Andrea and Laura Bocelli, a married couple both aged 42 live in Milan, Italy. Andrea earns an
Question:
Andrea and Laura Bocelli, a married couple both aged 42 live in Milan, Italy. Andrea earns an annual income of €90,000 before taxes. Laura is a housewife who recently inherited €850,000 in cash from her grandmother. The Bocellis other assets include
€25,000 in cash
€305,000 in stocks and bonds
The Bocellis need €40,000 for downpayment on the purchase of an apartment. They plan to make a €25,000 non-tax-deductible donation to a charity. Their annual living expenses amount to €80,000. Andrea’s salary is indexed to inflation. Thus, after-tax increases in income will offset future increases in living expenses.
During a meeting with their PWA, the Bocellis provide further details:
Andrea wants to retire after 15 years
They prefer low volatility investments
The PWA estimates that after 15 years the Bocellis will need €2.25 million to meet retirement expenses. Andrea’s income and all investment returns are taxed at 30%
A. Evaluate the Bocellis’ risk tolerance (above average, average, or below average). Justify your response.
B. How much money will the Bocellis need to withdraw from their investment portfolio every year to cover the difference between Andre’s after-tax salary and their living expenses?
C, Calculate the required nominal pretax rate of return on the Bocellis’ current net assets to cover the difference between after-tax salary and living expenses to provide for retirement expenses.
Income Tax Fundamentals 2017
ISBN: 9781305872738
35th edition
Authors: Gerald E. Whittenburg, Steven Gill, Martha Altus-Buller