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“Money’s only something you need in case you don’t die tomorrow.

- Wall Street (1987)

Gary and Erin Dickinson have come to me for help in planning their finances. I hope to educate them,
protect and grow their life’s savings, and reduce the some of the worry and uncertainty associated with
personal financial decisions. If I can guide them to a financial position which will allow them to reach
their goals, then I will have done my job.

After being briefed on their current situation and future goals, the first thing I would like do with Gary
and Erin is put together a net worth statement.

Cash $12,000
Joint Brokerage Acct $131,000
Erin 401(k) $43,000
Erin IRA $212,000
Erin SEP $173,000
Gary 403(b) $239,000
Gary IRA $57,000
IBM Shares $1,341,000
Tobias 529 Plan $16,000
Michelle 529 Plan $9,500
NY Apartment $680,000
Mortgage ($375,000; 5.75%; 30 yr; 06/2004) ($340,000)
Adirondacks Home
Mortgage ($70,000; 6.25%; 30 yr; 02/2007) $180,000
($67,000)
Net Worth $2,686,500

The net worth statement gives us a snapshot of the value of G&E’s assets. It is the foundation from
which we can start thinking about what adjustments we might make so that these assets best serve
G&E’s interests.

I will first look deeper into G&E’s financial standing, discuss their goals, and make assumptions for the
future. My aim is to think about what G&E should do in order to have the best chance of meeting their
goals, and identify what we have to work with.

I will then figure out how much they need to be saving every year to meet their goals. From there, I will
work backward to figure out how much they can be spending on everything else.

Later I will discuss asset allocation and recommend a portfolio for G&E.

As a rule of Given their level of income. and thereby be able to focus their portfolio on planning for retirement. the expected returns on the portfolio. take the place of any losers that we want to lock around 6%. I will take liberties with respect to the treatment of three aspects of G&E’s finances: real estate. ASSUMPTIONS. mainly through tax loss Assumption: G&E’s income tax rate is 40%. The current level in as tax losses. I will assume a flat 20% across the board. G&E’s portfolio will .3% for urban areas in the US from 1914 to on. The tendency of people to evaluate different aspects of their finances independently of the others. and charity. with similar expected Assumption: 3. I will identify their goals and what is needed to reach those goals. INFLATION be defined in terms of asset allocation. at which point I will Additional. I will make various assumptions for the future. and another 10% to the state and city. and harvesting. There that all investments henceforth will be taxed as might be opportunities to use this tax-deferred capital gains and not as ordinary income.5% annual inflation will be performance and similar expected contribution assumed for all calculations. This is not the case. college tuition. and I will work with G&E to use losses capital gains tax is 20% or 2 pp off expected to offset their capital gains throughout the returns. but I will not treat them any differently security benefits. to categorize financial decisions and ignore the relationships that exist between those decisions. I will keep a stable of replacements ready to 2010. These bench players will share is much lower. I will try to look objectively at all facets of their finances. treat them as given. A sound financial plan must be holistic. status to our advantage. but my intention is set those items aside. All the money is for retirement. I will explain my reasons for each as we come to them. I expect the real tax bill on G&E’s portfolio to be less than TAXES 20%. except for private to the portfolio as a whole. their retirement funds are tax- assume they will not be taxed on their social deferred. Tobias and Michelle’s education. the same risk factors as the original components of that part of the portfolio. There are ways to mitigate the amount paid in capital gains tax. can lead to trouble. Each part will serve its own purpose. Through our active tax loss harvesting. However. Whatever asset allocation we settle was 3. Each part of the portfolio will be made up assets from a The annualized rate of consumer price inflation given class. but will be evaluated in terms of its contribution to the plan as a whole. but I will not consider them here. than the brokerage account with regards to taxes. I will subtract 2 percentage points from about 30% of income to the federal government.GOALS. To create a plan for G&E. APPROACH I will now look further into G&E’s current financial situation. duration of our relationship. as a conservative estimate. G&E probably pay thumb. I will assume be paid at the end of the day anyway. well under the Fed’s 2% target. These assumptions will give me a foundation to work from when creating a plan. Taxes will Capital gains tax in the US is 20%. However. I will assume 40% until retirement. This will be avoided. G&E stated that inflation is high right now.

