Preparing Carolyn Bowen's Investment Plan

Preparing Carolyn Bowens Investment Plancarolyn Bowen Who Just Turne

Carolyn Bowen, aged 55, is employed as an administrative assistant at Xcon Corporation with 20 years of service. She is in good health, lives alone, and has two grown children. Following her husband's recent passing, she has received $60,000 from a life insurance payout, after medical and funeral expenses. She also has $37,500 in savings accumulated over the past decade. With retirement approaching within 10 years, Carolyn aims to invest her resources to ensure a comfortable retirement. She plans to retire either at age 62 or 65, depending on her financial strategy, and expects to sell her home at retirement, netting $112,500 if she retires at 62 or $127,500 if at 65. Her estimated annual living cost in retirement is $45,000 for the period until age 80. Carolyn anticipates her retirement income comprising Social Security, pension benefits, and an annuity purchased at retirement, with the annuity benefits varying based on her age at retirement. She invests her current savings at 6% compounded annually, with no plans for additional investments before retirement. The goal is to determine her future savings, the annuity benefits she can purchase, total retirement income, and whether her plan meets her long-term goals, including a discussion of the risk and return characteristics of her investment approach and potential recommendations.

Paper For Above instruction

Introduction

Retirement planning is a crucial financial process that ensures individuals can maintain their desired standard of living after they exit the workforce. For Carolyn Bowen, who is nearing her retirement age, developing a sound investment plan involves understanding her current financial position, estimating future needs, and selecting appropriate investment vehicles to bridge the gap between her current resources and her retirement goals. This paper analyzes Carolyn’s financial situation, calculates her potential retirement savings, evaluates her investment options, and provides recommendations to optimize her retirement income while managing associated risks.

Assessing Future Retirement Savings

Carolyn's current financial assets amount to $37,500 in savings, combined with $60,000 from her life insurance proceeds, totaling $97,500. Her investment growth is based on a 6% annual compound interest, with no additional savings contemplated before retirement. Using compound interest calculations, the future value of her current savings can be projected for both retirement ages. Investing her current amount at 6% until age 62 (7 years remaining) will grow her savings by a factor of 1.50, resulting in:

• Future value at age 62: $97,500 × 1.50 = $146,250

Similarly, if she delays until age 65 (10 years), the amount grows by a factor of 1.79:

• Future value at age 65: $97,500 × 1.79 = $174,525

In addition, if Carolyn chooses to sell her house at these points, she will net $112,500 at age 62 and $127,500 at age 65. Combining these proceeds with her accumulated savings will give her total assets available at retirement:

• At age 62: $146,250 + $112,500 = $258,750
• At age 65: $174,525 + $127,500 = $302,025

These sums form the basis for purchasing an income stream to support her retirement needs.

Estimating Annuity Benefits and Total Retirement Income

Carolyn plans to convert her accumulated assets into an annuity that provides a steady annual income until age 80. The annuity specifics are: at age 62, each $1,000 invested yields an annual benefit of $79 over 18 years; at age 65, each $1,000 yields $89.94 over 15 years. Using these ratios, the potential benefit from her total available assets can be calculated:

• Retiring at age 62: $258,750 / $1,000 = 258.75 units; annual benefit = 258.75 × $79 = $20,452.50 (approx.)
• Retiring at age 65: $302,025 / $1,000 = 302.03 units; annual benefit = 302.03 × $89.94 = $27,182.00 (approx.)

These annual benefits form the core of her retirement income, to which her social security and pension benefits will add.

Calculating Total Retirement Income

For a comprehensive view, total retirement income should include social security, pension, and annuity payments. At age 62, her social security and pension provide approximately $16,308 annually, while at age 65, the combined benefits increase to $20,256. Therefore:

• Retirement at age 62: $16,308 (social/security/pension) + $20,453 (annuity) ≈ $36,761
• Retirement at age 65: $20,256 + $27,182 ≈ $47,438

Comparing these totals to her estimated need of $45,000 annually suggests that retiring at age 65 might provide a more comfortable buffer, though retiring earlier would also meet her basic expenses with proper planning.

Financial Goal Alignment and Retirement Timing

Based on these calculations, retiring at age 65 appears to better ensure her financial security, given the higher total income and the larger accumulated assets. However, the decision must also consider her superstition and personal preferences. Retiring at 62 would still provide a sufficient income but with a narrower safety margin. Her plan to sell her house and invest in an annuity appears sound but must be based on accurate assessment of her mortality, investment returns, and market conditions.

Assessment of Investment Plan: Risks and Returns

Carolyn’s strategy of placing her funds in a savings account earning 6% compounds annually is relatively conservative but reliable. It provides steady growth with low risk but may not keep pace with inflation or provide substantially higher returns. Purchasing an annuity converts lump sums into predictable income, offering security but limited flexibility. The risk in her plan primarily involves market fluctuations, interest rate changes affecting her investments, and her superstition-influenced timing, which may lead to premature or delayed retirement.

Recommendations

To optimize her retirement preparedness, Carolyn could consider diversifying her investments beyond savings accounts and fixed annuities, including bonds, dividend-paying stocks, or mutual funds that offer growth potential with moderate risk. Considering inflation, her investments should aim for returns exceeding 6%, possibly through a balanced portfolio. Additionally, she should evaluate her spending needs and contingency plans in case her longevity exceeds expectations. Consulting with a certified financial planner can provide tailored guidance aligned with her risk tolerance and financial goals, ensuring her resources are maximized for a comfortable retirement.

In conclusion, while her current plan provides a solid foundation, strategic diversification and professional advice could significantly enhance her financial security, particularly if she retires earlier or experiences unexpected expenses or market shifts.

References

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