engineering".
The attached Excel sheet has several constraints embedded into the "Solver Function"... and you can tweak any of the following (after you download the file) to meet your financial needs: 1. $175,799 is the amount that you saved by age 58 (This is from the September 24th article). In this model, exactly $175,799 will be the total that is invested. However, you may enter any amount that is pertinent to your retirement needs in cell C13.
2. Half of your money ($87,899.50) must be put in investments that mature in 10+ years. 3. No more than 35% of your money ($61,529.65) is placed in investments that have a rating of either "Good" or "Fair". This is a safety feature that makes sure that you don't put too much of your cash into 'risky' investments. 4. In the study of investments, risk can be avoided by having a diversified portfolio. Thus, our final constraint will ensure that no more than 25% of your total cash is invested in any one investment. So, this means that $43,949.75 is the maximum allowed to be invested in ANY ONE investment vehicle (there are 6 total). For the advanced Excel Users only: Not only can you fiddle around with the above four constraints, but you can also add or delete the number of investments (in this model there are 6 different investment vehicles). You can also change the total amount of cash that you plan to have at age 58 (this model assumes that you will have $175,799 -- however, most people will have saved much more than this amount). A bit of interpretation: The $16,147 that results (as is displayed in the attached file in cell E12) is the return you receive from the investment of exactly $175,799 (Cell C13). Don't forget, that this means your principal ($175,799) is untouched! Thus, you are receiving $16,147 per year by doing nothing at all.
To get started with the Excel file attached to this article: 1. In cells B6-B11, you can name the investments that you currently have. Of course, this is optional. 2. In cell C13, enter the 'Total Available funds' that you have invested in the six different investment vehicles (IMPORTANT: Don't enter any amounts in the green cells; Excel will optimize the green cells for you! 3. Then, click TOOLS, and then SOLVER, and then finally hit the "SOLVE" button when the "Solver Parameters dialog box" pops up. There are many variables that can be adjusted to suit your retirement dreams -- Simply download the file... and have fun!
- Professor Gary
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Gary Plourde is an independent author. He writes about Traveling, Sailing, Inventions and the Patenting process. Patent your new idea and explore an opportunity to generate revenue for your business, scholarship, study abroad, or sabbatical.
Labels: cash flow, constraints, Financial Engineering, investment return, investment risk, investments |
