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Wealthcare Case Study

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This is a case study about differences between traditional financial advice and the patented Wealthcare process

Published in: Economy & Finance
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Wealthcare Case Study

  1. 1. Wealthcare Case Study<br />“The Boones”<br />
  2. 2. © Copyright Financeware, Inc 2003 All rights reserved<br />2<br />The “Boones” In 1992<br />Randy - Age 43 & Lori – Age 42<br />Children: Brian - Age 11 & Megan - Age 9<br />Household Income: $300,000<br />Situation in 1992: $1,250,000 in Assets:<br />Brokerage accounts totaling $500,000<br />Split between 3 brokers <br />Hodgepodge of stock “ideas”<br />Some from Randy & some from brokers<br />IRAs totaling $750,000 <br />$200,000 from traditional IRAs (balanced & international mutual funds)<br />$550,000 in New IRA rollover (CASH)<br />Randy just took new job…rollover from pension & 401k<br />
  3. 3. © Copyright Financeware, Inc 2003 All rights reserved<br />3<br />In 1992 – Typical Advisor:<br />First, identify investment objective:<br />“Growth”<br />’87 Crash/Gulf War still fresh in their mind<br />Conservatively allocate 80% stocks/20% bonds<br />Suggest a “conservative” 11.3% return assumption<br />Last 14 years (’78-’91) compound was 15.4%<br />
  4. 4. © Copyright Financeware, Inc 2003 All rights reserved<br />4<br />In 1992 – Typical Recommendations<br />Consolidate brokerage accounts with you<br />Sell the “trashy” stock ideas, keep some of the “Blue Chips”<br />Add diversified “Blue Chip” portfolio of individual stocks<br />Muni bond ladder for bond allocation in brokerage accounts<br />In the IRAs <br />Keep the international fund (Templeton World Fund originally sold by insurance agent with 8% load – avoid switch letter)<br />Sell the balanced funds (No-loads Randy bought) and buy more stocks so you can control asset allocation <br />Buy High Yield GNMA mutual fund for fixed allocation<br />Buy a technology mutual fund as the “aggressive” piece of both IRA and Brokerage accounts<br />THE BOONES BUY ALL OF THESE RECOMMENDATIONS!<br />
  5. 5. © Copyright Financeware, Inc 2003 All rights reserved<br />5<br />A Year Later…In 1993<br />The accounts have done well versus the 11.3% “benchmark”<br />Their $1,250,000 in assets are now worth $1,500,000<br />Stocks are a tad over-weighted due to performance, but it wasn’t being monitored by their advisor<br />
  6. 6. © Copyright Financeware, Inc 2003 All rights reserved<br />6<br />Boone’s Portfolio<br />11.3%<br />Stock allocation is getting really over-weighted<br />A Few More Years Go By…In 1996:<br />Their accounts total $2.4 million<br />Versus the 11.3% assumed return<br />Things look great!<br />
  7. 7. © Copyright Financeware, Inc 2003 All rights reserved<br />7<br />By the end of 1999:<br />Their accounts total $4 million<br />They have compounded at over 17%<br />They want to talk to their advisor about retirement<br />Could they retire now and generate $140,000 after tax lifetime income?<br />Plus finish paying for Brian & Megan’s schooling? (about $40,000 annually for 6 more years?)<br />
  8. 8. © Copyright Financeware, Inc 2003 All rights reserved<br />8<br />Can They Retire?<br />To analyze this the typical advisor takes the $4 million:<br />Set aside $240,000 for the kid’s education (6 years @ $40k)<br />With $3.8 million left for retirement<br />Assuming a “super conservative 8% return”<br />Less 3% for taxes (and commissions)<br />$190,000 looks like a no-brainer (5% of $3.8 million)<br />Their advisor tells them:<br />No problem paying for education and generating $140,000<br />You’ve done so well, even at a measly 8% return…(they’ve been doing 17%)…after tax they could spend $190,000<br />They should rebalance their portfolio if they retire<br />It is 90% in stocks at this point<br />They tell the advisor:<br />
  9. 9. © Copyright Financeware, Inc 2003 All rights reserved<br />9<br />“I Wish We Would Have Named Our Son After You…”<br />They retire…<br />There is no way they would spend $190,000<br />But…they did spend $160,000<br />Next year’s tuition/board will be $42,000<br />And their portfolio…well…<br />Was down 4.0% or $160,000<br />With $160,000 in retirement income, $40,000 in education and another $60,000 in taxes…<br />It is now worth $3,580,000<br />Advisor tells them… <br />“Stick with it…we are long-term investors”<br />
