Topics: Inflation, Basic financial concepts, Money Pages: 2 (546 words) Published: October 28, 2008
Portfolio = \$180,000
We get \$16,200 a year or \$1,350 a month in nominal terms. •Our portfolio grows at a nominal rate of 9% or a real annual rate of 4.8% = (1.09/1.04) - 1 Savings = \$12,000
Our savings is growing at a nominal rate of 5% or a real annual rate of .96% = (1.05/1.04) – 1 Social Security
We will get \$750 a month from social security; this amount will always stay true since it is indexed for inflation. In other words its real interest rate is 0%. Expenses
We have \$1,500 living expenses and \$500 for fun and travel. We should ask if these are real values? In other words, if the real rate at which these expenses are growing is 0%.

1.)Can he safely spend all the interest from his portfolio investment?

oNo, because the real value of his monthly interest is \$720 = \$180,000 * (.048/12) and when we add \$750 we have a total amount of \$1,470 which does not cover the \$2,000 or \$1,500 if we were to drop all of his hobby expenses.

2.)How much could he withdraw at year-end from that portfolio if he wants to keep its real value intact?

oFuture Value (in real terms) at year end = 180,000*(1.04) = \$7200 oAnnual Interest (nominal) = \$16,200
o\$16,200 - \$7200 = \$9000
oThis amount is possible only if the portfolio and its interest are not used to at all. He physically would receive the \$16,200, but its purchasing power is not the same.

3.)Suppose Mr. Road will live for 20 more years …you read the rest…How much can he afford to spend per month?

oThis is a possible form of our annuity using a monthly real interest rate > .048/12 = .004

***This is assuming that Mr. Roads does not start receiving payments today, but rather at the end of the month 1.***

180,000 = Monthly cash payment ((1/0.004)-(1/(0.004*1.004^240)) Annuity Factor
M=12, n=20, rmonthly=.004

180,000 = Monthly cash payment (154.0933029)

Monthly Cash Payments = (180,000 / 154.0933029) = \$1,168.12

Then add the 750 from Soc. Sec. (which is...