A retiree has $750,000 in his retirement account. In addition, bonds will mature in 10 years and will yield $400,000. He estimates future expenses over the next 20 years as shown in the table below. Times are relative to the current time which is time 0. All dollar figures are in 1,000's of dollars. Assume all cash flows occur at yearly intervals: times 0, 1, 2, etc.
|0, 7, 14||Expenses: Home repairs||$40|
|1, 2, 3, 4, 5||Expenses: Children's college||$20|
|1 through 9||Expenses: Annual Living Expenses||$50|
|10 through 20||Expenses: Living expenses: $50 + Increase of $5 per year||$55 year 10, $60 year 11, etc.|
|0||Income: Retirement fund||$750|
|10||Income: Receipts from bonds||$400|
Unused cash may be placed in regular savings at a rate of 4% per year. Five-year certificates of deposit are available. These pay a 6% annual return, but the money must be left in the CD account for a full 5 years. Assume CD investments may only be made at years 0, 5, 10 and 15. Money may be borrowed at an annual cost of 7%.
Determine a plan for investments and borrowing. The goal of the retiree is to meet all expenses while maximizing the amount remaining after 20 years.