Money management Essay Example | Topics and Well Written Essays - 1500 words

Money management - Essay ExampleI have then decided to consider one of two options a life-time insurance enc stackhement and a personally managed stemma. Life insurance option If I invest the $500,000 with a life insurance company then I may be able to earn a stable income each year with adjustments for inflation. found on discussions with my insurance company, Table 1 in Appendix 1 reflects the amount that I would receive if I invest in an insurance indemnity that makes adjustments for inflation and pays my estate the balance of my policy at death. The table shows an initial investment of $500,000 and indicates that over a 20 year period and assuming a 3.5% rate of interest and an inflation rate of 3%, I would be able to have an inflation adjusted income of $15,000 in year 1 inveterate to $26,302 payment in year 20. This policy continues as long as I am alive. The balance on the posting at year 20 suggests that there will be sufficient funds for me to earn an income many ye ars after year 20 if I am still alive. The leash amount only starts declining in year 12 suggesting that I will be paid out of interest earned on the investment up year 11, after which payments will start affecting my promontory. My total receipt up to year 20 would be $403,045.62 with a balance on the account of $443,861.55. This indicates a net gain of $346,907.17 (($403,045.62 + $443,861.55) $500,000). Table 3 in Appendix 1 shows the relevant returns. Personally Managed Funds In the event that I conduct to manage the funds personally then I would be able to make earnings at rates between 3 to 7 per cent. This fund would consist of a mixture of government bonds (at least 60%) and stocks. I would use the income generated from the fund in the first year year 1 as a basis to determine my future income if I am to prolong the same standard of living. I therefore allow for an inflation rate of 3% as with the life insurance option. Table 2 in Appendix 1 provides information on this fund. An average rate of return of 5% per annum is assumed. The information indicates that after the first payment of $17,500 subsequent payments will require selling investments and therefore reducing the principal initially invested if I am to maintain the same standard of living year after year. Comparison of both options In comparing both options the life insurance fund has a lot to recommend it. It is secure, simple, provides good returns, safe, and has no sales or administrative charges (immediateannuities.com). i. The life insurance offer provides a stable income for the rest of the pensioners life and in some cases beneficiaries can receive the balance after death. The income streams from the personally managed fund are not likely to be as stable, even though this is assumed in Table 2. ii. The pensioner can relax and does not have to watch the market and report on interest and dividends as in the case of the personally managed funds. iii. Returns on life insurance funds a re normally higher than those on government bonds. The reason is that a portion of the principal is normally paid with the interest earned. However, the personally managed fund is a mixture of bonds and stocks. iv. The principal is normally safe in the case of the life insurance