This section analyzes in detail the future money values need to achieve each of the

financial objectives that were identified in the previous chapter.

Ownership of Property
First objective is for James to own his own property. There are th main decisions that

need to be considered;

1. Timing of the purchase

2. Financing

3. The purchase value of the Property

Timing of the Purchase

The timing of the purchase of a property would depend in the first place on the

condition of the property market. Since this is considered an investment it is important to

understand whether the current time would be considered a good time to buy or whether

it might be better to wait some time, as market conditions might change and better deal

might become available. When deciding to delay James should take into account the time

value of money.

Since as a result of the financial crisis the property markets have come under pressure,

it is considered that this might be good time to buy as due to the shortage of buyers, good

deal can be begotten.

Financing

James could consider financing the property (partly) out of cash he inherited. However

given the tax advantage that can be generated through mortgage payment, which are

deductable from taxable income, James should consider to finance as much as possible

through a mortgage loan.

Purchase Value of the Property

Secondly James needs to consider the targeted value of a property he might be wanting

to buy. Clearly he should not look to spend his full income on the property as he would

want to have some diversification in his assets.

Trip to Florida
The second objective James indicated to be making a trip to Florida. Based on

information from his friend this would cost him currently £8,000. The actual cost of the

trip will depend on the actual timing of the trip. Over time there will be a number of

things that might impact the cost of the trip;

- Development of exchange rate between US$ and the British Pound; some of the

cost will be US$ based and there for the price estimate will change on influence

of exchange rate development. This risk could be mitigate by currently converting

some of his assets into US$.

- Oil price development; some of the cost will be driven by the price of airplane

ticket, which is normally heavily correlated to the price of oil.

Pension Plan - Early Retirement
James indicated that he would be interested to retire early in order to obtain this goals

the following estimated number were calculated; if James plans to retire 5 years before

the receives a pension his current employer it is estimated that James needs £325,000 in

accumulated funds when he reaches age 60. There is several ways he could finance this.

First he could anticipate making annual payment into an investment account that he

would set up for this purpose. Under the assumption that he would increase the annual

payment with 4% per annum, as an inflation correction, then he could achieve this by

starting now with annual payments £1,000. This will grow to the required £325,000 under

an assumption of 9% annual returns. As can be seen in table 2.1 below. As investment

income could vary some more optimistic as well as more pessimistic scenario’s are

shown for comparison.

Alternatively James could finance the £325,000 through a one time payment right now.

The advantage of this would be that the full payment would earn investment income for

the full period. If he would choose this route then (again assuming an annual return of 9%

could be achieved) he would only need to pay £18,915 into an investment account for this

purpose today.
Table 2.1 Projected Accumulated Fund (based on annual contribution)

Annual
Age contribution Accumulated Fund
7% 9% 11%
27 1,000 1,070 1,090 1,110
28 1,040 2,258 2,322 2,387
29 1,082 3,573 3,710 3,850
30 1,125 5,027 5,270 5,522
31 1,170 6,630 7,019 7,428
32 1,217 8,396 8,977 9,595
33 1,265 10,338 11,164 12,055
34 1,316 12,470 13,603 14,842
35 1,369 14,807 16,319 17,993
36 1,423 17,366 19,339 21,553
37 1,480 20,166 22,693 25,567
38 1,539 23,225 26,414 30,088
39 1,601 26,564 30,536 35,174
40 1,665 30,205 35,099 40,892
41 1,732 34,172 40,146 47,312
42 1,801 38,491 45,722 54,515
43 1,873 43,189 51,878 62,591
44 1,948 48,297 58,670 71,638
45 2,026 53,845 66,159 81,767
46 2,107 59,869 74,410 93,100
47 2,191 66,404 83,495 105,773
48 2,279 73,491 93,493 119,938
49 2,370 81,171 104,491 135,762
50 2,465 89,490 116,582 153,431
51 2,563 98,497 129,868 173,154
52 2,666 108,244 144,462 195,160
53 2,772 118,788 160,485 219,705
54 2,883 130,188 178,072 247,073
55 2,999 142,510 197,367 277,580
56 3,119 155,823 218,529 311,575
57 3,243 170,201 241,732 349,449
58 3,373 185,724 267,165 391,632
59 3,508 202,478 295,034 438,606
60 3,648 220,555 325,563 490,902

220,555 325,563 490,902

Disability Insurance
Disability insurance can be obtained in the Indonesian market. This will secure James of

having an income if at any point in the future he will not be able to generate income for

himself as he would have become disabled to work. It would be advisable for him to take

out enough cover for him to continue his current life style. Therefore the annual insured

income should be equal to something close to his current annual income. It would be

advisable to have this amount inflation correction, which is normally an option that the

insurance companies make available. In that way his income would be protected against

inflationary deterioration.

Risk Profile
James is still young. His primary his primary financial goals are long term goals.

Therefore James will be quite willing and able to sustain variation in annual returns on

his investment, this will enable James to achieve higher expected returns in his portfolio.

Higher returns are normally associated with higher risk. Higher risk indicates that there

are greater variances between the returns from one year to the next, although overall the

return is expected to be better. Since the objective are mostly long term objective James

will have enough years to make up for any negative variance in specific year(s). It would

make sense for James to revisit his risk profile over time as his personal situation

evolves; risk appetite should not be considered to be constant over time.