Mr. Road

doddery Alfred avenue, who is well-known to drivers on the Maine Turn-pike, has reached his seventieth birthday and is ready to retire. Mr. Road has no formal training in finance moreover has saved his bills and invested carefully. Mr. Road owns his homethe mortgage is paid offand does not take to move. He is a widower, and he wants to bequeath the house and any stay assets to his daughter. He has accumulated savings of $180,000, conservatively invested. The coronations are egressing 9% inte residuum. Mr. Road also has $12,000 in a savings account at 5% interest. He wants to keep on the savings account intact for upset(prenominal) expenses or emergencies. Mr. Roads basic living expenses now number about $1,500 per month, and he plans to spend $500 per month on belong and hob-bies. To maintain this planned standard of living, he go out have to confide on his investment portfolio. The interest from the portfolio is $16,200 per year (9% of $180,000), or $1,350 per month. Mr . Road entrust 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 automatic each(prenominal)y amplificationd in propor-tion to changes in the consumer price index. Mr. Roads main concern is with inflation. The inflation arrange has been below 3% recently, but a 3% rate is outstandingly low by his-torical standards. His Social Security payments will increase with inflation, but the interest on his investment portfolio will not. What advice do you have for Mr. Road? Can he safely spend all the interest from his investment portfolio?How much could he withdraw at year-end from that portfolio if he wants to keep its real value intact? Suppose Mr. Road will conk out for 20 more years and is willing to use up all of his investment portfolio over that period. He also wants his periodical spending to increase along with inflation over that period. In other words, he wants his monthly spending to stay the same in real terms. much erect he afford to spend per month? Assume that the investment portfolio continues to yield a 9% rate of return and that the inflation rate will be 4% Fundamentals of Corporate Finance, 154.