IPS - Quicksheet relative, his, individual, ability, company

scr879

Here are a couple rules I came up with from doing the Official Exams. Please add any other rules of thumb or corrections.
IPS
Decreases ability to take risk
1. Small amount of investable assets to support Jones in retirement relative to his spending levels.
2. No post-retirement EMPLOYMENT income. Aka human capital.
3. No further funds added to investable assets in retirement.
4. No participation in company or individual retirement plan.
5. Might have to pay for kid’s education
Decrease willingness to take Risk
1. Desire for preservation of real value of the portfolio
2. Preference to avoid losses.
3. Conservative nature of current investments.
Increases ability to take risk
1. Long time until retirement (25 yrs)
2. Flexibility to stop annual payments to charity
3. No debt
4. Only has to provide for himself
5. Large portfolio value relative to living expenses
6. Flexible retirement date
7. Set to receive large inheritance
8. Stable income
Increases willingness to take risk
1. Owns own business
2. Desire to retire early
3. Investing confidently in equities
4. For Foundation: Desire to increase value of real purchasing power
Return Calculations:
1. If asks for pretax income divide cashflows by (1-t)
2. Look for one-off expenses that will decrease the portfolio.
3. If cash withdrawal from pension account includes a penalty be sure to account for it
4. You have to adjust tax for “before-tax” but no tax adjustment for “after-tax”
5. You have to adjust returns for inflation for “nominal” but this is not needed for “real.”
Time
1. 15-20 Years considered long; less than 3 is short
2. Be sure to account for odd year. Such as current age 34. Retire at 60. 60-34-1 =25
3. Be sure to mention single or multi-stage
Liquidity
1. Inflation is not accounted for with liquidity as it’s short term requirement. It is accounted for in return requirement.
2. Mortgage payment should be included
Taxes
1. For constraint mention if portfolio has single stock that could have a large basis if sold
Unique
1. Value of house
Legal
1. If on board of directors

Rasec

2. Be sure to account for odd year. Such as current age 34. Retire at 60. 60-34-1 =25 ?
Why would you do that?
Tax:
Income source and residence conflicts
Gift or bequest (Tax avoidance)
Unique:
Not going to invest in certain stocks, or assets
Legal:
Create a trust

luckygiftvn

I think the extra year was because it was a two step question, i.e. she was 34, did a bunch of stuff, etc.. Then in the next part it asked for the return requirement, where she was now 35.

dirk01

Unique: SRI

Chuckrox

Retirement generally 65 and death between 75 and 85.
Kids start college at 18. Two kids need a range for that stage equal to their age difference.
Tax : if taxable portfolio , emphasize low turnover strategy , deferred capital gains, seek tax advisor help
Legal : seek help setting up bequest or trust

jarobi04

Why does a desire to retire early show willingness to take risk?

bpdulog

Shifting relatively more capital from Human to Financial ?
Human capital is less risky but Financial capital is risky

xilinx_altera

hmm.. I think the desire to retire early will decrease the the investors time frame. Not sure though.

HuskyGrad2010

I have stuck on several IPS ability of taking risk. One Question for 50 year old retirees (2007 exam).The nominal required return is 7.5% and liquidity need of 5% per year. No matter how rich the guy is, I would say the ability to assume risk is average. But answer is above average. The reasons given include he can go back to work. Required spending need of 5% (not even considering inflation) is low compared to assert. Etc.
Is 5% outflow really low?

dmrktrading

If you are willing to retire at 50 rather than working through to 65 you are willing to take a risk that you may come up short. It would lower your ability maybe, but increase your willingness. 2010AM