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How much can Mr. X afford to spend per month?

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Mr. X who is 70 & ready to retire. Owns home, mortgage paid off. He has accumulated savings of $100,000, invested yielding 9% interest & a $10,000 savings account @ 5% interest. Savings account is for emergency expenses only. He would like to spend $1,000 for living expenses and $300 monthly for travel. To live he will rely on his investment. Interest from investment is $9,000 per yr or $750 monthly. He will also receive $750 monthly in social security payments for the rest of his life, which increases with an inflation rate of 4%. It is assumed that the investment continues to yield @ 95 rate of return. Mr. X is expected to live for the next 20 years and use up all of his investment over that period. I need help in how to solve this problem to determine if what kind of advice to give Mr. X. How much can he afford to spend per month?

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Solution Preview

Number of months = 20*12 = 240

FV1 =$100,000
Yield rate = 9%
Since the yield rate is the same as the required return rate, the PV of the saving account is
PV1 = 100,000

FV2 = 10,000
Interest rate = 5%
Monthly interest income = ...

Solution Summary

The expert determines how much Mr. X can afford to spend per month.

$2.19