They are 2020 for Tobias’s education and $180. Erin has a $500. Later I will figure out if they benefits of 529 plans and get these accounts fully can afford this at their current level of spending. . As long as taxed as a gift. to be added to the 529 plans over the next 5 They have indicated that they would like to sell years. and it allocate any further money toward the purchase cannot be taken back. today. They Note: I will not consider their expected will likely be downsizing and moving to a part of performance in the context of G&E’s wider the country with cheaper property values than portfolio.They need to set aside $360. sufficiently safe.000 can be used to buy a new home. taken from their current stock holdings. IRS.000 (2010$) by Note: G&E are not land speculators.000 (2010$) needed for each child will be see no reason to pay them off now. respectively. I will encourage G&E to earmark $360. The additional that the rates on the mortgages are reasonable. Appendix tab 529 gives rough breakdown. they are happy with their properties. because a 8% return tax free would be like a 10% return PROPERTIES AND MORTGAGES which is taxed.000 in inflation. Private schools in insurance. Assumption: G&E will pay $32. The 529s will be treated as if the money NY and the Adirondacks.000 on the two mortgages college education. Being each over the next 5 years. Their retirement home will be purchased entirely with money from the sale of their two current homes.000/year for the mortgages for the next 20 years. A rate of return of 8% should be to compensate for the premiums. funded soon. G&E can contribute $130. The two mortgages combined have an annual 529 plan contributions are treated as gifts by the payment of about $32. Given her health risks and the fact that the US currently cost about $45. Expected rate of return on 529 the amount of money left to pay on the plans is 8%. so I see no need to was already given to Tobias and Michelle. I will grows at a rate approximately twice that of wider recommend that she get another $500. She has no disability 2020 and 2022. term life coverage through 2020. This plus the current amount in the 529 the properties before retirement and move to plans.INSURANCE CHILDREN’S COLLEGE Gary is well covered with life and disability G&E want to send Tobias and Michelle to private insurance. they will still contributions.000 home owners. the opportunity costs here are minimal. I will not consider property as part (2010$) by 2022 for Michelle’s education. which she brings in over 2/3 of their joint income.000 mortgages between now and 2030. I $50. If they sell in 2030. Tobias and Michelle will be 18 in that covers through 2020. of the retirement home. Assumption: G&E will need $180.000 term life policy universities. of their portfolio. Although we expect to make more than 8% on assets outside of the 529 plans. The only price I will look at is Inflation is 7%. should be enough for the kids’ owe about $120.000 tax-free to Mortgages tab for payment breakdown). age-based asset or if they will need to spend less on other things allocation.000 today. The proceeds from the sales minus the $120. I would encourage Gary and Erin to keep the mortgages. combined. and purchase high quality disability insurance that will cover I will encourage G&E to take advantage of the tax her through 2030.000 (see appendix.000/year. minus any taxes associated with the the Southwest. choosing a safe.

578. the table and set aside for charity. but if it has been to have enough money saved to be able to draw working for them then I wouldn’t pressure them on $110. In addition to the $40.000 IBM shares) ($270. Using the 4% rule as a to change. but could also Gary wishes to retire at 66 (2028) and Erin at 63 be used as an emergency source of cash. I will encourage them to put RETIREMENT another $100. Both figures are pre-tax. I expect them to receive something near these shares to charity whenever they please. Cash $12. $270. and both will be adjusted for inflation.000/year (2010$) until 2028.000/year (2010$) until 2030.000 and $200.000 (2010$) they Emptying their checking account every month will receive in social security benefits.INCOME rule of thumb. they will need around $2.000 (2010$) by 2030 to fund their retirement.000 or so in a money market fund.000 Investment Accts $2. Erin plans to retire at 63.196.000 shares.000 (2010$).000 shares of IBM will be taken off benefits. CASH In addition to the $12.000. Erin will earn $165. her income has fluctuated between $130.300.000 (2010$) combined in social security benefits every year starting in 2030. I will encourage G&E to set aside 20% The current maximum monthly social security of the shares (2. Assumption: Gary will earn $75. the maximum benefit. This will give them enough money to live Gary works for a non-profit and his income is very comfortably in retirement and leave an steady every year. (2031). Assumption: G&E will need $3. and give the proceeds from the sale of $2. First I need to know what we have to work with after my assumptions have been taken into account.000 G&E have in their checking account.800.000 .000 over the past 5 years.000 at current benefit for someone who retires at 66 is about price). Since Gary is concerned SOCIAL SECURITY about the capital gains tax associated with his IBM shares.000/year (2010$). Erin runs her own practice and inheritance for their children.000 Charity (2. TARGETED PERFORMANCE Now I want to see what kind of future performance is needed to meet the goals we have identified. This will be part of their portfolio.000) New Net Worth $1. they want might not be the best idea.000) College ($360. CHARITY G&E want to give to Unicef and Habitat for Humanity while alive. 3 years before she will be eligible for her full Assumption: 2. Assumption: G&E will receive $40.

