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³The Boones´
The ³Boones´ In 1992
‡ Randy - Age 43 & Lori ± Age 42
± Children: Brian - Age 11 & Megan - Age 9
‡ Household Income: $300,000
‡ Situation in 1992: $1,250,000 in Assets:
± Brokerage accounts totaling $500,000
‡ Split between 3 brokers
‡ Hodgepodge of stock ³ideas´
± Some from Randy & some from brokers
± IRAs totaling $750,000
‡ $200,000 from traditional IRAs (balanced & international mutual funds)
‡ '   

±       !"

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In 1992 ± Typical Advisor:

‡ First, identify investment objective:


± ³Growth´
‡ ¶87 Crash/Gulf War still fresh in their mind
‡ Conservatively allocate 80% stocks/20% bonds
‡ Suggest a ³conservative´ 11.3% return
assumption
± Last 14 years (¶78-¶91) compound was 15.4%

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In 1992 ± Typical Recommendations
‡ Consolidate brokerage accounts with you
± Sell the ³trashy´ stock ideas, keep some of the ³Blue Chips´
± Add diversified ³Blue Chip´ portfolio of individual stocks
± Muni bond ladder for bond allocation in brokerage accounts
‡ In the IRAs
± Keep the international fund (Templeton World Fund originally sold
by insurance agent with 8% load ± avoid switch letter)
± Sell the balanced funds (No-loads Randy bought) and buy
more stocks so you can control asset allocation
± Buy High Yield GNMA mutual fund for fixed allocation
‡ Buy a technology mutual fund as the ³aggressive´
piece of both IRA and Brokerage accounts

`#$%%#
$&'((%)`#
#
#%**#+`%
, 4
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A Year Later«In 1993

‡ The accounts have done well versus the 11.3%


³benchmark´
‡ Their $1,250,000 in assets are now worth
$1,500,000
‡
    - .  
   / . 
    

±
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A Few More Years Go By«In 1996:

‡ Their accounts total $2.4 million


‡ '       
± `. . ,

Boone¶s
Portfolio

11.3%



 
. .  
 - .
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By the end of 1999:

‡ Their accounts total $4 million


‡ `      
‡ `     
   
±       .   '"
 0   1
± 2    .$!* ./ 
.1 '"  3 
 1

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Can They Retire?
‡ To analyze this the typical advisor takes the $4 million:
± Set aside $240,000 for the kid¶s education (6 years @ $40k)
± With $3.8 million left for retirement
‡ Assuming a ³super conservative 8% return´
‡ Less 3% for taxes (and commissions)
± $190,000 looks like a no-brainer (5% of $3.8 million)
‡ Their advisor tells them:
± No problem paying for education and generating $140,000
± You¶ve done so well, even at a measly 8% return«(they¶ve
been doing 17%)«after tax they could spend $190,000
± They should rebalance their portfolio if they retire
‡ It is 90% in stocks at this point
‡ They tell the advisor:

ü
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³I Wish We Would Have Named Our Son
After You«´
‡ They retire«
‡ There is no way they would spend $190,000
‡ But«they did spend $160,000
‡ Next year¶s tuition/board will be $42,000
‡ And their portfolio«well«
± Was down 4.0% or $160,000
± With $160,000 in retirement income, $40,000 in education and
another $60,000 in taxes«
± It is now worth $3,580,000
‡ Advisor tells them«
2 tick with it«we are long-term investors´

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By the end of 2001«
‡ After spending another $160,000 with $50,000 in taxes
‡ And paying $42,000 in tuition/boarding
‡ And another 3% portfolio decline ($108,000 loss)
‡ Their portfolio is now worth: $3,220,000
± (bonds are a little over weighted)
‡ They want to talk to the advisor about that formula he
used to calculate retirement income«how¶d that work
again?
± Assuming a ³conservative 8%´ (the last 2 years they are down 7%)
± Less 3% for taxes
± Leaves 5% of portfolio ± on $3.2 million that¶s $160,000

`hey half jokingly ask the advisor if the 8%


was positive or negative ð
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By September of 2002«
‡ They are down ANOTHER 17% or $550,000
‡ Fortunately they won¶t have much in taxes
± Because there is nothing WITH GAINS TO SELL
‡ Their retirement spending is running at $150,000
‡ Brian got a job flipping burgers so tuition/boarding will
only run $38,000
‡ Still«their portfolio is now worth: $2,482,000
‡ Advisor¶s 5% formula shows $124,000 for retirement
income
‡ And there is still four years of schooling left!
‡ Fortunately for this advisor«they stopped calling about
$250,000 ago

ðð
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In Oct 2002«Advisor stops by to
pick up some Halloween Candy
‡ And who does
he see?
‡ RANDY!

ðr
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Forensic Finance«What Went Wrong?

‡ Just like most advisors are trained to do . . .


‡ This advisor:
± Identified investment objective
± And client¶s risk tolerance
± Diversified the portfolio
‡ In quality stocks
± Rebalanced at the market peak
± Used VERY conservative assumptions
± And compounded at better than 17% (at least prior to the bear market)
± Life to date compounded at 9.2% THROUGH SEPTEMBER!

