In this example, let’s consider a fictional client we’ll call the Evans family. Dr. John, 52, is in private practice, and his wife Nancy, 49, is an engineer with Ford. They have two children. Dr. and Mrs. Evans plan to retire in 15 years. They both have 401k plans where they work now, plus 401k plans from prior employers and $50,000 saved for their children's college in three after-tax mutual funds.
Rebuilding a plan in line with goals
After getting to know their goals, objectives, risk tolerances and reviewing their current portfolio, we would put together a plan of action. Our strategies would include the following:
Dr. and Mrs. Evans each roll their old 401k accounts into IRAs that we can independently manage, choosing from top-ranked no-load mutual funds available in the marketplace. We are able to manage their current 401k accounts as well. We review all of their current holdings, then reallocate the entire portfolio in an integrated fashion, choosing from the current 401k options. Each account itself may not be completely diversified, but the overall portfolio certainly is. For instance, the investment choices in John’s 401k plan contain a few good stock funds, but the bond fund choices are not ideal. We may have his 401k account reallocated so that he is 100% invested in various stock funds, then use his IRA and Nancy’s IRA to fill in the gaps in diversification with various types of bond funds and other non-stock alternatives that we select ourselves.
Each quarter we send the family a consolidated statement showing their holdings from all accounts, how they are allocated, and the overall performance (after our fees are deducted) versus an appropriate benchmark. John and Nancy are able to track the growth of their wealth quickly and easily.
Analyze
We start by reviewing current holdings and researching available investment options.
Restructure
We reallocate their portfolios in line with our strategy, considering cost, performance, and tax ramifications.
Report
Every quarter, we produce a consolidated statement for Dr. and Mrs. Evans so they can easily track their portfolio’s performance.
Taking care of the whole family
With two kids headed to college in the future and a mortgage to pay off, we help them assess the adequacy of their life-insurance coverage. Although we don’t sell life insurance, we can analyze current coverage and suggest alternatives.
As for the family’s college savings, it turns out that unfortunately the $50,000 in mutual funds was worth $75,000 when they purchased the funds at a high point in the stock market. We explain that they could sell the mutual funds to “harvest the loss” of the $25,000, and use those dollars to lower their future tax bills, while placing the proceeds in the Michigan 529 plan. In the 529 plan, $10,000 of each yearly contribution is deductible from Michigan income taxes (saving $425), and the future earnings will be tax-free if used for higher education expenses anywhere in the country.
Important Notes
No investment strategy or investment plan, including a well-diversified portfolio rebalanced periodically, can guarantee a return or that losses will not occur. Losses can occur from any investment, including those recommended by RIS, and it is likely any assumption used herein will not occur as estimated. Factors such as size and performance of investment positions and accounts, length of time positions are held, the amount and timing of purchases and sales, client objectives and restrictions, tax issues, interest rates, cyclical securities price trends, news pertaining to investments and markets, changes in client plans and other factors all influence performance and assumptions materially.
Nothing contained in this case study should be construed as offering specific investment advice, legal, accounting and/or tax advice.
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