case study for Financial Investment

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Fundamentals of Investment and Portfolio Management
Class Project: Investment Policy Statement
Case #1
Mary and Harry Reser
Mary and Harry Reser, 57 and 62, are looking ahead to retirement early next year.
They are thinking about heading south to a cheaper and warmer state but haven’t
made a firm decision. Harry is the sole breadwinner and earns $64,543, plus an
additional $8,169 from investments.
The Reser’s two main concerns are longevity and taxes. “We want to take income
from investments with the least amount of tax liability and make the money we have
accrued last as long as we do,” notes Harry. He also noted a concern about taking
money out of tax-deferred plans in the correct manner to avoid IRS penalties.
The Reser’s can be considered “millionaires next door,” with an impressive net
worth of $1,065,951. They have absolutely no debt and the following assets:
$32,000 in a 2% bank passbook account, $347,365 in telephone stock; $224,901 in
Harry’s 401(k); $31,000 in an annuity; $202,685 in mutual funds; $23,000 in whole
life insurance; their $190,000 home; and $15,000 of personal property.
No information was provided as to the type of mutual funds or the 401(k)’s asset
allocation (i.e., the percentage of the account in different types of assets like stocks
and bonds). Harry contributes 15% of his salary to the 401(k) and appears to have
been doing this for many years. Neither spouse has an individual retirement account
(IRA), however.
The Resers estimate that their monthly expenses total $4,500. They are concerned
about the future cost of health care and note that, in retirement, “the biggest
expense not in our current budget will be medical insurance.” Currently, Harry
shares part of the cost of health coverage with his employer but this coverage will
end after he retires. His employer also provides short-term disability coverage and
matches his 401(k) contribution up to the first 8% of pay.
The Reser’s car and home have $500,000 and $300,000 of liability coverage,
respectively. They do not own an umbrella liability policy. The Resers are thinking
of tapping their $23,000 of life insurance cash value. “We do not feel that we need
life insurance any longer,” says Harry, “and will most likely cash them in.”
Taxes were mentioned several times as a major concern. The Reser’s taxable income
is $50,543. If their adjusted gross income in retirement exceeds $44,000, 85% of
their Social Security benefits will be taxed. Tax on Social Security is figured on what
is known as “preliminary adjusted gross income.” This figure includes all earnings,
pensions, dividends and interest from investments, including tax-free municipal
bonds, and half of a person’s Social Security benefit.
Part I
Guide to Writing An Investment Policy
Step 1. Introduction
? Describe the purpose of the Investment Policy Statement
? Write a brief description of your client.
? This section should have a review of the client’s balance sheet and
investable assets, their current work status, desired retirement date and
family information.
Step 2. Describe your client’s goals and objectives.
? Goals – Express your client’s goals in qualitative terms, such as, wishing to maintain
their current standard of living through retirement, paying for a child’s college
education, or to leave something to their children after passing.
? Risk Tolerance –
o Complete a Risk Profile on behalf of your client.
o Write a brief summary of the results of your client’s questionnaire. Include
responses to questions that you think are significant.
? Return Objective – Your client’s return objective should be stated in terms of an
absolute or a relative percentage. Make sure your return objective is consistent with
your client’s risk tolerance.
Step 3. Identify your client’s investment constraints.
? Time Horizon – State how long your client has until retirement and/or how long they
expect to be retired.
? Liquidity – State whether your client’s emergency fund is appropriate and how much
should be kept in liquid reserves.
? Income Tax Considerations –
? Comment on whether your client is in a low, medium or high tax bracket and
whether taxes will be considered in their investment policy.
? Unique Needs and Circumstances – Include your client’s concerns or personal
Refer to Chapter 2 of the text for further information on the process of creating an investment
policy statement.

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