A client (Janet and John Smith) of yours would like you to help them prepare an
ID: 2657775 • Letter: A
Question
A client (Janet and John Smith) of yours would like you to help them prepare an investment policy statement for a retirement portfolio, which would be managed by a portfolio manager. Jane and her husband are both 55 years old and have a combined annual income of $150,000, which is sufficient to meet all the financial obligations of their current lifestyle. They have just finished paying-off the mortgage on their home and their children’s college education and are now focused on planning for their retirement. Currently, they have $1,150,000 accumulated in their tax-deferred retirement savings (401-K) and another $250,000 in a FDIC insured savings account. They plan to commit both funds to this new investment account and to continue making annual contributions of $20,000 to the account until the time they retire. They would also like to keep 5% of the new investment in liquid assets to meet emergency needs. Janet and her husband are risk-adverse and both plan to retire at the age of 67. They estimate they will need $2.5 million in addition to their social security benefits to live comfortably from then on. a. What is the annual return objective for your client? b. Prepare a draft investment policy statement which reflects your client’s objectives and constraints. Be specific and complete in presenting the objectives and constraints. (You may choose to specify how your neighbor’s asset should be allocated). c. Suppose your client suggests that you specify a 80% stock and 20% Private Equity portfolio allocation in their investment policy statement. Explain why this suggestion may or- may not be appropriate for your client.
Explanation / Answer
Funding to New Investment Account = $11,50,000+2,50,000+20000*12 years of service to retire
= $16,40,000
Investment in Liquid Assets = 5 % of ($16,40,000) = $82,000
Annual Return objective = $25,00,000/12 = $2,09,000
Investment Policy:
Client Name : Janet and John Smith
Risk Profile of Client : Risk Adverse
Annual Return : $2,09,000
Time Horizon : 12 Years of service
Liquid Assets : $82,000
Funds in New Investment Account :$16,40,000
Liquid funds needed : $2.5 Million
Portfolio Allocation : 20% Stock and 80% Fixed since Client is Risk Adverse
There fore it is not appropriate to choose 81% stock and 20% Private Equity Portfolio since Client is Risk adverse not willing to take risk by investing higher % in Risky stocks
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