A policyholder had about 47,500 units units of the Growth Combined Fund with a value of $87,700.
She wished to make monthly withdrawal of $400 opr $500 from this fund. Assuming that the investment grows at 5% per annum, the money will last as follows
monthly withdrawal $400 - total of 45.7 years
monthly withdrawal $500 - total of 25.6 years
By increasing the payount by 25% (from $400 to $500), the payout period is reduced by 44%. It could be due to the effect of a shorter period of compounding.
The policyholder was happy with the return on the Growth Combined Fund, and the long period for which the payout is projected to be available. She thinks that this scheme is suitable for retirees.
Mr Tan,
ReplyDeleteYour calculation is wrong. You should've used Monte-Carlo simulation since the yield is uncertain.
CitiBank Gold is using funds very similar to offer customer for retirement.
ReplyDeleteSame 3 levels of bond/equity mix.
It guarantees 5% draw down for 20 years, and with some bonus if the performance of the fund is good.
Kind of same as this Combined Fund principle as I read it.
But why let the bank declare bonus on investment when one can invest in such funds and draw down 5% annually, assuming if the fund yields 6 to 10% annually, it will be good retirement funds to draw down from.
You don't use Monte carlo simulation for regular withdrawal, it is for finding the probability of the end result\ which is usually very far into the future.
ReplyDeleteYou can try explaining Monte Carlo simulation to any average person in the street. You will confuse him and eventually he will not make any decision which benefits him.
ReplyDeleteI think its fair to use an assumed average returns. To be conservative, ones can use a lower returns. Thereafter review it yearly to guage the investment.