Amanda Howland

Math 1030-011 Spring 2016

Final Project
Inheritance and Retirement Planning
At 35 years of age I want to know, hypothetically, if I could invest an inheritance of
$50,000 and get a return at retirement that I could live off of.
I am currently 35 years old. Though historically retirement age has been 65 years old, I
know that people live much longer than they used to, meaning retirement funds must be
stretched further. For this reason, and for the purposes of this paper, I am planning to
retire at the age of 69. This gives me 34 years of working and investment to plan for
retirement.
First, I want to consider the kind of retirement income I would like to receive monthly. On
my current plan, I will have a paid off house, so I need only consider monthly expenses
and any kind of spending money I would like. Based on my current expenses and
thinking about future inflation, I estimate my future income needs to be $5,000 per
month, $60,000 per year.
In order to reach this goal, I want to look at a mix of investments that can get me there.
First, I am curious if 34 years is long enough, with compound interest, to turn in to a
balance in which I could live entirely off interest. My first calculation is based purely on
an assumption of return. Assuming my investment gets a return of 7% annually at age
69, what would my balance have to be to withdraw $60,000 annually?
60,000/.07 = $857,142
I would need to grow my initial $50,000 investment to $857,142 to live off of it alone.
There are a number of investment options out there and before researching, I am
1

curious what sort of return I would need to average over 34 years to reach this goal.
Using trial and error, I input a couple different rates to see what I could get. Looking at
all of my current investments, I seem to average around 10% growth. However, to play
on the conservative side, I am going to start with 7%. I am going to assume that the
interest is compounded monthly over 34 years:
50,000(1+.07/12)^12*34 = $643,826.82
Assuming I can get a return of 7%, the my balance at the age of 69 would be $643,826.
This is $214,000 shy of my target balance. Lets look at expecting a 9% return:
50,000(1+.09/12)^12*34= $1,054,271.26
This would leave me with a balance of $1,054,271, this is over my target by $197,129.
Knowing that markets can be fickle, lets look at if I assume an 8% return over the life of
my investments:
50,000(1+.08/12)^12*34= $752,195.63
It is incredible what one percentage point can do, the difference between an 8% and a
9% return is nearly $300,000. An 8% return leaves me short, again, of my target by
$104,947. So when I look at investments, I want the mix of them to equal somewhere
around an 8.5% return to meet my goal of $857,142 at the age of retirement.
To find a mix of investments that interested me, I looked at US News & World Reports
ratings of various mutual funds, domestic and international stock, and bonds to learn
more about how each of these funds performed over time. To decrease risk, I want to
spread out my $50,000 inheritance over multiple funds.
First, I will invest the maximum possible, $5,500, into a Roth IRA. The money in this
fund will grow tax free and as long as I dont withdraw it before the age of 55, I also will
2

not be penalized or have to pay anything extra. From January 1970 through to Dec.
2014, the average annual compounded rate of return for the S&P 500, including
reinvestment of dividends, was approximately 10.7% (source:
www.standardandpoors.com) so I will use this in calculating the expected balance at
age 69.. With just this investment alone, I can expect to have $205,742:
5,500(1+.107/12)^12*34= 205,742
Now I have a number of stocks and mutual funds that I looked at. In making my
decision, I looked at the average rate of return over the last three and ten years to help
me discern how stable the fund was.

T.Rowe Price Media and

Telecommunications Fund
PNC Multi Factor Small
Cap Growth (PLWAX)
Vanguard Equity Income
Fund (VEIPX)

Minimum initial
investment

Ave Return over last 3

years

Average Return over

last 10 years

$2,500

14.2%

12.4%

$500

12.7%

6.2%

$1,000

10.3%

7.3%

Given that the market can fluctuate, I assumed the 10 year average return for each of
these investments. After opening my IRA, I have $44,500 left to invest. To spread out
risk, I am going to invest almost equally in each of the funds. Given the above interest
rates, I can expect to have $1,291,522 at age 69:
T. Rowe Price Media and Telecommunications Fund: $15,000 invested
15,000(1+.124/12)^12*34= 994,675
PNC Multifactor Small Cap Growth: $14,500 invested
14,500(1+.062/12)^12*34=118,714

Vanguard Equity Income Fund: $15,000 invested

15,000 (1+.073/12)^12*34= $178,133
IRA

T.Rowe

PNC

Vanguard

1000000

750000

500000

250000

0
1

11 13 15 17 19 21 23 25 27 29 31 33

The total I would have at retirement with these investments and my Roth IRA, without
investing anything beyond my initial $50,000 would be $1,497,264. This exceeds my
initial target by $604,122. If I were to withdraw interest only at beginning at the age of
69, I would have an annual income of $104,808.
There are a number of factors that have not been included in these calculations. First,
aside from the Roth IRA account, I will have to pay capital gains taxes on all interest
earned. While this does not come out of the fund, it is something to consider when
thinking about expenses up to retirement. I could consider putting the remaining 44,500
balance in a low risk/low yield account and invest the maximum allowable to a Roth
over the following eight years and watch the investment grow tax free to retirement.

Second, as I look at the investments, 66% of my retirement income relies on one fund
alone. Further diversifying would reduce risk, though it could potentially also reduce
return.
Roth IRA

T.Rowe

PNC

12%

Vanguard

14%

8%

66%

Third, these assumptions are based on performance over 10 years. While this is good
data to have, it would be preferable to know the funds performance over its lifetime.
While historical data certainly cant predict the future, it can give a good idea of what to
reasonably expect.
Overall, if I were to receive this kind of return, I would be pleased at retirement.
However, I would not personally want to let my entire retirement ride on the inheritance
alone. I would continue to invest in my 401K and other investments during my working
years to further ensure my future financial health. I would also plan ahead with my
expected pension and think about how I could optimize that at retirement through
investment.

Doing this project and looking at investments and growth in this way certainly opens my
eyes. I started very late in saving towards retirement. I currently have $14,000 in a 401K
and 15,000 in a Roth IRA. Even if I saw a conservative rate of growth in these accounts,
I would fall short of what is needed. I can see how its more about time invested than
amount when it comes to compound interest and I have lost a lot of time. If I were to
focus intensely over the next 5 years in investing a larger sum towards retirement, I
could be sitting in a good situation when I turn 69. And maybe I can also hope to inherit
$50,000 this year.