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In: Finance

Discuss how economic conditions, chosen investment vehicles (FDIC insured investments, mutual funds, stock markets, etc.), diversification...

Discuss how economic conditions, chosen investment vehicles (FDIC insured investments, mutual funds, stock markets, etc.), diversification (e.g., invest all in Tesla or go with index funds), rates of return, and inflation will affect retirement planning. What are some ways that those saving for retirement can help address the key issues you have discussed?

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Expert Solution

Solution:-

Investing for retirement is very different from investing otherwise. Retirement-focused investing can afford very little risk and since the investment horizon is extremely long, the consistency of returns resulting in leveraging the power of compounding becomes very important. The objective is to make sure that the risk of the retirement portfolio remains as low as possible while generating good returns that not only covers the inflationary impacts but build enough for retirement goals.

The impact of various factors on retirement planning and ways to address those impacts are as follows:

  • Economic conditions are like the inevitable which can't be ignored and they impact long-term returns inevitably. That's why the retirement portfolio should be invested in an economy which is safe and growing.
  • Investment vehicles chosen to invest the retirement portfolio is very important as factors such as taxation, liquidity, management fee, etc are completely dependent on the choice of vehicles. The retirement planning must include choosing vehicles that offer the best financial platform to invest money for the long-term.
  • Diversification is the single biggest factor that must be taken into consideration while investing the retirement portfolio. The retirement portfolio should be diversified into multiple asset classes as well as geographies. This ensures that the whole portfolio is not exposed to the same risks and thus can be considered safe for retirement purposes.
  • The retirement portfolio must be designed to ensure that the expected rates of returns from the portfolio are enough to meet the retirement targets. It should be enough to cover inflation and generate real wealth over time.
  • Inflation eats up the value of money. If the retirement fund is generating return equal to inflation, it is essentially creating no wealth for investor as the purchasing power of money stays the same. As mentioned above, it is a crucial factor when analysing the expected returns from the portfolio. The idea is not to just generate nominal returns but to generate real returns, that covers inflation and builds wealth over time.

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