What three components are essential for making a lump sum projection?

In making a lump sum projection, the essential components that contribute to an accurate estimate of future financial needs are life expectancy, inflation, and investment return.

Life expectancy is crucial as it determines how long an individual may need their retirement savings to last. Understanding the duration of financial support will influence how much needs to be accumulated beforehand.

Inflation plays a significant role because it affects purchasing power over time. Money today will not have the same value in the future; therefore, projections must account for the expected rate of inflation to ensure that future cash flows maintain their effectiveness in meeting living expenses.

Investment return is another critical aspect, as it reflects the anticipated growth rate of the lump sum. The expected return on investments will help determine how much wealth can be built up over time and how sustainable that wealth will be relative to the anticipated expenses and inflation.

Combining these three components provides a comprehensive picture for creating a lump sum projection that accurately reflects future financial needs and the potential growth of investments.