edf40wrjww2CF_PaperMaster:Desc
Portfolio = $180,000
• We get $16,200 a year or $1,350 a month in nominal terms.
• Our portfolio grows at a nominal rate of 9% or a real annual rate of 4.8% = (1.09/1.04) - 1
Savings = $12,000
• Our savings is growing at a nominal rate of 5% or a real annual rate of .96% = (1.05/1.04) – 1
Social Security
• We will get $750 a month from social security; this amount will always stay true since it is indexed for inflation. In other words its real interest rate is 0%.
Expenses
• We have $1,500 living expenses and $500 for fun and travel. We should ask if these are real values? In other words, if the real rate at which these expenses are growing is 0%.
1.) Can he safely spend all the interest from his portfolio investment?
o No, because the real value of his monthly interest is $720 = $180,000 * (.048/12) and when we add $750 we have a total amount of $1,470 which does not cover the $2,000 or $1,500 if we were to drop all of his hobby expenses.
2.) How much could he withdraw at year-end from that portfolio if he wants to keep its real value intact?
o Future Value (in real terms) at year end = 180,000*(1.04) = $7200
o Annual Interest (nominal) = $16,200
o $16,200 - $7200 = $9000
o This amount is possible only if the portfolio and its interest are not used to at all. He physically would receive the $16,200, but its purchasing power is not the same.
3.) Suppose Mr. Road will live for ...