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Old Alfred Road

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Submitted By smcdaniel73
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Old Alfred Road
Case study
Financial Analysis and Economics

GRD6420T-(GR14)-T2, SP-2015-GRAD
Professor Brain McElyea Student Sara McDaniel

Old Alfred Road, who is well-known to drivers on the Maine Turnpike, has reached his seventieth birthday and is ready to retire. Mr. Road has no formal training in finance but has saved his money and invested 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 9 percent interest. Mr. Road also has $12,000 in a savings account at 5 percent 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 he plans to spend $500 per month on travel and hobbies. 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 percent of $180,000), or $1,350 per month. Mr. Road will also receive $750 per month in social security payments for the rest of his life. These payments are indexed for inflation. That is, they will be automatically increased in proportion to changes in the consumer price index. Mr. Road’s main concern is with inflation. The inflation rate has been below 3 percent recently, but a 3 percent rate is unusually low by historical standards. His social security payments will increase with inflation, but the interest on his investment portfolio will not.
Advice
Mr. Road‘s social security would adjust for inflation. But his earning from accumulated saving is in nominal terms. Since some values are in nominal terms and some are in real terms, it is advisable to perform all calculations in real terms

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