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:

A) Small Cap Growth StocksB) High Yield Junk BondsC) Portfolio of Utility Stocks With Good DividendsD) 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…

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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

25

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

134

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