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ASU Calculating the Prices of Soda After Thirty Years Questions

ASU Calculating the Prices of Soda After Thirty Years Questions


Answer the following questions:


Billy Petty, 56, just retired after 31 years of teaching. He is the father of two children who are still

dependent. He receives a $150,000 lump sum retirement bonus and will receive $2,800 per month from

his retirement annuity. He has saved $150,000 in a 403(b) retirement plan and another $100,000 in

other accounts. His 403(b) retirement plan is invested in mutual funds, but most of his other

investments are in bank accounts earning 2 or 3% annually. Bill has asked for your advice in deciding

where to invest his lump-sum bonus and other accounts now that he has retired. He also wants to know

how much he can withdraw per month, considering he has two children and a non-working spouse.

Because he has children, his current monthly expenses total $5,800. He is not eligible for Social Security

till age 62 when he will draw approximately $1,200 per month; however, he would rather defer drawing

on Social Security until 67 to increase his monthly benefit to $1,550.

1. Bill has an emergency fund already set aside, so he can use his $400,000 of savings for

retirement. How much can he withdraw on a monthly basis to supplement his retirement

annuity if his investments return 5% annually and he expects to live 30 more years?

2. Ignoring his social security benefit, is the amount determined in question 1 sufficient to meet

Bill’s current monthly expenses (keep in mind that he will receive a pension of $2,800 per

month)? If not, how long will his retirement savings last if his current expenses remain the

same? What if his expenses are reduced to $4,500 per month?

3. Considering the information obtained in question 2, should Bill wait until age 67 for his Social

Security benefits? If he waits until age 67, how will his monthly Social Security benefit change

the answer to question 2?

4. If the inflation rate averages 3.5% during Bill’s retirement, how old will he be when prices

doubled from current levels? How much will a soda cost when Bill dies if he lives the full 30

years and the soda costs $1 today?

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