Question 4

Jack has just retired and has received a lump sum pay-out of $1,500,000. He invests part of this pay-out on an investment property which earns 5 percent per annum and provides a perpetual income to him of $50,000 per year (assuming start-of-year withdrawals). He puts the rest of the pay out in another investment in the form of an annuity which earns 4 percent per annum.He wants to make equal annual withdrawals over the next 15 years from this investment annuity, to fund some overseas trips and a few other extravagances, leaving a balance of zero,

Required

(i) Calculate how much Jack has invested in the investment property.

(ii) Show how much extra Jack can expect to spend each year (assuming start-of-year withdrawals), over and above the $50,000 from the property investment, for the next 15 years from the investment annuity. Note: ignore tax in your calculations.