Background

Your aunt and uncle, Marilyn and David are both 65 and are about to retire. They have no assets 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 per year. They have no children and they do not wish to bequeath any assets to charity after they pass. 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). During their retirement years, they will rely entirely on their savings to support themselves. In addition, they are risk averse and do not want to experience a significant loss of their savings.

Marilyn and David have decided to use their cash savings to purchase an annuity that will provide them with the necessary income to cover their living expenses over their retirement years. They initially consult with Ms. Sheila Young who is an investment advisor at Merrill Lynch about purchasing their desired annuity. Ms. Young is a relatively new financial advisor and 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 Excel spreadsheet (also posted on Canvas), this assumed rate is well above the historical average return for U.S. stocks as measured by the S&P 500 stock market index.

Marilyn and David want you to provide a second opinion of the analysis done by the Merrill Lynch advisor. Specifically, they want you to write a memo to Ms. Young that compares her proposal with your "second opinion" that will analyze the risks and benefits of each alternative. They feel certain that Ms. Young is not giving due consideration to their risk aversion and other consideration such as realistic expected stock market returns and longevity. Since your aunt and uncle do not know how to clearly articulate their concerns to Ms. Young, they want you to prepare this memo on their behalf.

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

You must include the calculations from the 2 Excel spreadsheet tables in your memo. To do this: i) Enter your assumptions. ii) Highlight the appropriate section of the Excel spreadsheet, then iii) Click on: "Edit\Copy", then iv) Go to the Word document where you want the table to appear and v) Click on: "Edit\Paste Special\Bitmap\OK"