000 (2030$). 12% every year up until Gary retires. not being able retire when you want to. And that’s without will shoot for.000 of income to G&E to maintain their current level of spending. The name of the game is asset making any more contributions.000 after our charity assumption). G&E have stated that they want to invest for maximum return and maximum income. .000/year until 2027 (the year before revealing the benefits of a well-diversified. The kind of event that would send one of their holdings tumbling would likely send all of them tumbling. While the returns on their accounts have mostly outperformed their respective benchmarks in recent years.000 by 2030. But first I want to look at how G&E are for G&E.000/year to the portfolio. they have been highly volatile and highly correlated amongst themselves. I assume that they can afford to do this Years: 10% pre-tax. I think recommendations based largely on the findings $10. pre-fee returns. I will encourage volatility.Earlier I set G&E target portfolio value for spend up to $18. Contribute $10. the figure is $6. 3. the portfolio would be periodically-rebalanced portfolio. I will not distinguish between the different accounts. and CURRENT PORTFOLIO G&E currently have a joint brokerage account and 5 retirement fund between the two of them. 7% return means about 10% before taxes and fees. maintain your standard of living. This leaves G&E very heavily exposed to certain risks. I don’t want to scare them. If it too much risk. Investment Style G&E’s portfolio is highly concentrated in shares of large US companies. If I could only do one thing for G&E it would be to convince them that with high returns and a concentrated portfolio come high risks—risks like not being able to afford to put Tobias and Michelle through college. etc. Gary wants to retire). This amount is reachable. but they need to understand that their current portfolio—and their view on investing in general—is not compatible with their goals. This is certain attainable without accepting We have about $1. Such an aggressive investment style is not suitable for their life savings. receive a life-saving surgery.000.000 (2010$) by 2030.500 on life and disability retirement at $3. At insurance for Erin. invested now. They are very poorly diversified.000/year is a good minimum level of saving of others.400.5% inflation. There has been extensive research add $10. not being able to give to charity.000 to invest with. I will make worth about $6. If they were to allocation. Gary also owns 10. As explained above. in that the prices of most of their assets are driven by the same risk factors. Last year they contributed $28.000 by 2030.000 shares of IBM (8. portfolio every year.566.000.060. add at least $10. pay for your daughter’s wedding. 10% annualized return with 12% grew at an annualized rate of 7% it would be annual volatility over the next 20 years is what I worth $6.500 to their Performance and Saving Targets for Next 20 portfolio.

0% $281.0% $93.880 Emerging Market Gov't Bonds 8. US Government Bonds: 5 year Treasury notes.800 US Equities (further breakdown below) 20. Use G&E existing holdings as much as possible. EXECUTION This is the asset allocation I would like to start with. Additional rebalancing will be carried out when any one asset class move 5 percentage points or so from its initial proportion. so as to limit the capital gains tax incurred when selling winning investments.200 International Equities (further breakdown below) 18. International Equities: Evenly split between emerging and developed. US Equities: Evenly split between value and growth.ASSET ALLOCATION What I will recommend for G&E: Cash Equivalents 6.880 Cash Equivalents: Money market funds. The portfolio will be periodically rebalanced to maintain its initial features.0% $125. Choose 3-10 countries who actively devalue their currencies in the foreign exchange markets. with view that such devaluation cannot last forever. We will try to do as much of the rebalancing as possible when adding new money to the portfolio. value and growth. big and small. A few dozen individually selected stocks are better than indices at capturing the desired risk factors. A few dozen individually selected stocks are better than indices at capturing the desired risk factors.0% $469.0% $281. Use G&E existing holdings as much as possible. Commodities: Entire amount can be invested in one diversified commodities index like those offered by UBS and Goldman Sachs. Then I will work with what G&E already own to make up the new portfolio as much as possible.280 Commodities 30. Emerging Market Bonds: Short-term (1-5 years) government bonds from developing foreign countries. . big and small.960 5 year T-notes 18. as I think it is well suited for our targeted risk and return. I will first sell any of G&E’s losing investment to take advantage of tax losses.0% $313.