Assume that the future (average) inflation rate over the following 25 years will be 5%. Will  Mr. Moore be able to cover his living expenses with his income sources expressed in real terms?   

Calculate  the  monetary  difference  between  his  real  annual  income  and  annual  expenses over the future 25 years.

 

Transcribed Image Text:

Alan Moore is 70 years old and is planning for his retirement. He has accumulated portfolio investments of $200,000. They are yielding 8% interest. Mr. Moore also has $15,000 in a bank (savings account) earning 5% interest. He wishes to keep the savings account available for emergencies and use only interest payments from it. Mr. Moore's monthly living expenses are about $2,000/month and he wishes to maintain this lifestyle by mainly using his portfolio investments. Mr. Moore will also receive $800/month in pension payments (indexed for inflation) for the rest of his life. In other words, these payments are proportionally adjusted based on the consumer price index (CPI). Mr. Moore's is nervous about the potential future inflation increases, although it has been low recently (2%). Assume that Mr. Moore will live for 25 more years and will exhaust all his portfolio investments by the end of 25 years. Assume that the yield on his portfolio will remain fixed at 8% over the future 25 years. Alan Moore is 70 years old and is planning for his retirement. He has accumulated portfolio investments of $200,000. They are yielding 8% interest. Mr. Moore also has $15,000 in a bank (savings account) earning 5% interest. He wishes to keep the savings account available for emergencies and use only interest payments from it. Mr. Moore's monthly living expenses are about $2,000/month and he wishes to maintain this lifestyle by mainly using his portfolio investments. Mr. Moore will also receive $800/month in pension payments (indexed for inflation) for the rest of his life. In other words, these payments are proportionally adjusted based on the consumer price index (CPI). Mr. Moore's is nervous about the potential future inflation increases, although it has been low recently (2%). Assume that Mr. Moore will live for 25 more years and will exhaust all his portfolio investments by the end of 25 years. Assume that the yield on his portfolio will remain fixed at 8% over the future 25 years.

Answer rating: 100% (QA)

To determine if Mr Moore will be able to cover his living expenses with his income sources expressed ... View the full answer