  10. 10. © Copyright Financeware, Inc 2003 All rights reserved<br />10<br />By the end of 2001…<br />After spending another $160,000 with $50,000 in taxes<br />And paying $42,000 in tuition/boarding<br />And another 3% portfolio decline ($108,000 loss)<br />Their portfolio is now worth: $3,220,000<br />(bonds are a little over weighted)<br />They want to talk to the advisor about that formula he used to calculate retirement income…how’d that work again?<br />Assuming a “conservative 8%” (the last 2 years they are down 7%)<br />Less 3% for taxes<br />Leaves 5% of portfolio – on $3.2 million that’s $160,000<br />They half jokingly ask the advisor if the 8% was positive or negative<br />
  11. 11. © Copyright Financeware, Inc 2003 All rights reserved<br />11<br />By September of 2002…<br />They are down ANOTHER 17% or $550,000<br />Fortunately they won’t have much in taxes<br />Because there is nothing WITH GAINS TO SELL<br />Their retirement spending is running at $150,000<br />Brian got a job flipping burgers so tuition/boarding will only run $38,000<br />Still…their portfolio is now worth: $2,482,000<br />Advisor’s 5% formula shows $124,000 for retirement income<br />And there is still four years of schooling left!<br />Fortunately for this advisor…they stopped calling about $250,000 ago<br />
  12. 12. © Copyright Financeware, Inc 2003 All rights reserved<br />12<br />In Oct 2002…Advisor stops by to pick up some Halloween Candy<br />And who does he see?<br />RANDY!<br />
  13. 13. © Copyright Financeware, Inc 2003 All rights reserved<br />13<br />Forensic Finance…What Went Wrong?<br />Just like most advisors are trained to do . . .<br />This advisor:<br />Identified investment objective<br />And client’s risk tolerance<br />Diversified the portfolio<br />In quality stocks<br />Rebalanced at the market peak<br />Used VERY conservative assumptions<br />And compounded at better than 17% (at least prior to the bear market)<br />Life to date compounded at 9.2% THROUGH SEPTEMBER!<br />
  14. 14. © Copyright Financeware, Inc 2003 All rights reserved<br />14<br />The advisor may have managed the portfolio well…<br />But the portfolio was there to accomplish their goals…<br />One of the goals was to avoid being a GREETER!<br />Let’s rewind to December of 1992<br />And see if we can determine what would have happened with: Wealthcare<br />
  15. 15. © Copyright Financeware, Inc 2003 All rights reserved<br />15<br />The “Boones” In 1992<br />Randy - Age 43 & Lori – Age 42<br />Children: Brian - Age 11 & Megan - Age 9<br />Household Income: $300,000<br />Total Investment Assets & Resources:<br />IRAs (Saving $8,000 a year) – $750,000 <br />Brokerage Accounts (Saving $37,500 a year) – $500,000<br />Willing to save an additional $25,000 annually if necessary<br />1987 Crash and Gulf War still in their mind, but can tolerate 80% equity exposure<br /><ul><li> Goals:
  16. 16. Retire at 57 (last year of schooling – 2005), no later than 60
  17. 17. On at least $140,000 of income, maybe $160,000
  18. 18. Educate kids 100% of private undergrad, but at least public
  19. 19. Leave $1 million in today’s dollars to Green Peace
  20. 20. Travel in retirement to age 70 – ($20,000 a year budget)</li></li></ul><li>© Copyright Financeware, Inc 2003 All rights reserved<br />16<br />The “Boones” In 1992<br />Randy - Age 43 & Lori – Age 42<br />Children: Brian - Age 11 & Megan - Age 9<br />Household Income: $300,000<br />Total Investment Assets & Resources:<br />IRAs (Saving $8,000 a year) – $750,000 <br />Brokerage Accounts (Saving $37,500 a year) – $500,000<br />Willing to save an additional $25,000 annually if necessary<br />1987 Crash and Gulf War still in their mind, but can tolerate 80% equity exposure<br />They should have been asked these few simple questions<br /><ul><li> Goals:
  21. 21. Retire at 57 (last year of schooling – 2005), no later than 60
  22. 22. On at least $140,000 of income, maybe $160,000
  23. 23. Educate kids 100% of private undergrad, but at least public
  24. 24. Leave $1 million in today’s dollars to Green Peace
  25. 25. Travel in retirement to age 70 – ($20,000 a year budget)</li></li></ul><li>© Copyright Financeware, Inc 2003 All rights reserved<br />17<br />The “Boones” In 1992<br />Randy - Age 43 & Lori – Age 42<br />Children: Brian - Age 11 & Megan - Age 9<br />Household Income: $300,000<br />Total Investment Assets & Resources:<br />IRAs (Saving $8,000 a year) – $750,000 <br />Brokerage Accounts (Saving $37,500 a year) – $500,000<br />Willing to save an additional $25,000 annually if necessary<br />1987 Crash and Gulf War still in their mind, but can tolerate 80% equity exposure<br />In order to understand their PRIORITIES<br /><ul><li> Goals:
