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Figuring my target yield
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THE SCENARIO
I've got a friend, Sandy, who received somewhat of a windfall, so she's got some money in the bank. She'd like to turn that into monthly income, and has about 20 years until her retirement accounts become available for withdrawal. One thing Sandy can do is to buy a note to provide income over time in exchange for money spent today. Before looking at available notes, however, it would be beneficial to know what her real needs are. That will make finding suitable notes much easier.
The question: Sandy has $300,000 to spend, and needs a stream of income that lasts at least 20 years. She figures that she needs $2,500 per month for the duration. What's the minimum yield Sandy needs to get when buying a note* in order to meet her goals?
* Sandy could buy more than one note if she finds ones that are suitable, but knowing her target minimum yield will help her to winnow down the lists she'll be looking at to find the one(s) she wants.
THE SOLUTION
First things first, make sure the calculator is using 12 Payments per Year.
N: 240 (Sandy's retirement starts in 20 years from now, so that's how long she needs to note to last)
I/YR: (This is what I'm trying to find)
PV: -300,000 (Sandy has $300,000 to spend on notes)
PMT: 2,500 (Sandy needs $2,500 in monthly income)
FV: 0 (At the end, Sandy expects her retirement accounts to provide for her income needs)
To meet her income goal, Sandy needs to make at least 7.95% on her money.
What do you think? Should Sandy try and find notes that yield at least 7.95%? Do you think that'll be easy for her to do? Do you think she should invest in something else instead, and if so, what should she buy? Let us know in the comments!
