Ritchie just retired, and has $640,000 to invest. A very safe Certificate of Deposit (CD) account pays 1.5%, while a riskier bond fund pays 7.5% in interest.

Question

Ritchie just retired, and has $640,000 to invest. A very safe Certificate of Deposit (CD) account pays 1.5%, while a riskier bond fund pays 7.5% in interest. Ritchie figures he needs $32,000 a year in interest to live on. How much should he invest in each account to make enough interest while minimizing his risk?

Answer 1

.075(x) + .015(640-x) = 32

.075x -.015x = 32- .015(640)

.06x = 32 - 9.6= 22.4

x = 22.4/.06 = 2240/6 = 373 1/3 thousand invested at 7.5%

$373,333.33

640-x = 640-373 1/3 = 266 2/3 thousand invested at 1.5%

= $266,666.67

.075(373 1/3) + .015(266 2/3)

= 28+ 4 = 32