  26. 26. Retire at 57 (last year of schooling – 2005), no later than 60
  27. 27. On at least $140,000 of income, maybe $160,000
  28. 28. Educate kids 100% of private undergrad, but at least public
  29. 29. Leave $1 million in today’s dollars to Green Peace
  30. 30. Travel in retirement to age 70 – ($20,000 a year budget)</li></li></ul><li>© Copyright Financeware, Inc 2003 All rights reserved<br />18<br />The “Boones” In 1992<br />Based on these priorities, the Wealthcare recommendation might have looked like this: (Focus on Estate Target, Education & Travel)<br />
  31. 31. © Copyright Financeware, Inc 2003 All rights reserved<br />19<br />By 1996, Their Lower Risk Portfolio…<br />But would have still grown to $2.2 Million<br />Wouldn’t have grown to $2.4 Million….<br />
  32. 32. © Copyright Financeware, Inc 2003 All rights reserved<br />20<br />By 1999, They would have fallen into “Unnecessary Compromise”<br />With diligent rebalancing the portfolio would have only grown to $3 million<br />
  33. 33. © Copyright Financeware, Inc 2003 All rights reserved<br />21<br />Their Current Plan is Clearly Taking Unnecessary Risk<br />
  34. 34. © Copyright Financeware, Inc 2003 All rights reserved<br />22<br />In fact, they can be reasonably confident of achieving all of their ideal goals…<br />
  35. 35. © Copyright Financeware, Inc 2003 All rights reserved<br />23<br />Based on this, Wealthcare recommends they adopt their “Ideal” plan…<br />They are taking unnecessary risk<br />Move to the conservative growth portfolio (55% bonds)<br />Retire a year earlier – Age 57…their “Ideal”<br />Increase planned retirement income to $160,000, $14,000 more than they were planning on<br />Stop saving the additional $12,500 they had planned<br />
  36. 36. © Copyright Financeware, Inc 2003 All rights reserved<br />24<br />Based on this, Wealthcare recommends they adopt their “Ideal” plan…<br />They are taking unnecessary risk<br />Move to the conservative growth portfolio (55% bonds)<br />Retire a year earlier – Age 57…their “Ideal”<br />Increase planned retirement income to $160,000, $14,000 more than they were planning on<br />Stop saving the additional $12,500 they had planned<br />At the end of 2000, after taxes and tuition, this leaves their portfolio at $2.98 Million<br />
  37. 37. © Copyright Financeware, Inc 2003 All rights reserved<br />25<br />And a year later…. With $2.9 million…<br />Their comfort zone dropped from 83 to 81<br />
  38. 38. © Copyright Financeware, Inc 2003 All rights reserved<br />26<br />By the end of 2001, after taxes, tuition, etc…(not to mention a bad market)<br />Their comfort zone fell to 77<br />
  39. 39. © Copyright Financeware, Inc 2003 All rights reserved<br />27<br />There was nowhere to hide in 2002…By September, even their conservative portfolio declined 10%<br />Their comfort zone for all of their “Ideal” goals fell to 70<br />And NOW is the time to be proactive!<br />So Wealthcare designs two alternatives for them:<br />1- Moving risk back up a notch in risk to “Moderate Growth” and reduce retirement income to $155,000<br />OR<br />2- Keeping the conservative growth allocation, delay retirement to 58 on $151,000 retirement income<br />It probably wouldn’t hurt if they were reminded that theORIGINAL RECOMMENDATION<br />Had them in a “Moderate Growth” portfolio<br />Retiring at AGE 58<br />On a $145,000 income<br />
  40. 40. © Copyright Financeware, Inc 2003 All rights reserved<br />28<br />So, the Boone’s are given the choices:<br />Move up risk, tweak retirement income:<br />
  41. 41. © Copyright Financeware, Inc 2003 All rights reserved<br />29<br />So, the Boone’s are given the choices:<br />Delay retirement a year, reduce income a little more:<br />
  42. 42. © Copyright Financeware, Inc 2003 All rights reserved<br />30<br />Think about the difference!<br />With Wealthcare:<br />Without Wealthcare:<br />$20,000 travel budget<br />Educational goals met<br />Estate goal met<br />Retirement income still more than they had been planning on for years<br />Retirement age is the same as ORGINAL projection, WITH MORE income<br /><ul><li>Ignored
  43. 43. Flipping Burgers???
  44. 44. Least of worries now
  45. 45. Wal-mart Greeter</li>

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