Case: TOM YEE SEEKS THE GOOD LIFE
Tom Yee is a widower who recently retired after a long career with a major manufacturer. Beginning as a skilled craftsman, he worked his way up to the level of factory supervisor over a period of more than 30 years with the company. Tom receives a generous superannuation pension which amounts to over $3500 per month (part of which is tax free). The Yees had no children, so he lives alone. Tom owns a two-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, Tom and his late wife Camilla always tried to put a little money aside each month. The results have been nothing short of phenomenal; the value of Tom's liquid investments (all held in bank term deposits and savings accounts) runs well into the six figures. Up to now, Tom has just let his money grow and hasn't used any of his savings to supplement his pension and rental income. But things are about to change. Tom has decided, ‘What the heck, it's time I started living the good life!' Tom wants to travel and, in effect, start reaping the benefits of his labours. He has therefore decided to move $100 000 from one of his savings accounts to one or two high-yielding managed funds. He would like to receive $1000 to $1500 a month from the fund(s) for as long as possible, because he plans to be around for a long time.
QUESTIONS
1. Given Tom's financial resources and investment objectives, what kinds of managed funds do you think he should consider?
2. What factors in Tom's situation should be taken into consideration in the fund selection process? How might these affect Tom's course of action?
3. What types of services do you think he should look for in a managed fund?
4. Assume that Tom invests in a managed fund that earns about 12% annually from dividend income and capital gains.
Given that Tom wants to receive $1000 to $1500 a month from his fund, what would be the size of his investment account five years from now?
How large would the account be if the fund earned 16% on average and everything else remained the same?
How important is the fund's rate of return to Tom's investment situation? Explain.