Your client spends $2000 per month on living expenses, including mortgage on his property
worth $800,000, with a balance of $300,000 owing at interest rate of 6%. His current bank
deposit is $30,000 and he earns 5% APR on his deposit. He wants to buy a car costing
$20,000 with estimated residual value of $7000 at end of 36 months and he is presented
with the option of buying the car outright with cash or finance at 8% interest rate per annum for 36 months with deposit of $2000. Your client currently earns $70,000 a year, paid
monthly, and expects to earn $90,000 if he can get a master degree. Income tax is 28%. If he
studies towards a master degree now, he will be without income for two years and will have
to pay $5,000 non tax deductable course related fees per semester for two years. There are
two 6-month semesters per year. For his retirement, he wants to retire on his 75th birthday and he is looking at two investment products (correlation between two asset is 0.5)
consisting of 15% return on shares (variance of 225, or a standard deviation of
p
225/10000
if converted at the same unit as reported returns) and 10% on bonds (variance of 90, or a
standard deviation of
p
90/10000 if converted at the same unit as reported returns), and
being a conservative investor, he would like to minimize his risk using combination of these
two assets.
Your client expects he will need $6000 per month by the time he is 75 and he expects to
sell his home for 1.4 million dollars and move into an apartment cost $800,000. He will
1also put any money he has in low risk investment by that time, earning APR of 3%. He
also plans to have assisted living once he reaches 85 to 90, with cost being approximately
$10,000 per month. He would also like to have $10,000 to cover his final expenses by the
time he reaches 90. He would like to know how much money he needs to put aside into
investment fund at end of every month, beginning end of this month, so he can reach his
retirement objective. The client is also aware of investment variability for his portfolio and
would like to have some information as to the amount of money he needs to put aside per
month in case the investment over or under deliver the expected return.
To calculate how much money your client needs to put aside into an investment fund every month in order to reach his retirement objectives, we need to break down the different components and calculate them individually. Let's go step by step:
1. Living Expenses:
Your client spends $2000 per month on living expenses, including the mortgage on his property. We'll assume this remains constant throughout.
2. Property:
The client's property is worth $800,000, with a balance of $300,000 owing at an interest rate of 6%. We'll assume the property value remains constant, and the client continues to pay off the mortgage.
3. Bank Deposit:
The client has a current bank deposit of $30,000 and earns 5% APR on the deposit. Again, we'll assume this remains constant.
4. Car Purchase:
The client wants to buy a car costing $20,000 and has the option to buy it outright with cash or finance it at an 8% interest rate per annum for 36 months with a deposit of $2,000. We'll need to consider the monthly installments in the finance option.
5. Income and Education:
The client currently earns $70,000 a year and expects to earn $90,000 if he obtains a master's degree. However, pursuing the master's degree means he'll be without income for two years and will have to pay $5,000 non-tax-deductible course-related fees per semester for those two years. We'll need to consider the impact of the change in income and the education expenses.
6. Retirement Planning:
The client wants to retire on his 75th birthday and will need $6,000 per month. He plans to sell his home for $1.4 million and move into an $800,000 apartment. Additionally, he plans to put any money he has in low-risk investments earning an APR of 3%. At age 85-90, he expects to have assisted living with a cost of approximately $10,000 per month. Finally, he wants to have $10,000 to cover his final expenses by the time he reaches 90.
7. Investment Portfolio:
The client wants to minimize risk and has two investment products: shares with a 15% return and a variance of 225, and bonds with a 10% return and a variance of 90. We'll need to determine the optimal allocation between these two assets.
Now that we have broken down the components, we can proceed with calculating the amount of money your client needs to put aside into an investment fund every month to reach his retirement objectives.