Financial Analysis Example – Planning for Retirement


While a robust financial analysis example can teach you many things and span across numerous practical applications, there is none that is as relevant as the one involved in your own personal financial planning. This particular financial analysis example shows you how you can set up a spreadsheet model to evaluate and attain your personal financial goals. Relevant concepts such as Present Value, Future Value and Real Rate of Return, among others, are discussed. The exportable spreadsheet can be found at the end of the tutorial.

Although initial assumptions are forward looking, the way you structure your own model based on this financial analysis example will allow you to make modifications seamlessly in order to make new evaluations over time. It is important to note that financial markets are volatile and any assumptions you make in your analysis need to be tweaked as time goes on and more factual information is available to you.


This financial analysis example, as with any other that is robust (meaning concepts pertaining to time value of money is central to the analysis), involves :

    1. Making a set of assumptions
    2. Choosing the right analytical concepts to incorporate (I.E., Discounting vs. Compounding, PV, FV, NPV, IRR, etc)
    3. Building a financial model (It’s better to build a basic case first and then expand by adding complexity)
    4. Validating your work
    5. And finally, as mentioned earlier, tweak your assumptions as more information become available

There are a few  basic concepts that you may find useful knowing beforehand as you read and work through the retirement planning financial analysis example below. First and foremost, understand that receiving$1 cash today is worth more than receiving the same $1 cash tomorrow, or anytime in the future for that matter. The reason is because inflation will reduce the purchasing power of that very dollar. Moreover, from an investment perspective, assuming that the markets will allow you to generate a positive return on your investment, you are better off taking that $1 today and investing it.

Secondly, understand that whenever you see a rate of return (APR, interest rate, etc) those are nominal rates. As with the cash example above, these rates need to be adjusted for inflation so that you get the true or “Real Rate of Return”. It makes no sense to put your money where you’re going to earn a 3% nominal return when the inflation rate is, say, 4%. Your money will actually be losing value with that investment.

One more thing that you should be aware of, if you’re already not, is that the younger you are, the more risks you can take when it comes to financial matters. You will have time to make adjustments, change game plan or do other things to recover. The older you are, the less flexibility you have and so it’s only natural to become risk averse over time.

With that said, let’s dive in and work through this personal financial analysis example. You may find it useful to plug the numbers in to a spreadsheet and build yourself a model as you go through the steps.

Financial Analysis Example Background Information:

Let’s assume that it’s Jan 1 and you are 30 years old today (your birthday). As you turned thirty, you reflected on your past and wondered about what the future holds. You come to a few realizations including the fact that you will definitely want to retire on the day you turn 65 and spend the next 20 years (your anticipated lifespan from retirement onward) traveling, spending time with grand kids and fishing. You realized that you’ve been a bit cavalier with your finances up to this point in your life and you need to make some changes that include putting money away for retirement. Thing is, you don’t have money to spare at the moment but you know your finances will free up late this year. So you plan to make your first contribution into a tax-free account towards your goal on your birthday next year and every year after that till your retirement.

During the day you think more about what you will need in the future and also do some research. You come to the conclusion that you can live comfortably on $100,000 a year (in today’s dollars) during retirement and expect inflation to run about 4% a year throughout your life. You also decide that you will take a riskier investment path up until 5 years before retiring and then shift gears into less risky investments. You expect that you can earn a 10% nominal rate of return per year up until the 5 years before retirement mark and then a 5% return onward till you’ve depleted your funds.

So how much will you need to contribute  to that tax-free account every year until retirement? (Continue Reading) 


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