Decision making on investment portfolio

Reference no: EM1311153

Alfred Road has reached his 70th birthday and is ready to retire. Mr.Road has no formal training in finance but ha saved his money and invested carefully. Mr Road owns his home- the mortgage is paid off and does not want to move. He is a widower, and he wants to bequeath the house and any remaining assets to his daughter.

He has accumulated $180,000, conservatively invested. The investments are yielding 9% interest. Mr Road also has $12,000 in a savings account at 5% interest. He wants to keep the savings account intact for unexpected expenses or emergencies.

Mr. Road's basic living expenses now average about $1500 per month and he plans to spend $500 per month on travel and expenses. To maintain his planned standard of living, he will have to rely on his investment portfolio. The interest from the portfolio is $16,200 per year(9% of $180,000) or $1,350 per month.

Mr. Road will also receive $750 per month in Canada pension old age security payments for the rest of his life. These payments are indexed for inflation. That is, they will automatically be increased in proportion to changes in consumer price index.

Mr. Road's main concern is with inflation. The inflation rate has been below 3% recently, but a 3% rate is unusually low by historical standards. His pension payment will increase with inflation but the interest on his investment portfolio will not.

What advice do you have for mr.Road? can he safely spend all the interest from his investment portfolio? How much could he withdraw at year end from that portfolio if he wants to keep its real value intact?

Suppose mr. Road will live for 20 more years and is willing to use up all his investment portfolio over that period. He also wants his monthly spending to increase along with inflation over that period. In other words he wants his monthly spending to stay the same in real terms. How much can he afford to spend per month?

Assume that the investment portfolio continues to yield a 9% rate of return and that the inflation rate is 4%.

Reference no: EM1311153

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