Joe Marcus, a professor at Duke, just had his 56th birthday and wants to finally retire...

 

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Joe Marcus, a professor at Duke, just had his 56th birthday and wants to finally retire Dr. Marcus Does not have a lot of financial knowledge but has saved and invested well over the years. Dr. Marcus owns his house and the mortgage is paid off. Dr. Marcus has savings of $180,000. The investments are yielding 9 percent interest. Dr. Marcus also has $12,000 in a savings account at 5% interest. Marcus wants to keep the saving account level in real terms for emergencies. Dr. Marcus's basic living expenses average about $1,500 per month and he plans to spend $500 a month on travel and hobbies. To maintain this planned standard of living, Marcus will rely on his investment portfolio. The interest on the portfolio is $16,200 per year (9 percent of $180,000) or $1,350 per month. Dr. Marcus will also receive $750 per month in Social Security payments for the rest of his life. These payments are indexed for inflation. That is, the payments will automatically increase in proportion to changes in the consumer price index. Dr. Marcus is concerned with inflation because although his Social Security payments increase with inflation, his portfolio interest will not increase. Dr. Marcus needs your advice. Dr. Marcus thinks he will live 20 more years and is willing to use up all of his investment portfolio over that period. He also wants his monthly spending to increase with inflation. Can Dr. Marcus afford his planned lifestyle in retirement? What would you advise Dr. Marcus to do? Assume that the investment portfolio continues to yield a 9 percent rate of return and that inflation will be 4 percent. Joe Marcus, a professor at Duke, just had his 56th birthday and wants to finally retire Dr. Marcus Does not have a lot of financial knowledge but has saved and invested well over the years. Dr. Marcus owns his house and the mortgage is paid off. Dr. Marcus has savings of $180,000. The investments are yielding 9 percent interest. Dr. Marcus also has $12,000 in a savings account at 5% interest. Marcus wants to keep the saving account level in real terms for emergencies. Dr. Marcus's basic living expenses average about $1,500 per month and he plans to spend $500 a month on travel and hobbies. To maintain this planned standard of living, Marcus will rely on his investment portfolio. The interest on the portfolio is $16,200 per year (9 percent of $180,000) or $1,350 per month. Dr. Marcus will also receive $750 per month in Social Security payments for the rest of his life. These payments are indexed for inflation. That is, the payments will automatically increase in proportion to changes in the consumer price index. Dr. Marcus is concerned with inflation because although his Social Security payments increase with inflation, his portfolio interest will not increase. Dr. Marcus needs your advice. Dr. Marcus thinks he will live 20 more years and is willing to use up all of his investment portfolio over that period. He also wants his monthly spending to increase with inflation. Can Dr. Marcus afford his planned lifestyle in retirement? What would you advise Dr. Marcus to do? Assume that the investment portfolio continues to yield a 9 percent rate of return and that inflation will be 4 percent.

Answer rating: 100% (QA)

Monthly expenses expected 1500 500 2000 Out of this amount available from Social Security inflation ... View the full answer