As an investment advisor, you are developing an investment plan for a new client.
Information on the client follows.
- The client plans to retire in 30 years.
- The client desires an annual retirement income that will provide purchasing power (measured in today's dollars) of $60,000.
- The client has saved $40,000 to date.
- The client's salary will likely grow at 5% per year.
- The client's daughter plans to go to college in three years and the client wishes to pick up the expected cost of $10,000 per year for four years.
- The client is conservative and currently has a portfolio with a beta of 0.8. You believe a beta of 0.8 is appropriate given the client's level of risk aversion. Once the client retires, however, you believe a beta of 0.2 will be more appropriate for the client's portfolio.
Other information follows.
- The yield on long-term Treasury securities is 4.0%.
- The expected return on the Russell 3000 index is 9.0%.
- Inflation is expected to be 2% per year indefinitely.
- To be conservative, your policy is to develop a plan based on a client life expectancy of 50 years following retirement.
Develop a reasonable retirement plan for the client. Specifically, describe a well-reasoned savings plan that will meet the client's goals. In doing so, you should assume that the client's savings will increase at the rate of his/her salary growth.