Need lots of advices !!!

**kork13** · 01-22-2011, 05:16 AM

The savings account provides $50/mo income.
The invested $180k provides $900/mo income.
**Side note: investments returning 9% don't sound very "conservative", particularly for a 70-y/o. I estimated my figures with 6%, and you may want to take a closer look at your actual level of risk. If you're comfortable with it as is, okay--I just wanted to bring it up)

In addition to the $750/mo 'security' (social security?) payment, you have a total of $1700/mo in income WITHOUT using up any of your principle.

If you draw down the $180k toward zero over 20 years, you can increase your investment income to approximately $1250/mo, which gives you a total income of $2050/mo.
**As I said above, I used 6% return for this. For the sake of using your provided numbers, $180k @ 9% will provide $1350/mo in interest, or $1650/mo drawn down to zero over 20 years.

Keep in mind that all of this is based on today's dollars. I've never figured out a good way to consistently account for inflation, so I've not addressed it here. However, as long as your earnings outpace inflation, your 'real' income will maintain its purchasing power and you'd just need to adjust your income withdrawals accordingly.

**jpg7n16** · 01-22-2011, 09:42 AM

Kork,

I think this is a student who's posting one of his homework questions online for help.

I don't think it's a real situation.

Paul,

Nominal is just the amount of income he'll earn.
Real is adjusted for inflation.

But I don't know what your teacher expects of you for 'evaluate.' What does that mean? I assume it means that you'll have to use up all his assets over a 20 year period.

Figure out the amount of money he'll get each of those 20 years, and then adjust them all for inflation.

**jpg7n16** · 01-22-2011, 10:50 AM

And I'm not going to do the work for you, because the point is for you to learn how to do the calculations for yourself.

But as far as what to do:

For the investments, you need to figure out the PMT that will reduce the investment to $0 over 20 years. (use financial calculator, or Excel) Note: determine whether it's more appropriate to withdraw at the beginning of the year, or the end of the year.
For the savings account, you only need to figure the amount of interest earned each year (says he will keep the savings account in tact, meaning a FV of $12,000 not $0)
For SSI - determine what the annual amount would be, and then increase by inflation each year for the 20 years.

Add those together. This will determine the actual income he'll have (nominal).

Then you need to adjust those figures by inflation to get the real income. Note: remember that inflation compounds each year.

As some check figures, this is what you should get for year 1 and year 14. You'll likely need to do all 20 years to get full credit.

Year 1:
Nominal - $27,690.24
Real - $27,690.24

Year 14:
Nominal - $33,675.91
Real - $20,224.88

**kork13** · 01-22-2011, 03:06 PM

haha! nice. That thought/possibility didn't even enter my mind--I guess I'm entirely too trusting, and took it for face value.

Well, if that's the case, then unfortunately none of my numbers will be accurate enough for his homework assignment--I'm terribly guilty of frequent estimation/rounding errors. oh well

**jpg7n16** · 01-24-2011, 11:34 AM

Originally posted by DRaggnar

your savings are yielding 9% interest? are they very risky? you might want to consider less risky investments for retirement savings!

Originally posted by jpg7n16 View Post

Kork,

I think this is a student who's posting one of his homework questions online for help.

I don't think it's a real situation.

It's likely a Homework problem with a scenario given for instructive purposes in a classroom.

But the OP hasn't replied to confirm that or not.

Still I don't know many people age 70 who go onto an online forum requesting advice stating 'assume I live for another 20 years' asking for us to evaluate 'nominal' and 'real' returns. Those are dead giveaways for classroom questions.

Another giveaway is that the $12k in savings is earning 5%. Yeah right

**bjl584** · 01-24-2011, 11:41 AM

Well if this is fake, then tis has certainly went terribly wrong for the poster. Maybe you will have better luck getting an answer on a different forum. Or maybe try this, be honest. There are plenty of people on here that will help you work through a problem if you are honest and upfront about things.

**jpg7n16** · 01-24-2011, 11:50 AM

I think the OP was trying to be honest, just worded it funny so that it seems as though it's his real life problem.

He says that he's 'stuck on a question' and needs help. Then posts the scenario in quotations.

This reminds me a lot of what we did in our finance classes, so I guess it jumps out at me.

I posted above on everything he needs to do (even gave 2 check figures) - so that he can learn, but I'm not here to do homework for people

I'm all for him learning how to do the calculations though.

**PaulYeoh** · 01-25-2011, 09:30 PM

Re: Need lots of advices !!!

Dear all

I would like to say thank you to all of your replies.

Here is my solution (kindly take a look see whether it's correct)

Annual Income in term of Nominal rate

From investment portfolio

PV: $180K
N : 20
I/R: 9%
=> PMT = $19,718.37

From Saving Account

PV: 12K
N: 20
I/R: 5%
=> Annual interest payment is $962.91

Securities Payment per year should be $750 * 12 = $9,000

Thus, annual income in total should be $19,718.37 + 962.91 + 9,000 = 29,681.28

About annual income in real term, I repeated the same solution but replacing 9% and 5% by 5% and 1%.

