Calvin 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 super- visor over a period of more
than 30 years with the firm. Calvin receives Social Security benefits and a
generous company pension. Together, these amount to over $4,500 per month (part
of which is tax-free). The Jacobs’s had no children, so he lives alone. Calvin
owns a 2-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 Calvin’s liquid investments (all held in bank
CDs and savings accounts) runs well into the 6 figures. Up to now, Calvin has
just let his money grow 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 benefits of his
labors. He has therefore decided to move $100,000 from a savings account to 1
or 2 high-yielding mutual funds. He would like to receive $1,000 to $1,500 a
month from the fund(s) for as long as possible because he plans to be around
for a long time.
Calvin’s financial resources and investment objectives, what kinds of mutual
funds do you think he should consider?
factors in Calvin’s situation should be taken into consideration in the fund
selection process? How might these affect Calvin’s course of action?
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 that Calvin wants to
receive $1,000 to $1,500 a month from his mutual fund, what would be the size
of his investment account 5 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 Calvin’s investment situation?