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Discussion Case

Doug Klock, 56, just retired after 31 years of teaching. He is a husband and father of three children, two of whom are still dependent. He received 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) plan is invested in mutual funds, but most of his other investments are in bank accounts earning 2 or 3 percent annually. Doug has asked 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 in college and a nonworking spouse. Because Rachel and Ronda are still in college, his current monthly expenses total $5,800. He does not intend to begin receiving Social Security until age 67 and his monthly benefit will amount to $1,550. He has grown accustomed to some risk but wants most of his money in FDIC-insured accounts.


1. Assuming Doug has another account set aside for emergencies, how much can he withdraw on a monthly basis to supplement his retirement annuity if his investments return 5 percent 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 his current monthly expenses? If not, how long will his retirement last if his current expenses remain at $5,800 per month? If his expenses are reduced to $4,500 per month? (Hint: Use the information in the appendix to this chapter to solve this problem.)

3. If he withdraws $3,000 per month, how much will he have in 11 years when he turns 67? If he begins to receive Social Security payments of $1, 550 at 67, how many years can he continue to withdraw $1,450 per month from his investments?

4. If the inflation rate averages 3 percent during Doug's retirement, how old will he be when prices have doubled from current levels? How much will a soda cost when Doug dies, if he lives the full30 years and the soda costs $1 today?


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