The relative importance of protecting and growing our assets exceeds our future income potential, beginning in our early 50s. Human capital is your lifetime earning potential.  It declines with age and reaches 0 when you retire. Life insurance protects your family against a human capital loss. The insurance payout is meant to replace the insured’s

In what follows, we guide you through the expense profile of a high earner during his or her working years and in retirement. Using an Engineer as a proxy for a working professional, we take you through his or her working and retirement life, accounting for all income and expenses therein. First, we establish a

An investor who begins to save later in her or her working life will require a higher investment amount over a longer time period to catch up to an investor who began to save earlier in her or her working life. For example: Let’s say the person who began earlier started saving $10,000 a year

CAGR is used for measuring investment return and standard deviation for volatility. Investment return is often expressed as annualized return or CAGR (Compound Annual Growth Rate). Let us explain the concept using an example in which the annual performance of an investment is different each year. A simple arithmetic average of the three annual returns

While the effect of taxes on investment return occurs when a sale transaction happens, the effect of inflation is continuous and is modeled as a discount factor. Consider a scenario in which you invest $100 in a financial instrument that promises a 10% annual return on a compounded basis. You sell your investment after holding

Achieving a multi-million dollar asset value in one’s lifetime is more possible and likely than you may think it is. It can be achieved by committing capital to a long-term growth vehicle that, thanks to the power of compounding, provides a consistently increasing return! Rule of 72 is an elegant way to quantify investment return

An investment of $100 growing at a 10% annual compounded rate will be $1.4M in 100 years! This basic statement expresses the earning power of compounded interest on an initial investment amount.  How so? First, let’s understand how simple interest works. Simple interest is only paid on the principal or original investment amount. Hence, the

It is fundamental to financial engineering that we understand the interplay between nominal and real terms due to inflation and its effect on such things as accounting for future expenses, asset growth or long-term investments. The math behind adjusting for inflation is simple, but the underlying concept can quickly become confusing. Inflation represents increase in