MINICASE Old Alfred Road, who is well-known to drivers on the Maine Turnpike, has reached his 70th birthday and is mady to retire. Me Road has no formal training in finance but has saved his money and levested 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 savings of $180,000, conservatively invested. The investments are yielding 95 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 $1.500 per month, and be plans to spend $500 per month on travel and bob bies. To maintain this 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 5750 per month in Social Security payments for the rest of his life. These payments are indexed for (Toot, Chapter 3164) 14.0% 120% 100% 8.0% 60% 4.0% 20% 0.09 inflation. That is, they will be automatically increased in propor ton to changes in the consumer price indes Mr. Road's main concern is with inflation. The inflation rate has been below 3 recently, but a 35 rate is salty low by his torical standards. His Social Security payments 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 be withdraw at year-end from that portfolio if he wants to keep its real value intact use up all of his investment portfolio over that period. He also Suppose Mr. Road will live for 20 more years and is willing to that period. In other words, he wants his monthly spending to stay wants his monthly spending to increase along with inflation over the same in real terms. How moch can be afford to spend per month? Assume that the levestment portfolio continues to yield a 9% rate of r and that the inflation rate will be 4 Exhibit 2.5 The Effect of Taxes munt laflations et 1547 2016 Afer Taxes After Before Taxes and Inflation After Taxes and Inflation Inflation (Orly) 5.00% 2875 5.44% Common stock S&P 500) Interlom Govt Bonds 4.90% 3.57% 1.045 2.72% 2.13% 1.53% -0.59% 0.01% U.S. Treas Bonds Municipal bonds 4.20% 2015 2045 Before Taxes and inflation After Taxes After Taxes and internation (Only Common stacks P 500 Govt Bond Us The Bod Mod Assumptions: 28 percent tax rate on income; 20 percent on price change. Compound inflation rate was 2.21 percent for full period Source: Computations by authors, using data indicated. Table from Reilly, Brown and Leeds, Investment Analysis and Portfolio Management, Cengage, 11 edition, 2019, page 47. pints) 2. Now consider inflation at 4% annually. After 15 years project the nominal and real income from his three sources of income. Show in a table. What is your conclusion? (10 points) MINICASE Old Alfred Road, who is well-known to drivers on the Maine Turnpike, has reached his 70th birthday and is mady to retire. Me Road has no formal training in finance but has saved his money and levested 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 savings of $180,000, conservatively invested. The investments are yielding 95 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 $1.500 per month, and be plans to spend $500 per month on travel and bob bies. To maintain this 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 5750 per month in Social Security payments for the rest of his life. These payments are indexed for (Toot, Chapter 3164) 14.0% 120% 100% 8.0% 60% 4.0% 20% 0.09 inflation. That is, they will be automatically increased in propor ton to changes in the consumer price indes Mr. Road's main concern is with inflation. The inflation rate has been below 3 recently, but a 35 rate is salty low by his torical standards. His Social Security payments 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 be withdraw at year-end from that portfolio if he wants to keep its real value intact use up all of his investment portfolio over that period. He also Suppose Mr. Road will live for 20 more years and is willing to that period. In other words, he wants his monthly spending to stay wants his monthly spending to increase along with inflation over the same in real terms. How moch can be afford to spend per month? Assume that the levestment portfolio continues to yield a 9% rate of r and that the inflation rate will be 4 Exhibit 2.5 The Effect of Taxes munt laflations et 1547 2016 Afer Taxes After Before Taxes and Inflation After Taxes and Inflation Inflation (Orly) 5.00% 2875 5.44% Common stock S&P 500) Interlom Govt Bonds 4.90% 3.57% 1.045 2.72% 2.13% 1.53% -0.59% 0.01% U.S. Treas Bonds Municipal bonds 4.20% 2015 2045 Before Taxes and inflation After Taxes After Taxes and internation (Only Common stacks P 500 Govt Bond Us The Bod Mod Assumptions: 28 percent tax rate on income; 20 percent on price change. Compound inflation rate was 2.21 percent for full period Source: Computations by authors, using data indicated. Table from Reilly, Brown and Leeds, Investment Analysis and Portfolio Management, Cengage, 11 edition, 2019, page 47. pints) 2. Now consider inflation at 4% annually. After 15 years project the nominal and real income from his three sources of income. Show in a table. What is your conclusion? (10 points)