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The Bruckner's Asset Allocation




Question;Case 2. The Bruckner's Asset Allocation (P892).;You have new clients, Erik and Senta Bruckner. They are in;their mid-30s and have two;children, Stella and Chloe, ages 6 and 8. The Bruckners?;primary financial objective is to;provide for their children?s college education. Their;secondary objective is to plan for;retirement. They own a home with a mortgage and have total;family income of $100,000.;Senta?s employer provides medical insurance and life;insurance. She participates in her;employer?s 401(k) retirement plan and currently has $40,000;in the plan. The funds are;invested in her company?s stock. Erik is self-employed and;works from their home. He;has not established a retirement plan. After deducting the;amount of the mortgage, the;family has total assets of $200,000 available for investing;in addition to the $40,000 in;the retirement account.;The Bruckners want sufficient liquid assets to cover six;months? income as a precaution;(0.5?$100,000=$50,000). At least 20 percent of the $50,000;should be in exceedingly;liquid assets, but the remaining 80 percent may be invested;elsewhere provided that the;assets meet the objective to provide sufficient liquidity.;The remaining assets ($150,000) are available for other;investments. These funds could;be allocated in numerous ways. Since the couple is;generating income, you expect the;Bruckners to conclude that income-producing bonds are not a;necessary component of;their portfolio. That conclusion, however, is not;necessarily correct. Bonds do offer;potential diversification and may be included as part of any;tax-deferred retirement;account. The interest income will not be taxed until the;proceeds are removed from the;retirement account and the flow of interest income will;compound over time. If Senta?s;employer offers a bond fund as part of the retirement plan;selecting the bond fund;instead of the company?s stock makes sense from an overall;asset allocation perspective.;You decide to develop a sample asset allocation;illustration. Once the Bruckners have;grasped the concept, you can further subdivide the;allocation. The starting amount is;$240,000: the $40,000 in the retirement account, the $50,000;needed for liquid assets;and the $150,000 balance. You decide that the retirement;account should be invested in;bonds and liquid assets should be in a money market mutual;fund that stresses federal;government Treasury bills. The balance should be divided;equally between large cap and;smaller cap stocks. To illustrate the allocation and its;possible results over time, prepare;answers to the following questions.;1. How much is allocated to each class of assets?;2. Based on the historical returns in Exhibit 10.2 in the;textbook, how much will be in;each account when the girls approach college age ten years;from now?;3. Since historical;returns are averages, how much will be in each account assuming that;the worst- and best-case scenarios based on Exhibit 10.4 in;the textbook were to occur?;(Be careful to select the appropriate time horizon for the;comparisons.);4. What would have been the impact on the terminal amounts;in Question 3 if the;allocation had been 40 percent large cap companies and 60;percent small cap companies?;5. Given the values in Question 3, what is the portfolio?s;asset allocation after ten years;have passed? What steps should be taken?;6. If the Bruckners do not need the funds to finance their;daughters? college education;how much will be in each account when they approach;retirement in their mid-60s under;the original allocation?;7. Based on the rate of inflation in Exhibit 10.2, goods and;services costing $100 will cost;how much at their retirement? How much annual income is;necessary to maintain their;standard of living?;8. If their combined life expectancy is 15 years at;retirement, can they maintain their;standard of living if their funds as a whole earn 7 percent;after they retire? What is the;future rate of inflation assumed in your answer to the;previous question? Is that;assumption reasonable?;9. Based on the above answers, what are some suggested;courses of actions the Bruckners;should consider taking?


Paper#59144 | Written in 18-Jul-2015

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