17 Sep In this assignment, you will recommend a personal retirement plan for a client that you identify. Support your recommendation to the client by explaining how the plan meets the clien
In this assignment, you will recommend a personal retirement plan for a client that you identify. Support your recommendation to the client by explaining how the plan meets the client's needs and mitigates risk. In addition to the required page total, include the required appendices. Required appendices may be tables, pie charts, and/or other appropriate figures.
This week, you continue in the role of retirement planner you took on for the Week 7 assignment. You will identify a client, create a retirement plan that meets that client's needs, and recommend the plan to the client.
In a 5-6 page paper, complete the following:
- Identify a person, couple, or family for whom you are creating the plan. Describe the person, couple, or family (no name is required, but it can be you, someone else, or someone you imagine). Each of the following items is important because your recommendations must align with them:
- Include the factors that are important to know when developing a retirement plan (age, marital status, number of dependents, health, life expectancy, and other sources of income such as social security and pensions).
- Identify a desired age of retirement and retirement income (assume these were provided by the client).
- Describe the client's personal risk tolerance (assume this information was provided by the client).
- Develop a personal retirement plan that identifies required savings before retirement and planned savings and withdrawals before and after retirement. Support your explanation of this plan with the following appendices:
- Annual and monthly savings before retirement (in addition to the required page total).
- Annual and monthly withdrawals after retirement (in addition to the required page total).
- Recommend asset allocations that mitigate risk based on the client's profile, such as age, marital status, and personal risk tolerance, and based on the riskiness of the assets. Provide the following appendix to support the original and changing allocation of asset classes:
- Asset allocation over the life of the plan (in addition to the required page total).
- Use 5-6 sources to support your writing. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source page at least one time within your assignment. For help with research, writing, and citation, access the library or review library guides.
This course requires the use of Strayer Writing Standards (SWS). The library is your home for SWS assistance, including citations and formatting. Please refer to the Library site for all support. Check with your professor for any additional instructions.
The specific course learning outcome associated with this assignment is as follows:
- Create investment recommendations based on research that includes the rationale and risk mitigation for the chosen stra
Client Memo: Understand and Mitigate Risk
Professor Ingrid Nelson
August 21, 2023
Several factors at play when it comes to retirement planning significantly affect how effective the plan is. Age is a crucial factor since it affects the time horizon open to saving and investment growth (Kadoya & Khan, 2020). Younger people have the advantage of experience, which may enable them to accept greater amounts of risk in search of greater rewards.
The level of financial duties and commitments, which affects the amount that may be devoted to retirement savings, is significantly influenced by marital status and the existence of dependents. The number of dependents and the cost of providing for them are family-related issues that frequently endanger people's financial security in retirement (García Mata, 2021). The likelihood that a retiree's financial well-being may decrease in retirement increases with the number of dependents they have and the associated costs.
Other important factors include one's health and life expectancy because they determine how long retirement money must endure. A person with a longer life expectancy and good health will need a larger corpus to sustain their preferred quality of living throughout retirement. In addition, retirees' health issues have significant financial ramifications because they are likely to increase healthcare costs and reduce their capacity to work to generate extra income sources as retirees (Harlow et al., 2020).
The financial well-being of people in retirement is also correlated with their work history before retirement. In particular, people with more disrupted career paths prior to retirement have a less likelihood to receive as much pensions and social security as individuals with who are more stable career wise (e.g., changing jobs frequently; experiencing periods of unemployment), which in turn compromises their financial well-being in retirement (Záhorcová et al., 2021). This is a key explanation as to why women and people with less education typically have less money in retirement. Lower levels of education frequently restrict work prospects, whereas social gender norms that are expected of women frequently result in more rapidly changing career pathways. Additionally, being unemployed just before retirement puts retirees' financial security at risk because it is frequently more difficult for older persons to obtain employment that pays a salary equal to what they were earning before being laid off. As a result, individuals might have to use some of their funds before retiring, which puts them under financial strain after retiring.
Relationship between Risk and Return
Retirement planning heavily weighs the correlation between risk and reward. As seen in assets like stocks, the potential for greater profits frequently comes at the expense of greater risk. Because they have a longer investing horizon, younger people may afford to take on greater risk because it gives them time to recover from market downturns. In contrast, people who are getting close to retirement often choose more cautious investment strategies, such as bonds or stable assets, to protect their funds and limit potential losses.
