Tri-State Corporation Case Problem

Problem Summary:

One of the major questions facing all employees at this time is retirement. Each person has a different vision of life after work and needs to plan accordingly. One main question that is always a difficult one to answer is how long one needs to work before they can comfortably stop working and rely on their financial portfolio to take care of expenses after work.

In order to analyze these questions, a deterministic model of an investment portfolio was created and stochastic modeling was used to determine the likelihood of being able to accumulate the necessary finances over the desired period of time.

Quantitative Analysis:

1. Using the given deterministic model, the annual outflows were estimated from the retirement portfolio over the retirement years and the estimated return on the account was also calculated. It was determined that under these basic assumptions of salary and portfolio growth rate the portfolio could expect to grow to $452,900 within thirty years. However, this assumed a fixed salary growth rate of 5% as well as a 4% annual investment rate. Given the high rate of inflation and the projected expenses after retirement, it was calculated that if this money was to last for the retirement, then even pulling out $50,000 per year in expenses would cause the account to run out after just a few years.

2. Adjusting the annual rate to 8% from 4% had a major effect. Although the portfolio fell short of the one million dollar goal by only reaching $853,633, this was a major effect as it allows the individual the ability to pull $100,000 each year from this account and still sustain the account well past age 80. It should be noted though that this model makes unrealistic fixed rate assumptions in this case and this should be considered the ideal case not the likely investment return.