Question

As part of his retirement strategy Winston plans to invest $600,000 in two different funds. He projects that the high-risk investments should return, over time, about 12% per year, while the low-risk investments should return about 4% per year. If he wants a supplemental income of$30,000 a year, how should he divide his investments?

Answer 1

Answer: Winston should invest $75,000 in the high-risk fund and $525,000 in the low-risk fund to achieve his retirement income goal.

Explanation:

Let x be the amount of money invested in the high-risk fund, and y be the amount of money invested in the low-risk fund. We know that x + y = $600,000, since that is the total amount Winston plans to invest.

We also know that the high-risk investments should return 12% per year, and the low-risk investments should return 4% per year. Therefore, the total return on his investment will be:

0.12x + 0.04y

Winston wants a supplemental income of $30,000 per year. We can set up an equation for this as well:

0.12x + 0.04y = $30,000

We can use the equation x + y = $600,000 to solve for one of the variables in terms of the other. For example, we can solve for y as follows:

y = $600,000 - x

Substituting this expression for y into the equation for the total return, we get:

0.12x + 0.04($600,000 - x) = $30,000

Simplifying and solving for x, we get:

0.12x + $24,000 - 0.04x = $30,000

0.08x = $6,000

x = $75,000

Winston should invest $75,000 in the high-risk fund and $525,000 in the low-risk fund to achieve his retirement income goal.