A 30-year-old person planning for retirement might decide to invest a larger amount of their portfolio in equities, given their higher potential for long-term gain. A 55-year-old who is getting close to retirement may choose a more well-balanced portfolio to protect against significant market fluctuations. In order to balance capital preservation and growth, the risk-return trade-off is crucial in forming the investment plan.
Impact of Risk Factors on the Allocation of Assets
Risk factors inclusive of age and individual risk tolerance, significantly affect the allocation of assets during retirement. When allocating funds, a balance between capital growth and preservation is sought while taking the person's circumstances into account. A younger investor with a longer investing horizon and higher risk tolerance, for instance, would devote more of their retirement account to equities and other growth-oriented assets. This allocation tries to take advantage of the potential for higher long-term returns. Asset allocation tends to move in favor of safer investments like bonds and stable assets as investors age, and their risk tolerance may decline. A person getting close to retirement would prioritize capital preservation to ensure market turbulence doesn't significantly affect their amassed resources. As risk factors alter, the asset allocation shifts from aggressive to more conservative, ensuring that the retirement plan is in line with the individual's changing financial objectives and comfort levels.
Impact of Fiscal and Monetary Policies on Retirement Plans
Due to their effects on the economy and financial markets, fiscal and monetary policies greatly impact retirement plans. Tax rates, social security benefits, and healthcare provisions can all alter as a result of fiscal policies, which involve government spending and taxing. A person's post-retirement financial situation could be impacted by changes in tax legislation, which could reduce the amount of money available for retirement savings or change how retirement income is taxed (Kuitto & Helmdag, 2021). Interest rates and inflation rates are influenced by monetary policies, which are under the supervision of central banks. Retirement investors who depend on fixed-income investments like bonds for income may need help in a low-interest rate environment, which is influenced by monetary policies.
On the other hand, sustained high inflation may eventually reduce the purchasing power of retirement funds. In order to minimize the impact of prospective policy changes on their retirement income, individuals should consider these policies when creating their retirement plans and adapt their asset allocation methods accordingly. One such adjustment is to diversify their investment portfolio.
Impact of Changes in Fiscal and Monetary Policy on Retirement Savings
By changing important variables like interest rates, tax rates, and regulations governing retirement accounts (such IRAs and 401(k)s), changes in fiscal and monetary policy can substantially impact retirement savings. The amount of money individualse have at hand to save for retirement may change due to fiscal policies, such as adjustments to tax rates or changes to tax incentives related to retirement (Sterk & Tenreyro, 2018). For instance, a decrease in the tax benefits connected to retirement accounts may lessen the incentive to contribute to such accounts, affecting the trajectory of overall savings. Monetary policy can impact investment returns, specifically changes in interest rates imposed by central banks. Low-interest rates can result in reduced yields on savings and fixed-income assets, which could make it harder for retirees to accumulate money over time. Conversely, higher interest rates may result in better savings yields but may also have an impact on borrowing costs, which may limit a person's ability to pay for retirement contributions.
Implications of Time Value of Money for Retirement Savings
A key idea in retirement planning is the time value of money, which emphasizes that factors like inflation and possible investment returns influence the amount of money that is worth today compared to how much it will be worth in the future (Hauff et al., 2020). The idea emphasizes the significance of beginning early retirement savings. Compounding can be used to one's advantage by saving even small sums over a longer period of time, leading to significant growth over time. As an illustration, take into account A and B. While B begins saving for retirement at age 35, A begins saving at age 25. By age 65, assuming a 7% annual return, A would have about $1.03 million, whereas B would only have about $550,000. The added ten years of compounding substantially affect A's retirement savings because of the time value of money.
García Mata, O. (2021). The effect of financial literacy and gender on retirement planning among young adults. International Journal of Bank Marketing, 39(7), 1068-1090.
Harlow, W. V., Brown, K. C., & Jenks, S. E. (2020). The use and value of financial advice for retirement planning. The Journal of Retirement, 7(3), 46–79.
Kadoya, Y., & Khan, M. S. R. (2020). What determines financial literacy in Japan? Journal of Pension Economics & Finance, 19(3), 353-371.
Kuitto, K., & Helmdag, J. (2021). Extending working lives: How policies shape retirement and labor market participation of older workers. Social Policy & Administration, 55(3), 423-439.
Sterk, V., & Tenreyro, S. (2018). The transmission of monetary policy through redistributions and durable purchases. Journal of Monetary Economics, 99, 124-137.
Záhorcová, L., Halama, P., Škrobáková, Ž., Bintliff, A. V., & Navarová, S. (2021). Qualitative analysis of the transition from work to retirement among Slovak retirees. Current Psychology, 40, 1531-1545.
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