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Wealthcare Case Study

Wealthcare Case Study. “The Claussens” Maximize Retirement Income. The “Claussens” In 1993. Harvey & Harriet – Age 61 Just Retired $1,000,000 Portfolio All Cash from: Lump Sum Pension with 5 Year Forward Averaging Sale of their home Savings accounts. The “Claussens” In 1993.

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Wealthcare Case Study

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  1. Wealthcare Case Study “The Claussens” Maximize Retirement Income

  2. The “Claussens” In 1993 • Harvey & Harriet – Age 61 • Just Retired • $1,000,000 Portfolio • All Cash from: • Lump Sum Pension with 5 Year Forward Averaging • Sale of their home • Savings accounts

  3. The “Claussens” In 1993 • Investment Objective: • Maximize Current Income • Describe themselves as “Conservative” • Never invested in stocks before • Mention ’87 Crash and Gulf War Market Losses • No Need for Capital Appreciation • No Children & No Estate Goals • Maximize Current Income – Retirement Spending: • Ideally $45,000 but no less than $40,000 • Make Sure We Don’t Outlive Our Money!

  4. The “Claussens” In 1993 • Compliance Quiz: • What would the appropriate investment vehicle be for someone that…? • Said they are conservative • Never invested in stocks • Want to maximize current income • No need for capital appreciation • Write Down Your Answers: • Small Cap Growth Stocks • High Yield Junk Bonds • Portfolio of Utility Stocks With Good Dividends • Government Bonds

  5. In 1993 – Your Analysis: • 10 Year Bond Yield: 5.78% • On $1,000,000 Portfolio Generates: • $57,800 Pre-tax • $49,000 After-tax • Since they have no estate goals, not worried about inflation or dipping into principal if needed • Just to be sure…

  6. What if Yields Go Down? • Better Pull Up Some Research: Yields at 25 Year Lows

  7. But term spreads are near historical highs…

  8. So you put them in 10 year bonds…(doesn’t hurt that you can get a full point on a ten-year) • A year later…Dec. of ’94: • The Claussens call you up and want to meet with you • Your thoughts: • Their bonds got WHACKED! (Down 10%) • And yields are back up to 7.3% • After their withdrawals, taxes and the decline, portfolio is worth $893,000 • Better prepare a retirement analysis before the meeting • They are probably upset about the decline in their portfolio • You need to show them they are o.k.

  9. The Retirement Analysis Looks Like This: With $1,000,000 at 5.78%, Withdrawing $45,000 a year, adjusted for 3% inflation Their money lasts through AGE 92!

  10. The Retirement Analysis Looks Like This: With $893,000 at 7.3%, Withdrawing $45,000 a year, adjusted for 3% inflation Things even look a little better! SWAP???(better not)

  11. So…you are prepared for the meeting… • You welcome them and seat them in the conference room (retirement projections under your arm) • And ask them how they have been • They say: • GREAT! • We heard yields were up • We were wondering if we could increase our budget • Our rent went up and we need another $1,000 a year • You think to yourself… • DARN…should have prepared the swap analysis! • And…Whew! • You show them the retirement projections, and tell them you planned on adjusting their income 3% a year

  12. A Few More Years Go By…In Dec. 1998: • Their bonds recovered – total $1,012,000 • You have been adjusting their income each year for inflation They call you up and ask for another meeting…

  13. In the meeting…Harvey and Harriet both look upset… • They ask: • Why don’t we have any stocks in our portfolio? • You respond by completing a risk questionnaire • And, it turns out these “conservative” investors can tolerate 20% downside risk • Hmmm…they did take the 10% decline pretty well • So you reposition their portfolio in a diversified managed account with 10% still in bonds

  14. They Had A Great 1999! • Portfolio is worth $1,124,000 Net of Taxes & Withdrawals!

  15. But By The End of 2001… • They had given it back and more • They aren’t upset though…Still worth more than the low they had in bonds What do you think the next nine months look like? Another 15% decline!

  16. Now they are talking about going back into bonds • Their portfolio is now worth $750,000 • Annual 3% CPI adjustments have spending at $55,000 • But yields on the 10-Year are 4.00% • On $750,000 that is $30,000 PRE-TAX • $26,000 AFTER TAX! • WE HAVE A GAP! ($29,000 ANNUAL GAP) • By the way…had they just stayed in bonds • Their after-tax yield on $1 million would only be $34,000 • “ONLY” $21,000 short of their current income need

  17. Forensic Finance…What Went Wrong? • Just like each of you would have done… • This advisor: • Identified investment objective • Invested in appropriate portfolio (Gov’t Bonds) • Did a retirement income analysis • Planned on the impact of taxes & inflation • Later identified risk tolerance and diversified into appropriate portfolio for risk tolerance • Just did it over the course of several years…

