BWAC Evaluation

Background
Your aunt and uncle, Marilyn and David are both 65 and are about to retire. They have no
assets other than $1,600,000 in cash savings, and they have no debts. They wish to maintain their
current lifestyle during their retirement years. Their current annual living expenses are $120,000
per year. They have no children and they do not wish to bequeath any assets to charity after they
pass.  Marilyn and David are in excellent health and have a normal life expectancy. They are,
however, concerned about the possibility of outliving their retirement income (i.e., longevity
risk).  During their retirement years, they will rely entirely on their savings to support
themselves. In addition, they are risk averse and do not want to experience a significant loss of
their savings.
Marilyn and David have decided to use their cash savings to purchase an annuity that will
provide them with the necessary income to cover their living expenses over their retirement
years. They initially consult with Ms. Sheila Young who is an investment advisor at Merrill
Lynch about purchasing their desired annuity.  Ms. Young is a relatively new financial advisor
and claims to be able to get Marilyn and David a much higher annual income because she
“knows” how to invest their savings in financial instruments that can yield at least 15% per year.
Given the data in the “Risk and Return” Excel spreadsheet (also posted on Canvas), this assumed
rate is well above the historical average return for U.S. stocks as measured by the S&P 500 stock
market index.
Marilyn and David want you to provide a “second opinion” of the analysis done by the
Merrill Lynch advisor.  Specifically, they want you to write a memo to Ms. Young that
compares her proposal with your “second opinion” that will analyze the risks and benefits
of each alternative.  They feel certain that Ms. Young is not giving due consideration to their
risk aversion and other consideration such as realistic expected stock market returns and
longevity.  Since your aunt and uncle do not know how to clearly articulate their concerns to Ms.
Young, they want you to prepare this memo on their behalf.
Assignment
Write a memo to Ms. Sheila Young containing the following information:
1. Provide a professional and financially sound evaluation of her proposal and contrast it
with your own alternative proposal.
2. Please use and include the attached Excel spreadsheet in your evaluation that will:
i) analyze and challenge Ms. Young’s assumptions and identify weaknesses in her
analysis, and
ii) offer an alternative analysis based on your own assumptions.
3. Your conclusion must include specific actions to address and correct the problems and/or
mistakes in Ms. Young’s analysis.

(No sources are needed for this assignment, just an evaluation).

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