Calcin Jacobs is a widower who recently retired after a long career with a major
ID: 2701600 • Letter: C
Question
Calcin Jacobs is a widower who recently retired after a long career with a major midwestern manufacturer. Beginning as a skilled craftsman, he worked his way up to the level of shop supervisor over a period of more than 30 years with the firm. calvin receives social security benifits and a generous company pension. Together, these two sources amount to over $4,500 per month. (part of which is tax-free) the jacobs had no children, so he lives alone. calvin owns a two bedroom rental house that is next to his home, and the rental income from it covers the mortgage payments for both the rental house and his house.
over the years, calvin and his late wife, allie always tried to put a little money aside each month. the results have been nothing short of phenomenal. the value of calvins liquid investments (all held in bank CDs and has not used any of his savings to supplement his social security, pension, and rental income. But things are about to change. calvin has decided, "what the heck, it's time i start living the good life!" calvin wants to travel and, in effect, start reaping the benifits of his labors. he has therefore decided to move $100,000 from one of his savings accounts to one of two high-yielding mutual funds. he would like to receive $1,000-$1,500 a month from the fund(s) for as long as possible, because he plans to be around for a long time.
a. what kind of mutual funds do you think he should consider
b.what factors in calvin's situation should be taken into consideration in the fund selection process? how might these affect Calvin's course of action?
c. what types of services do you think he should look for in a mutual fund?
d. assume calvin invests in a mutual fund that earns about 10% annually from dividend income and capital gains. given calvin wants to receive $1,000 to $1,500 a month from his mutual fund, what would be the size of his investment account give years from now?
how large would the account be if the fund earned 15% on average and everything else remained the same?
how important is the fund's rate of return to calvins investment situation?
Explanation / Answer
All mutual funds are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. 1The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility. 2An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. *Based on cumulative total return, 139 of 181, 130 of 170, 130 of 158, and 84 of 109 funds (including all share classes and excluding funds used in insurance products) outperformed their Lipper average for the 1-, 3-, 5-, and 10-year periods ended 9/30/12, respectively. Not all funds outperformed for all periods. Fund returns have been affected by market volatility and are negative for certain periods. ?For funds with at least a 3-year history, a Morningstar Rating is based on a risk-adjusted return measure (including the effects of sales charges, loads, and redemption fees) with emphasis on downward variations and consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% 4 stars, the next 35% 3 stars, the next 22.5% 2 stars, and the bottom 10% 1 star. Each share class is counted as a fraction of one fund within this scale and rated separately. The Morningstar Rating™ is for the retail share class only; other classes may have different performance characteristics. ±In determining the funds on the 2012 Money 70, the editors of MONEY Magazine based their decision on each fund's low expenses, a proven track record of putting shareholders first, experienced management, and 5-year performance record. The ending date for performance was 12/7/11. Note: MONEY Magazine recommends all of the T. Rowe Price target-date retirement funds in its January/February 2012 article "Funds You Can Count On," in which it lists the Money 70 "Recommended" mutual funds, but the 11 T. Rowe Price target-date retirement funds are counted as one fund on this list b)he should consider following........... Professional Management • Diversification Economies of Scale Liquidity • Simplicity c)the servise should be like.............. Professional Management should be good. Everything from the manager’s salary to the investors’ statements cost money. Those expenses are passed on to the investors. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative long-term consequences. Remember, every dollar spend on fees is a dollar that has no opportunity to grow over time. Taxes - When a fund manager sells a security, a capital-gains tax is triggered. Investors who are concerned about the impact of taxes need to keep those concerns in mind when investing in mutual funds he mutual fund return rate is what the fund achieves with the amount of money it has been given to use ( capital) Mutual funds are managed funds. Unlike regular stock funds ,mutual funds are managed . The manager(s) decide how to invest the money and what and when to invest. The purchaser of the mutual fund pays a fee for this service so therefore this will affect the return rate if the mutual fund. In most cases purchasing mutual funds instead of stock funds is a safer way to invest. The rate of return may be less because of the management fees attached, but the capital is usually safer because the fund is managed.