The General Logic and Organization of Simulation - Common Rule of Thumb - Accounting Assignment Help

Assignment Task:

At age 22, you decide to start saving for retirement. Write a simulation to investigate 40 years of saving for retirement, with the following guidelines:

• Add $2,000 to your retirement savings account in the first year. 
• Increase the amount you contribute by 3% each subsequent year.
• Invest money in an 80/20 portfolio of stocks and bonds. 
• Invest 80% in the S&P500. 
• Investigate 20% in bonds.

 
Run the simulation for 1,000 replicates to model 40 years of time. The file stocksbonds.csv contains data on the historical yearly returns of the S&P500 from 1928 to 2018, along with data on the historical yearly returns of bonds during the same time period. 

a)  Write the simulation according to the above guidelines; be sure to clearly comment on your code. In one paragraph, briefly explain the general logic and organization of your simulation; in other words, provide a high-level overview of the steps in your simulation. 

b) Based on the simulation from part a), what is the 90th percentile of returns after 40 years of investing? 

c) Someone mentions that the 80/20 scheme is too conservative and you should be 100% in stocks. Rerun the simulation under this scenario; what is the 90th percentile of returns after 40 years of investing? 

d) You read some investment advice and learn about a common rule of thumb: one should invest their age (as a percentage) in bonds and the rest in stocks, increasing the percentage invested in bonds by 1% each year. A friend suggests that instead, you start at 100% in stocks at age 22 and go down 2% per year with the rest in bonds (e.g., in the second year, but 98% in stocks and 2% in bonds). Under this scenario, what is the 90th percentile of returns after 40 years of investing? 

e) Compare the three investing schemes discussed in parts a) through d). Which investing scheme do you think is most advisable? Explain your answer, referencing results from the simulations as needed. 

f) Suppose you decide to invest 100% in the S&P500 starting at age 22 years. Once you reach 62 years old, you decide to cash out completely from the stock market and stop investing. Suppose that you spend $50,000 a year on living expenses and that these expenses increase by 3% each year. What is the estimated probability that you have left with no money 20 years later (i.e., when you are 82 years old)?

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