MINICASE Old Alfred Road, who is well-known to drivers on the Maine inflation. That is, they will be automatically increased in propor- Turnpike, has reached his 70th birthday and is ready to retire. Mr. tion to changes in the consumer price index. Road has no formal training in finance but has saved his money and Mr. Road's main concern is with inflation. The inflation rate invested carefully. has been below 3% recently, but a 3% rate is unusually low by his- Mr. Road owns his home-the mortgage is paid off-and does torical standards. His Social Security payments will increase with not want to move. He is a widower, and he wants to bequeath the inflation, but the interest on his investment portfolio will not. house and any remaining assets to his daughter. What advice do you have for Mr. Road? Can he safely spend all He has accumulated savings of $180,000, conservatively the interest from his investment portfolio? How much could he invested. The investments are yielding 9% interest. Mr. Road also withdraw at year-end from that portfolio if he wants to keep its real has $12,000 in a savings account at 5% interest. He wants to keep the value intact? savings account intact for unexpected expenses or emergencies. Suppose Mr. Road will live for 20 more years and is willing to Mr. Road's basic living expenses now average about $1,500 per use up all of his investment portfolio over that period. He also month, and he plans to spend $500 per month on travel and hob- wants his monthly spending to increase along with inflation over bies. To maintain this planned standard of living, he will have to that period. In other words, he wants his monthly spending to stay rely on his investment portfolio. The interest from the portfolio is the same in real terms. How much can he afford to spend per $16,200 per year (9% of $180,000), or $1,350 per month. month? Mr. Road will also receive $750 per month in Social Security Assume that the investment portfolio continues to yield a 9% payments for the rest of his life. These payments are indexed for rate of return and that the inflation rate will be 4%