Investment decisions for personal finance are made according to the profile of an investor. It relates to the conditions of investors and external factors that put a direct impact on the decisions for investment. The investor profile of Marilyn and David is short and simple, but there are some facts that need to consider while making an investment such as longevity risks.
The scheme or investment plan provided by investment advisor is effective, but the rate of interest offered is above estimations as indicated by the US Stock index. The calculation of the investment plan prepared is.
$160,000*15%=$24,000 annual return
The major problems are the unusual rate of return and absence of longevity risks in this investment. It is essential to consider the risks factor as high return means high risks in investment. The annual rate of return on the investment that is 15 percent is too high according to the market condition.
There is an alternative plan for the investment that also suits to the profile of Marilyn and David.
The annuity method mentioned above suits to the current conditions of Marilyn and David. It is a less risky investment as the rate of investment is low, and the longevity risk is eliminated due to this investment. The main benefit of this type of investment is that an investor can withdraw the money at any time. The facility is beneficial at the time of retirement as some expenses come forward during retirement stage. In comparison with the investment plan prepared previously, annuity method is preferable for long-term return.
The annuity is the only method that can provide a high amount of return at the year end. Also, it is beneficial for the accumulation of amount more than the expenses at the time of retirement. The excess amount can be used to generate more money for the future, and the initial investment will also be safe in this way. The annuity method is used by mutual fund providers who are entitled to ensure the high annual return on investment to the investors.
It can be observed that the investment planned recommended may not provide expected return in future. However, annuity plan is effective in generating a high return in the long run where investment can be withdrawn by the investors at any time. Also, there is another factor that life expectancy of both the investor is long so the amount generated can be utilized to make further investment. On the other hand, investments in stocks and bonds are risky due to the fluctuation of market price, depending on profits, and dividend policies of the particular company. It can be concluded that the investment for the retirement requires savings that can pay off routine expenses and reinvest another amount to generate more money that can be utilized in future.
