Bill Petty, 56, just retired after 31 years of teaching. He is a husband and father of two children who are still dependent. He received a $150,000 lump-sum retirement bonus and will receive $2,800 per month from his retirement annuity. He has saved $150,000 in a 403(b)-retirement plan and another $100,000 in other accounts. His 403(b) plan is invested in mutual funds, but most of his other investments are in bank accounts earning 2 or 3 percent annually. Bill has asked your advice in deciding where to invest his lump-sum bonus and other accounts now that he has retired. He also wants to know how much he can withdraw per month, considering he has two children and a nonworking spouse. Because he has children, his current monthly expenses total $5,800. He is not eligible for Social Security until age 62, when he will draw approximately $1,200 per month; however, he would rather defer drawing on Social Security until age 67 to increase his monthly benefit amount to $1,550.

Questions

1. Bill has an emergency fund already set aside, so he can use his $400,000 of savings for retirement. How much can he withdraw on a monthly basis to supplement his retirement annuity if his investments return 5 percent annually and he expects to live 30 more years?

2. Ignoring his Social Security benefit, is the amount determined in question 1 sufficient to meet Bills current monthly expenses (keep in mind that he will receive a pension of $2,800 per month)? If not, how long will his retirement savings last if his current expenses remain the same? What if his expenses are reduced to $4,500 per month?

3. Considering the information obtained in question 2, should Bill wait until age 67 for his Social Security benefits? If he waits until age 67, how will his monthly Social Security benefit change the answers to question 2? (Hint: Calculate his portfolio value as of age 67, and then calculate how long that amount will last if it earns 5 percent annually.)

4. If the inflation rate averages 3.5 percent during Bills retirement, how old will he be when prices have doubled from current levels? How much will a soda cost when Bill dies if he lives the full 30 years and the soda costs $1 today?