Trudeau Case Study Situational Analysis

Alternatives including Analysis

Recommendation and Implementation

Surviving Accounts

Current Account Balances/Payments for Trudeaus at Ages 60-13

Current Account Balances/Payments for Trudeaus at Age 67.5

The Trudeaus are seeking to retire in either 6 years at age 60 or in 13.5 years at age 67.5. They will have 1.5 million dollars in savings at age 60 and north of 3 million dollars in savings at age 67.5. They want to be able to live on $10,000 per month. If they live until 85, the Trudeaus could do this -- but one of two things will happen: they will use all their money and have nothing left for their children; or they will have to wait until they are older to retire in order to live off the interest and save the rest for their children. However, the Trudeaus could compromise and reduce their income per month and still maintain something for their children. It depends on what the Trudeaus wish to do with their savings and with the time they have left. It is recommended that the Trudeaus construct a detailed plan of how they wish to spend the remainder of their days in retirement, including trips, etc., and then to make a table of costs and what it is they would like to be able to spend. It is also recommended that the Trudeaus not assume that they will only live to they are 85. At the same time, they must consider market instability and think about asset classes that can be used as wealth preservers and not just view vehicles that are for growth opportunities. The coming years may see a downturn in market productivity. Implementing a wealth preservation strategy may be the best option; this would include purchasing precious metals as an asset class, going to a cash account in case of a market downturn whereat equities could be purchased at a reduced cost, and taking off risk. As most of the Trudeau's money is in a tax-shelter annuity plan, however, this difference is not expected to bring a significant advantage to the Trudeaus' expectations as far as what they would like to spend per month in retirement.

Situational Analysis

The Trudeaus (Robert and Linda) have been married nearly 30 years. They have two children (both grown, college graduates, neither of whom is financially dependent on their parents). Since the time when they began stressing the need to save money to their children, the Trudeaus themselves have managed to open several accounts of various types in order to save for their own future.

The question that Ron and Linda now seek to answer is how they should approach their retirement. They are nearing retirement age and one of the main questions they have is whether they should look to retire sooner rather than later or continue working and saving and retire with a larger nest egg. Other questions besides this are also on their minds -- such as: how might they best use their existing funds and accounts in order to meet the desired allowance that they project will be sufficient for themselves in their retirement years?

According to the table of Surviving Accounts (see Appendix 1), the Trudeaus are well-situated for a comfortable retirement.

If the Trudeaus retire at age 60, the wealth they will have built up, given the strategy outlined in exhibit 4, will be just over 1.5 million dollars (see Appendix 2).

The amount they will have if they choose to retire at age 67.5 will be just under 3.2 million dollars (see Appendix 3).

If the Trudeaus want to live on $10,000 post-tax payments per month in their retirement, it is essential to know whether they have adequate funds available to meet these expectations.

The Trudeaus could retire in 6 years at age 60 with nearly 1.5 million, or they could retire in 13.5 years at age 67.5 with more than 3 million. However, they will be nearly ten years older.

Alternatives including Analysis

There are several consideration that should be made in order to allow the Trudeaus to fully see what is available to them in the future.

The Trudeaus may pursue a number of various solutions to meet their needs. However, it is also important that they understand what they are retiring for. At nearly 68 years of age they are much closer to 70 than they would be were they to retire at 60. Those ten years may seem small on paper, but in reality it can be the difference between enjoying a cruise around...

The longer they put off retirement, they less time they may have to actually enjoy their retirement and do the things they would like to do. Therefore, one consideration they might make is decide if $10,000 is really what they require at age 60. They may in fact be overestimating that amount by a significant margin.
At the same time, assessing the situation depends upon the motive of the Trudeaus. How do they view their children in this decision? Their children are not financially dependent upon their parents, but the Trudeaus may wish to leave something for an inheritance. If, therefore, the Trudeaus have a strategic bequest motive in mind, such as that identified by Bernheim et al. (1985), there may be reason to consider not retiring until age 67.5. At this age there will be plenty of money in their accounts that the Trudeaus can affordably live on the allowance specified until age 85 (though there should be some consideration about what happens beyond this age if they live to see it).

As it stands the following points should be made:

The Trudeaus wish to maintain their current balance and live solely on the interest alone of their funds/investments

In order to draw down $10,000 per month from the interest accrued, the Trudeaus will need to maintain a $2 million balance in their accounts

If they retire at age 60, they do not have enough money to live solely off the interest alone

However, if they wait till 67.5 to retire, they will have sufficient funds to live off the interest and will be able to draw down $10,000.

On the other hand, if the Trudeaus decide that they do not wish to save anything for their children and wish to spend the money that have spent their lives saving, then it is advisable that they get started sooner rather than later, especially if they foresee themselves not living past 85 for whatever reason.

From 60 to 85 is a span of 25 years. That means the Trudeaus would have just north of $1.5 million to spend in the space of a quarter century, should they choose to retire at 60.

From 67.5 to 85 is 17.5 years, just shy of two decades in which the Trudeaus would have to spend just around 3.2 million dollars.

The following points are worth keeping in mind, therefore:

Retiring at age 60, with no plan to pass anything on to their children, the Trudeaus could withdraw more than $10,000 a month but under $12,000 for 25 years. Then they were would be no money left.

Retiring at age 67.5, the Trudeaus could take out $20,000 a month for the 17.5 years they plan to live.

Neither of these options appears to be recommendable, if the Trudeaus plan to leave something for their children. However, working until they are 67.5 may not be recommendable either. What may be recommendable is to change the amount they wish to withdraw every month.

Or the Trudeaus could change up their accounts so that more money is earning interest in certain vehicles rather than others. To do this, however, some assessment of the state of the economy would need to take place. Considering that currently, interest rates are at near zero % and in Europe some rates are going negative, keeping money in the bank is not a good plan for earning interest. Then again, equities (stocks) are not necessarily a good idea either as they are at all time highs and are currently only being backstopped or supported by more quantitative easing from central banks (such as the Fed and the ECB). When QE stops (as it has with the Fed, for now), what will happen to the stock market? A crash may be in store if economic recession occurs. Some analysts suggest the global economy is heading in that direction, especially with Chinese Yuan devaluation, trade imploding, and oil prices remaining low.

Bonds are also having low yields and are not a recommended vehicle for earning interest, especially as they are also costly, as they are being supported by central bank initiatives. In short, the state of the economy is fragile. A separate asset class, perhaps gold or real estate if it can be purchased inexpensively, rehabbed, and sold for a profit of 10% or rented (as rental rates are high) for 6 years and then sold -- each of these could yield substantial returns that could facilitate the growth of the Trudeaus' portfolio. But as the Trudeaus are already planning on selling the rental property they own,…