episode 03 discussion

1.	See if you can replicate the results of Maria's "life-cycle" investment strategy that she explained in the Resolution Video. She suggested that her parents invest in stocks for the next four years, then switch their savings to bonds for the following four years, and finally invest in CDs for the final four years prior to their retirement (all the time contributing $250 per month to the savings fund along with the $80,000 they have already saved). Remember that CDs return 6%, bonds 10%, and stocks 12%.

2.	If Maria's parents follow the strategy discussed above, they expect to have $283,597 available to them in 12 years when they retire. They will be interested in knowing what monthly stipend they will be able to draw from that fund. Assume that they will take a conservative, risk-averse strategy with this money during their retirement by keeping the funds in CDs that earn 6% per year, compounded monthly. Furthermore, assume that their actuarial life expectancies are 25 years. Can you help them find the size of the monthly withdrawals they can afford to take from their retirement nest egg under the assumptions just outlined?

3.	Will this be enough to live on? To answer that question, it is helpful to restate the monthly retirement stipend in today's terms. By doing this, Maria's parents can get a better idea of the actual purchasing power that the money will have. To restate a $1,827.21 monthly payment that will be received in 12 years in terms of today's purchasing power, you must discount that payment at the anticipated rate of annual inflation. Suppose that 4% is a reasonable number. What is the relative value of the first $1,827 payment which will be received in 12 years expressed in terms of today's purchasing power? Keeping in mind that the retirees will be drawing this fixed amount of retirement income for 25 years after they retire, it would be wise to also restate the purchasing power of the last $1,827 payment in today's terms. What is that value? Judging from your answers to parts a and b, is the retirement savings plan going to provide sufficient funds for a comfortable retirement?

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