Mr. and Mrs. Jones have informed me that they want to have their saving last throughout their retirement. Therefore, the objective should be to ensure their needs are met without undertaking any unnecessary risk.

The following analysis will help determine the appropriate investment strategy for the couple. Their plan is to invest $1,600,000 into an annuity due with the expectation of pulling out enough to maintain their current lifestyle, currently estimated to be $120,000. To account for inflation, this figure would need to increase annually by the U.S. historical average of 3.2% (Source: Inflation Data). Considering the average life expectancy in the U.S. is 85 years (Source: SSA.gov), the distributions should be slated to continue until the couple reaches the age of 95 (95+ 2 Std dev). Taking that all into account, a 15% return would require an initial investment of less than $1,125,000 as demonstrated below.
*…show more content…*

The couple would maintain more than $475,000 of their assets, for which they've expressed no desire to do so. Additionally, a 15% return would open them up to a great deal of risk. Even if the investment strategy succeeded in yielding the couple the aforementioned return, the risk in itself extremely distressing for the couple

The objective is to invest in an annuity due that allows thee couple to maintain their current lifestyle throughout their retirement years, while exposing them to the least amount of risk possible. Since there is no need to have any for the couple to have any remaining savings, any additional capital would be best utilized by reducing risk. After some trial and error, I've determined that an 10.4% interest rate would require the initial investment of just under $1,600,000, as demonstrated below.

Net Rate = (1 + 0.104)/(1 + 0.03) - 1 = 0.0698 or

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