Forecasting Retirement Portfolio

Overview

Forecasting the retirement portfolio during the working years is essentially the savem problem as Forecast Asset Returns During Retirement. That is, you will construct a portfolio of equities and fixed income. However, instead of withdrawing money from the portfolio, you will be contributing. However, the mathematics is essientially the same, that is a contribution is just a negative withdrawal.

The only additional complication that occurs for simulating the savings years is the retiree's salary. That is, the contribution itself is random. For example, the analyst may model that the contribution every year is 10% of the workers salary, in which case, she must account not only for the random nature of asset returns, but the salary of the worker.

Forecasting Salary

Salaries are hard to forecast. Typcially, an analyst will build a forecast based on the workers current job and any assumptions that the worker wants to make in terms of their earning potential.

Absent guidance from the worker, one may reasonably assume some constant growth rate of salary and just ignore the randomness.