  18. Imagine their Life with Wealthcare • First, risk tolerance AND income need would have been identified from the start • One person’s “conservative” is another’s “aggressive” • But remember the premises of Wealthcare: • Confidence in achieving goals • Without unnecessary compromise to lifestyle • While avoiding undue investment risk

  19. Their Retirement Income & Risk Tolerance Range… Priority

  20. Recommendation Based On Premises of Wealthcare • Comfort Goals Will Be Met • Without Undue Compromise • Avoid Unnecessary Risk

  21. Recommendation – Their Future Comfort Zone Would Look Like This: 1994 1995 Add Back $200,000 Estate Goal

  22. With Recommendation Their Future Comfort Zone Would Look Like This: 1996 1997 Add Back $200,000 Estate Goal Taking Unnecessary Risk –Decrease Portfolio Risk

  23. With Recommendation Their Future Comfort Zone Would Look Like This: 1998 1999 2000 2001 9/30/02 Taking Unnecessary Risk –Decrease Portfolio Risk

  24. Time To Do A Complete Update Same Original Range of Goals Except Income Need Adjusted for Inflation as Originally Planned

  25. Their “Ideal” Plan is their Current Plan… Adopted in 1998 When Risk Was Lowered Still in Comfort Zone Despite Bear Market You feel the worst of the Bear Market is over, so you want to move up risk to improve results

  26. Your Recommendation as of Sept. 2002 High Comfort, less than 1/2 their maximum risk, and Ideal Income You feel the worst of the Bear Market is over, so you want to move up risk

  27. Benefits of Wealthcare vs. Bond Portfolio • High Comfort 75-90 With Wealthcare vs. Bonds: • Bonds only had 4% Chance of Meeting Ideal Goals • 89% Chance of RUNNING OUT OF MONEY • As Early as AGE 78! • Wealthcare Portfolio Value as of 9/20/02: • $1,250,000 VS. $995,000 (had to dip into principal)

  28. Benefits of Wealthcare vs. “Whip Saw” • Wealthcare Avoided Whip Saw • 70% Maximum Equity Exposure (‘94-’97) • vs. 90% in 1999 (Hurrah!) & 2000-2002 (Boo) • 30% Minimum Equity (’98-’02) • vs. 0% Equity 1994-1998 • Regular Good News – • Ideal Income • Keeps pace with inflation • Add Estate Goal Back In – Bonus…not a priority • Lower Investment Risk – At the right time… • vs.: • Your Bonds got WHACKED • Oh, you wanted stocks in your portfolio? • Can you get by on half of your budget? • How about 2/3?

  29. What’s In It For Me? – Claussen Portfolio Choices and Associated Production Ten Year Total $10,000 10 Year Treasuries: 1pt ($10,000) every ten years $24,000 GNMAs: 2pts ($20,000) every 8 years 10 Year Bond Ladder: 3/4pt ($7,500) 1st year1 pt each year on 10% of portfolio - $1,000 each year $16,500 Bond Fund: 1pt ($10,000) 1st year¼ pt thereafter - $2,500 each year $35,000 $75,000 Financeware Wealthcare Portfolio:@ 3/4pt ($7,500) EACH year

  30. These Had All The Service Responsibility AND <15% Chance of Meeting the Client’s Goals! Ten Year Total $10,000 10 Year Treasuries: 1pt ($10,000) every ten years $24,000 GNMAs: 2pts ($20,000) every 8 years 10 Year Bond Ladder: 3/4pt ($7,500) 1st year1 pt each year on 10% of portfolio - $1,000 each year $16,500 Bond Fund: 1pts ($10,000) 1st year¼ pt thereafter - $2,500 each year $35,000 $75,000 Financeware Wealthcare Portfolio:@ 3/4pt ($7,500) EACH year

  31. While This Paid You For Service AND Had 75%-90% Chance of Meeting the Client’s Goals! Ten Year Total $10,000 10 Year Treasuries: 1pt ($10,000) every ten years $24,000 GNMAs: 2pts ($20,000) every 8 years 10 Year Bond Ladder: 3/4pt ($7,500) 1st year1 pt each year on 10% of portfolio - $1,000 each year $16,500 Bond Fund: 1pts ($10,000) 1st year¼ pt thereafter - $2,500 each year $35,000 $75,000 Financeware Wealthcare Portfolio: @ 3/4pt ($7,500) EACH year

  32. Think About A Book Of “Claussens” # of Clients for $1 Million Gross: Leads Needed 50% Prospects 50% Close: Assets Gathered: 10 Year Treasuries: 1,000 4,000 $1 Billion GNMAs: 333 1,332 $333 Million 10 Year Bond Ladder: 606 2,424 $606 Million 285 1,140 $285 Million Bond Fund: Financeware Wealthcare Portfolios: 134 536 $134 Million No Wonder You Have No Time!

  33. Wealthcare • Comfort In Achieving Prioritized Goals • Without Unnecessary Compromise to Lifestyle • Avoiding Undue Investment Risk

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