Case Study: John & Betty

Wealth Management Case Study– John & Betty Smith

John & Betty Smith

John and Betty recently

completed the sale of their

business and are looking

forward to a long and fulfilling

retirement.

JOHN (AGE 60)

BETTY (AGE 58)

4 CHILDREN

9 GRANDCHILDREN

Example

Prioritized List of Goals

Financially Secure Retirement

Education of Grandchildren

Build Second Home in Iowa

Annual Gifts to Children

Donate Money to Charity

Maintain the Principal Value of Estate

Investments $5,000,000

Home $800,000

Land in Iowa $200,000

Total of Assets $6,000,000

ASSETS

LIABILITIES Education of Grandchildren $30,000/year for 10 years

Gifts to Children $30,000/year

Retirement Income $200,000/year

Gifts to Charity $20,000/year

Total of Annual Liabilities $280,000/annually

Build Second Home in Iowa $400,000 (one time)

Investment Assets $4,600,000

PRODUCTIVE ASSETS

USE ASSETS

Home $800,000

Land in Iowa $200,000

Set Aside for Second Home $400,000

LIABILITIES

Their annual commitments total $280,000 or approximately 6.1% of their investment assets

QUESTION

With $4,600,000, can the Smith’s afford to fulfill their goals?

Hierarchy of Investment Priorities High Returns - Growth

Low Volatility of Account

Consistency of Returns

Asset Growth

Fees (Lowest Possible)

Preservation of Income

Out Performing the Market

Finding Great Stock

Buying Hot Fund

Studying Economic Activities

Employing Market Timing Strategies

Finding Opportunities in the Markets

Understanding Your Investment Process

Making All Investment Decision

Not Running Out Of Money

Hedge Funds

Direct Real Estate

Venture Capital

Finding Highest Performing Money Manager

High Returns - Growth

Low Volatility of Account

Consistency of Returns

Asset Growth

Fees (Lowest Possible)

Preservation of Income

Out Performing the Market

Finding Great Stock

Buying Hot Fund

Studying Economic Activities

Employing Market Timing Strategies

Finding Opportunities in the Markets

Understanding Your Investment Process

Making All Investment Decision

Not Running Out Of Money

Hedge Funds

Direct Real Estate

Venture Capital

Finding Highest Performing Money Manager

Hierarchy of Investment Priorities

1

3

5

4

2

Asset Allocation? Assumed Return?

Asset Allocation Assumed Return: 8.61%

65% Equity/ 35% Fixed Return Downside: -11.8%

Cash 2%

Bonds 33%

Stock 65%

Retirement Funding Analysis

Current Age

Mortality Age

Inflation Rate

Annual Rate of Return

Desired Retirement Income

Retirement Investments

Lump Sum at End of Retirement

ASSUMPTIONS

60

90

3%

8.6%

$280,000

$4,600,000

$1,000,000

RESULTS

Amount needed at retirement

Total at Beginning of Retirement

Surplus/Deficit

$4,105,625

$4,600,000

$494,374

Probability of Falling Below $0

Year 1 Year 8 Year 15 Year 22 Year 30

Probabilities 0% 0% 0% 13.2% 37.1%

Note: “SD” = Standard Deviation

In Thousands

Probabilities Year 1 Year 8 Year 15 Year 22 Year 30

98% - (2 sd) Best Case $5,767 $9,552 $15,075 $22,462 $37,724

84% - (1 sd) 5,152 6,859 8,835 11,282 16,458

50% - Expected Case 4,660 4,830 4,863 4,591 3,135

16% - (-1 sd) 4,209 3,358 2,372 359 0

2% - (-2 sd) Worst Case 3,851 2,396 668 0 0

Note: "sd" = standard deviation

Simulation Results - Range of Assets


80% Equity / 20% Fixed Return Downside: -13.3%

Cash 2%

Bonds 18%

Stock 80%


Probabilities 0% 0% 0% 11.5% 32.5%

In Thousands


98% - (2 sd) Best Case $6,101 $11,353 $22,985 $38,267 $57,470

84% - (1 sd) 5,293 7,308 10,775 15,835 27,269

50% - Expected Case 4,721 5,084 5,704 6,048 6,075

16% - (-1 sd) 4,102 3,239 2,572 902 0

2% - (-2 sd) Worst Case 3,737 2,303 312 0 0




Revised Goals

Education of Grandchildren

Gifts to Children

Retirement Income

Gifts to Charity

Annual Total Expenditures

Value of Estate

REVISED ORIGINAL GOALS

QUESTION

With the revised annual commitments of $230,000 (5.0%) can John and Betty fulfill their goals?

