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Wealthcare Case Study
“The Claussens”
Maximize Retirement Income
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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
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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!
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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:
A) Small Cap Growth StocksB) High Yield Junk BondsC) Portfolio of Utility Stocks With Good DividendsD) Government Bonds
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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…
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What if Yields Go Down?
• Better Pull Up Some Research:
Annualized Yield - 7 Year Treasuries
1.00%
3.00%
5.00%
7.00%
9.00%
11.00%
13.00%
15.00%
17.00%
19.00%
21.00%
Jan
-69
Jan
-70
Jan
-71
Jan
-72
Jan
-73
Jan
-74
Jan
-75
Jan
-76
Jan
-77
Jan
-78
Jan
-79
Jan
-80
Jan
-81
Jan
-82
Jan
-83
Jan
-84
Jan
-85
Jan
-86
Jan
-87
Jan
-88
Jan
-89
Jan
-90
Jan
-91
Jan
-92
Jan
-93
Yields at 25 Year
Lows
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But term spreads are near historical highs…
10 Year Treasury Yield vs 7 Year Treasury
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
Jan-
69
Jan-
71
Jan-
73
Jan-
75
Jan-
77
Jan-
79
Jan-
81
Jan-
83
Jan-
85
Jan-
87
Jan-
89
Jan-
91
Jan-
93
Year
Sp
read
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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.
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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!
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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)
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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
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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…
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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
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They Had A Great 1999!
• Portfolio is worth $1,124,000 Net of Taxes & Withdrawals!
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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!
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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
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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…
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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
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Their Retirement Income & Risk Tolerance Range…
Priority
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Recommendation Based On Premises of Wealthcare
• Comfort Goals Will Be Met
• Without Undue Compromise
• Avoid Unnecessary Risk
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Recommendation – Their Future Comfort Zone Would Look Like This:
19941995
Add Back $200,000 Estate Goal
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With Recommendation Their Future Comfort Zone Would Look Like This:
Taking Unnecessary Risk –Decrease Portfolio Risk
19961997
Add Back $200,000 Estate Goal
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With Recommendation Their Future Comfort Zone Would Look Like This:
Taking Unnecessary Risk –Decrease Portfolio Risk
1998199920002001
9/30/02
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Time To Do A Complete Update
Same Original Range of
Goals
Except Income Need Adjusted for Inflation as
Originally Planned
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Their “Ideal” Plan is their Current Plan… Adopted in 1998 When Risk Was Lowered
You feel the worst of the
Bear Market is over, so you want to move
up risk to improve results
Still in Comfort Zone Despite Bear Market
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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
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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)
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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?
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What’s In It For Me? – Claussen Portfolio Choices and Associated Production
10 Year Treasuries: 1pt ($10,000) every ten years
GNMAs: 2pts ($20,000) every 8 years
Bond Fund: 1pt ($10,000) 1st year¼ pt thereafter - $2,500 each year
10 Year Bond Ladder: 3/4pt ($7,500) 1st year1 pt each year on 10% of portfolio - $1,000 each year
Ten Year Total
$10,000
$24,000
$16,500
$35,000
Financeware Wealthcare Portfolio: @ 3/4pt ($7,500) EACH year
$75,000
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These Had All The Service Responsibility AND <15% Chance of
Meeting the Client’s Goals!
10 Year Treasuries: 1pt ($10,000) every ten years
GNMAs: 2pts ($20,000) every 8 years
Bond Fund: 1pts ($10,000) 1st year¼ pt thereafter - $2,500 each year
10 Year Bond Ladder: 3/4pt ($7,500) 1st year1 pt each year on 10% of portfolio - $1,000 each year
Financeware Wealthcare Portfolio: @ 3/4pt ($7,500) EACH year
Ten Year Total
$10,000
$24,000
$16,500
$35,000
$75,000
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While This Paid You For Service AND Had 75%-90% Chance of Meeting the
Client’s Goals!
10 Year Treasuries: 1pt ($10,000) every ten years
GNMAs: 2pts ($20,000) every 8 years
Bond Fund: 1pts ($10,000) 1st year¼ pt thereafter - $2,500 each year
10 Year Bond Ladder: 3/4pt ($7,500) 1st year1 pt each year on 10% of portfolio - $1,000 each year
Financeware Wealthcare Portfolio: @ 3/4pt ($7,500) EACH year
Ten Year Total
$10,000
$24,000
$16,500
$35,000
$75,000
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Think About A Book Of “Claussens”
10 Year Treasuries:
GNMAs:
Bond Fund:
10 Year Bond Ladder:
Financeware Wealthcare Portfolios:
# of Clients for $1 Million
Gross:
1,000
333
606
285
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Leads Needed 50% Prospects
50% Close:
4,000
1,332
2,424
1,140
536
Assets Gathered:
$1 Billion
$333 Million
$606 Million
$285 Million
$134 Million
No Wonder You Have No Time!
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Wealthcare
– Comfort In Achieving Prioritized Goals– Without Unnecessary Compromise to
Lifestyle– Avoiding Undue Investment Risk