Your aunt and uncle, Marilyn and David are both 65 and are about to retire. They have noassets other than $1,600,000 in cash savings, and they have no debts. They wish to maintain their
current lifestyle during their retirement years. Their current annual living expenses are $120,000.They have no children and they do not wish to bequeath any assets to charity (after their deaths).Marilyn and David are in excellent health and have a normal life expectancy. They are, however,concerned about the possibility of outliving their retirement income (i.e., longevity risk). Duringtheir retirement years, they will rely entirely on their savings to support themselves. In addition,they are risk averse and do not want experience a significant loss of their savings.
Marilyn and David have decided to use their cash savings to purchase an annuity that willprovide them with the necessary income to cover their living expenses over their retirementyears. They initially consult with Ms. Sheila Young who is an investment advisor at MerrillLynch about purchasing their desired annuity. Ms. Young is a relatively new financial advisorand claims to be able to get Marilyn and David a much higher annual income because she"knows" how to invest their savings in financial instruments that can yield at least 15% per year.

Given the data in the "Risk and Return" handout, this assumed rate is well above the current andhistorical average return for U.S. stocks as measured by the S&P 500 index.
Marilyn and David want you to provide a "second opinion" of the analysis done by theMerrill Lynch advisor. Specifically, they want you to write a memo to Ms. Young thatcompares her alternative with your "second opinion" and highlights the risks and benefitsof each alternative. They feel certain that Ms. Young is not giving due consideration toassumptions and variables that will impact their decision (e.g., market risk, risk tolerance, andlife expectancy - among others). However, they do not know how to articulate their concerns to
Ms. Young and want you to prepare this memo on their behalf.

Required:
Write a memo to Ms. Sheila Young containing the following information:
1. Provide a professional and financially sound evaluation of her proposal and your ownalternative proposal.
2. Please use and include the attached Excel spreadsheet in your evaluation to:
i) analyze and challenge Ms. Young's assumptions and identify weaknesses in heranalysis
ii) offer an alternative analysis based on your own assumptions
3. Your conclusion must include specific actions to address and correct the problems and/ormistakes in Ms. Young's analysis.

Answer rating: 100% (QA)

Your Name Your Title Your CompanyOrganization Date Ms Sheila Young Investment Advisor Merrill Lynch Address Subject Evaluation and Alternative Proposal for Retirement Annuity Dear Ms Young I hope this ... View the full answer