$30,000/10 years

$30,000

$200,000

$20,000

$280,000

$1,000,000

$30,000

$10,000

$190,000

Suspend

$230,000

$1,000,000



Cash 2%

Bonds 38%

Stock 60%


Probabilities 0% 0% 0% 0.5% 5.3%

In Thousands


98% - (2 sd) Best Case $5,693 $9,900 $16,673 $26,172 $47,883

84% - (1 sd) 5,137 7,582 10,917 15,676 25,561

50% - Expected Case 4,662 5,669 7,004 8,687 10,980

16% - (-1 sd) 4,257 4,189 4,232 4,178 3,495

2% - (-2 sd) Worst Case 3,888 3,174 2,484 1,276 0




Cash 5%

Muni Bonds 30%

High Yield 5%

Large Growth

40%

Large Value 10%

Small Growth

10%

Asset Allocation - Current Assumed Return: 8.76%


Asset Class Actual Allocation Target Allocation Drift

Large Growth 40% 15% 25%

Large Core - 10% (10%)

Large Value 10% 15% (5%)

Small Growth 10% - 10%

Small Value - 10% (10%)

International - 10% (10%)

Total Equities 60% 60% -

Municipal Bonds 30% 38% (8%)

High Yield 5% - 5%

Cash 5% 2% 3%

Total Fixed Income 40% 40% -

Total 100% 100% -

In Thousands


98% - (2 sd) Best Case $5,884 $11,143 $18,711 $32,337 $60,658

84% - (1 sd) 5,209 7,975 11,801 17,245 29,891

50% - Expected Case 4,679 5,600 7,070 8,905 11,632

16% - (-1 sd) 4,188 3,988 3,985 3,577 2,790

2% - (-2 sd) Worst Case 3,801 2,891 1,918 583 0






Before-Tax Returns


98% - (2 sd) Best Case 40.6% 18.5% 15.5% 13.8% 12.8%

84% - (1 sd) 24.4% 13.2% 11.8% 11.1% 10.5%

50% - Expected Case 8.5% 8.3% 8.4% 8.4% 8.4%

16% - (-1 sd) -4.6% 4.1% 5.2% 5.7% 6.2%

2% - (-2 sd) Worst Case -15.2% -0.7% 2.2% 3.1% 4.1%



Cash 2%

Muni Bonds 38%

Large Growth

15% Large Core 10%

Large Value 15%

Small Value 10%

Int'l Growth 5%

Int'l Value 5%

Asset Allocation - Proposed Assumed Return: 8.31%

60% Equity/ 40% Fixed Return Downside: -10.5%

Asset Class Actual Allocation Target Allocation Drift

Large Growth 15% 15% -

Large Core 10% 10% -

Large Value 15% 15% -

Small Growth 10% - 10%

Small Value 5% 10% (5%)

International 5% 10% (5%)

Total Equities 60% 60% -

Municipal Bonds 38% 38% -

Cash 2% 2% -

Total Fixed Income 40% 40% -

Total 100% 100% -

In Thousands


98% - (2 sd) Best Case $5,693 $9,900 $16,673 $26,172 $47,883

84% - (1 sd) 5,137 7,582 10,917 15,676 25,561

50% - Expected Case 4,662 5,669 7,004 8,687 10,980

16% - (-1 sd) 4,257 4,189 4,232 4,178 3,495

2% - (-2 sd) Worst Case 3,888 3,174 2,484 1,276 0






Before-Tax Returns


98% - (2 sd) Best Case 34.5% 16.8% 14.1% 13.0% 12.5%

84% - (1 sd) 21.5% 12.5% 11.4% 10.8% 10.5%

50% - Expected Case 8.5% 8.8% 8.7% 8.7% 8.6%

16% - (-1 sd) -2.5% 5.2% 6.0% 6.4% 6.8%

2% - (-2 sd) Worst Case -11.7% 1.5% 3.6% 4.2% 4.8%



Case Study: John & Betty

Economy & Finance

Transcript of Case Study: John & Betty