Memo Assignment Background You are an investment advisor and your clients, Maril
ID: 2794188 • Letter: M
Question
Memo Assignment
Background
You are an investment advisor and your clients, Marilyn and David, require your services. Marilyn and David are both 65 and are about to retire. They have no assets other than $1,600,000 in cash savings, and they have no debts. They wish to maintain their current lifestyle during their retirement years. Their current annual living expenses are $120,000. They have no children and they do not wish to bequeath any assets to charity (after their death). Marilyn and David are in excellent health and have a normal life expectancy. They are, however, concerned about the possibility of outliving their retirement income (i.e., longevity risk). They will rely entirely on their cash savings to support themselves financially during their retirement years. Furthermore, they have a strong aversion to risk.
Marilyn and David have decided to use their cash savings to purchase an annuity that will provide them with the necessary income to cover their living expenses over their retirement years. They initially consult with Ms. Sheila Young who is an investment advisor at Merrill Lynch about purchasing their desired annuity. Ms. Young is a very experienced advisor and she claims that she could get Marilyn and David a much higher annual income than they require because she “knows” how to invest their savings in financial instruments that can yield at least 15% per year. This rate of return is well above the current and historical average return for U.S. stocks as measured by the S&P 500 index.
Marilyn and David want you to provide a “second opinion” of the analysis done by the Merrill Lynch advisor. Specifically, they want you to write a memo to Ms. Young that compares the two alternatives and highlights the risks and benefits of each alternative. They feel certain that Ms. Young is not giving due consideration to assumptions and variables that will impact their decision (e.g., market risk, the clients’ risk tolerance, life expectancy, among others), but they don’t know how to articulate their concerns to her. Therefore, since you speak “finance” they would like you to prepare this memo on their behalf.
Assignment
Write a memo to Ms. Sheila Young containing the following information:
Provide a professional and financially sound critique where you identify the problem(s), if any, with her investment analysis.
Conduct your own comprehensive investment analysis where you address any problem(s) identified using the appropriate methods (e.g., formulas, models, etc.) and assumptions; and provide the appropriate insight from your analysis.
Recommend one or more specific, clearly explained actions that address the problem(s) identified based on your investment analysis; and support your recommendations using your analytical results.
Explanation / Answer
First of all as an advisor, some key points to think before choosing which option to be best
1) Ms Sheila Young should consider their risk appetite because they are now about to retire so debt products are best suited for them
2)We should not ignore the adverse effect of Inflation in our savings it reduces our real return prime focus should not only return but Real Return
3) They are also concerned about longevity risk so planning should be such that there will be no harm in future annuities
4)The most important part is their investment should be such that don't erode their principal and it should provide regular income because they are going to fully depend on it