ð=
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The advisor may have managed the
portfolio well«

‡ But the portfolio was there to accomplish their goals«


‡ One of the goals was to   .4##`#,
‡ Let¶s rewind to December of 1992
± And see if we can determine what would have happened with:

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The ³Boones´ In 1992
‡ Randy - Age 43 & Lori ± Age 42
± Children: Brian - Age 11 & Megan - Age 9
‡ Household Income: $300,000
‡ Total Investment Assets & Resources:
± IRAs (Saving $8,000 a year) ± $750,000
± Brokerage Accounts (Saving $37,500 a year) ± $500,000
± Willing to save an additional $25,000 annually if necessary
‡ 1987 Crash and Gulf War still in their mind, but can tolerate 80%
equity exposure

‡ Goals:
±Retire at 57 (last year of schooling ± 2005), no later than 60
±On at least $140,000 of income, maybe $160,000
±Educate kids 100% of private undergrad, but at least public
±Leave $1 million in today¶s dollars to Green Peace
±Travel in retirement to age 70 ± ($20,000 a year budget) ð±
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The ³Boones´ In 1992
‡ Randy - Age 43 & Lori ± Age 42
± Children: Brian - Age 11 & Megan - Age 9 `    
‡ Household Income: $300,000   
‡ Total Investment Assets & Resources:     
± IRAs (Saving $8,000 a year) ± $750,000
  
± Brokerage Accounts (Saving $37,500 a year) ± $500,000
5 
± Willing to save an additional $25,000 annually if necessary
‡ 1987 Crash and Gulf War still in their mind, but can tolerate 80%
equity exposure

‡ Goals:
±Retire at 57 (last year of schooling ± 2005), no later than 60
±On at least $140,000 of income, maybe $160,000
±Educate kids 100% of private undergrad, but at least public
±Leave $1 million in today¶s dollars to Green Peace
±Travel in retirement to age 70 ± ($20,000 a year budget) ð
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The ³Boones´ In 1992
‡ Randy - Age 43 & Lori ± Age 42
± Children: Brian - Age 11 & Megan - Age 9
‡ Household Income: $300,000  
‡ Total Investment Assets & Resources:     
± IRAs (Saving $8,000 a year) ± $750,000 2%`#

± Brokerage Accounts (Saving $37,500 a year) ± $500,000


± Willing to save an additional $25,000 annually if necessary
‡ 1987 Crash and Gulf War still in their mind, but can tolerate 80%
equity exposure
‡ Goals:
±Retire at 57 (last year of schooling ± 2005), no later than 60
±On at least $140,000 of income, maybe $160,000
±  
   , but at least public
±
      
±    ! " # ð]
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The ³Boones´ In 1992
Based on these priorities, the Wealthcare recommendation might have
looked like this: (Focus on Estate Target, Education & Travel)

ðü
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By 1996, Their Lower Risk Portfolio«
Wouldn¶t have grown to $2.4 Million«. But would have still
grown to $2.2 Million

ð¢
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By 1999, They would have fallen into
³Unnecessary Compromise´

With diligent rebalancing the portfolio


would have only grown to $3 million
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Their Current Plan is Clearly Taking
Unnecessary Risk


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In fact, they can be reasonably confident
of achieving all of their ideal goals«

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Based on this, Wealthcare recommends
they adopt their ³Ideal´ plan«
They are taking unnecessary risk
Move to the conservative growth portfolio (55% bonds)
Retire a year earlier ± Age 57«their ³Ideal´
Increase planned retirement income to $160,000, $14,000 more
than they were planning on
Stop saving the additional $12,500 they had planned

r=
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Based on this, Wealthcare recommends
they adopt their ³Ideal´ plan«
They are taking unnecessary risk
Move to the conservative growth portfolio (55% bonds)
Retire a year earlier ± Age 57«their ³Ideal´
Increase planned retirement income to $160,000, $14,000 more
than they were planning on
Stop saving the additional $12,500 they had planned

At the end of 2000, after taxes and tuition, this leaves their portfolio
at $2.98 Million

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And a year later«. With $2.9 million«

Their comfort zone dropped from 83 to 81



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By the end of 2001, after taxes, tuition,
etc«(not to mention a bad market)

Their comfort zone fell to 77


r
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There was nowhere to hide in 2002«
By September, even their conservative
portfolio declined 10%
Their comfort zone for all of their ³Ideal´ goals fell to 70
And NOW is the time to be proactive!
So Wealthcare designs two alternatives for them:
1- Moving risk back up a notch in risk to ³Moderate Growth´ and reduce
retirement income to $155,000
OR
2- Keeping the conservative growth allocation, delay retirement to 58 on
$151,000 retirement income

It probably wouldn¶t hurt if they were reminded that the


ORIGINAL RECOMMENDATION
‡ Had them in a ³Moderate Growth´ portfolio
‡ Retiring at AGE 58
‡ On a $145,000 income

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So, the Boone¶s are given the choices:
‡ Move up risk, tweak retirement income:


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So, the Boone¶s are given the choices:
‡ Delay retirement a year, reduce income a
little more:


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Think about the difference!
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‡ $20,000 travel budget ‡ Ignored
‡ Educational goals met ‡ Flipping Burgers???
‡ Estate goal met ‡ Least of worries now
‡ Retirement income still more ‡ Wal-mart Greeter
than they had been planning
on for years
‡ Retirement age is the same as
ORGINAL projection, WITH
MORE income

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