**PaulYeoh** · 01-25-2011, 09:35 PM

Re: Need lots of advices !!!

Originally posted by jpg7n16 View Post

And I'm not going to do the work for you, because the point is for you to learn how to do the calculations for yourself.

But as far as what to do:

For the investments, you need to figure out the PMT that will reduce the investment to $0 over 20 years. (use financial calculator, or Excel) Note: determine whether it's more appropriate to withdraw at the beginning of the year, or the end of the year.
For the savings account, you only need to figure the amount of interest earned each year (says he will keep the savings account in tact, meaning a FV of $12,000 not $0)
For SSI - determine what the annual amount would be, and then increase by inflation each year for the 20 years.

Add those together. This will determine the actual income he'll have (nominal).

Then you need to adjust those figures by inflation to get the real income. Note: remember that inflation compounds each year.

As some check figures, this is what you should get for year 1 and year 14. You'll likely need to do all 20 years to get full credit.

Year 1:
Nominal - $27,690.24
Real - $27,690.24

Year 14:
Nominal - $33,675.91
Real - $20,224.88

Hi there, thanks for your advice

I'm still confused by the word " intact". In saving account, the principle (in this case, it's $12K) is Present Value (PV). However, you stated it as an FV. Could you explain me more about this point?
Moreover, since the question is about annual income, do I need to calculate the inc year by year?

Best Regards,

Paul Yeoh

**PaulYeoh** · 01-25-2011, 10:27 PM

Re: Need lots of advices !!!

My understanding of the case is as below

The 70 year-old guy wants to keep his full saving account due to for some emergency situations. Therefore, he doesn't touch his annual interest. That's why "intact" is the word.
So finally, he only has two sources of annual income. They are interest payment from his investment portfolio and Security Payment. In other words, his saving interest doesn't contribute into his annual income.

AM I RIGHT?

**jpg7n16** · 01-26-2011, 06:58 AM

Originally posted by PaulYeoh View Post

From investment portfolio

PV: $180K
N : 20
I/R: 9%
=> PMT = $19,718.37

What you've calculated is a simple PMT calc, using end mode. But is that the most accurate description of what the client is likely to do? End mode means wait till the end of the period and then make 1 withdrawal.

So your calculation means that he waits until the end of the year, and then withdraws 1 big chunk of money. Is that what you expect the client to do? How do you expect the client would typically make withdrawals? (note - this changes my answer above) 1 big withdrawal at the end of the year? 1 withdrawal at the beginning of the year? 1 withdrawal at the end of each month? or 1 withdrawal at the beginning of each month?

From Saving Account

PV: 12K
N: 20
I/R: 5%
=> Annual interest payment is $962.91

Your problem states that he wants to keep the balance in tact. Meaning, he wants to always keep $12k in the account - or at least that's how I read it. I believe he'd live off the interest, and would be required to include it in his income.

Your calculation here (962.91) is based on him withdrawing all $12k too - which is not what the client wants.

This is why I said the FV would be $12k. Obv PV is $12k, but in your calculation, you used a FV of $0. This means he did not keep his balance intact.

Securities Payment per year should be $750 * 12 = $9,000

This is correct - for the 1st year only.

Thus, annual income in total should be $19,718.37 + 962.91 + 9,000 = 29,681.28

I don't think this is correct.

By re-evaluating my method, I think the 1st year's income should be: $28,889.40

About annual income in real term, I repeated the same solution but replacing 9% and 5% by 5% and 1%.

That is not how you adjust for inflation. Your textbook should provide a method of calculating inflation over multiple years.

You should be dividing each year's income by {(1+i)^(n-1)}; where i= rate of inflation (4%=.04) and n=year.

Example: year 1

28,889.40 income
(1.04^(1-1)) = 1.04 ^0 = 1

Which is true because year 1 is the base year - and thus isn't impacted by inflation.

Originally posted by PaulYeoh View Post

I'm still confused by the word " intact". In saving account, the principle (in this case, it's $12K) is Present Value (PV). However, you stated it as an FV. Could you explain me more about this point?

If you want to keep the balance intact, that means you want to end with what you started. So PV=FV.

Moreover, since the question is about annual income, do I need to calculate the inc year by year?

That is a good question for your professor, but I would say yes. You need to calculate all 20 years of income (nominal) and then adjust each of those 20 years' income for inflation, using the formula above.

The easiest way to do that is in Excel.

-------------------------------------------------------------

Like I said above, I think there is a better method than what I originally did, so I have new check figures for you.

Year 1:
Nominal - $28,889.40
Real - $28,889.40

Year 7:
Nominal - $31,277.27
Real - $24,718.88

Need lots of advices !!!