Term Paper on "Investment Plan"

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[EXCERPT] . . . .

Investment Policy

The time frame for the accumulation of funds is 35 years (65-30). At that point, Paul will be 37 years old. The total time frame for care for Paul is going to be 48 years (85-37). One question not addressed is the need that John and Mary have for their own retirement. At present, it is assumed that they will live off of social security and any pensions, rather than from their own savings, but it would be best to ask the clients that.

The first thing to assess is the level of risk aversion that these clients are going to have. Normally, a long time frame implies that a fairly high amount of risk can be taken with the portfolio, but in this case there is likely to be a higher degree of risk aversion because the money is being used to care for their son, who is not expected to have any earning capacity of his own. While the actual level of risk aversion needs to be determined, it is assumed that it will be lower than for a retirement fund, because Paul will need this money to live.

The present day cost of assisted living is $42,000 per year. In 35 years' time, this will be $118,183 annually. By the time Paul is 85, which is 83 years from now, this amount will be $488,358. The total need during the time from when John and Mary turn 65 until Paul turns 85 will be $12,827,575.

An important consideration is how large this fund needs to be when Paul enters assisted living. The reason for this is that at that point, the clients (John and Mary) will be retired, and therefore unable to make further capital investments into the fund. The fund will need to generate its own income at that point, but the client's level of risk

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aversion is going to be much higher as well because there are no further opportunities to add to the fund. Thus, the fund will be steadily depleted over this time, and need to earn on fixed income interest enough money for the fund to last 48 years. Building a fund for 35 years that has to last 48 years is a major challenge.

It is assumed that John and Mary are going to make monthly contributions to this account during their working lives. These contributions will be separate from Paul's current medical bills, whatever caregiver costs there are today, and whatever disruption Paul represents to the earning potential of John and Mary. The objective here is simply to calculate how much John and Mary will need to contribute on a monthly basis to this fund, so that they have that information.

There are a few basic assumptions that go into this calculation. The first such assumption is with respect to the rates earned on different categories of investment. It is assumed, based on Treasury data, that the long run average Treasury rate (or risk-free rate) is 3.3%. Corporate bonds are assumed to have a 1.5% premium, equities a 7% risk premium. Cash is assumed to pay 0.5%. So the rates on corporate bonds are 4.8%, and 10.3% for equities.

The next step is to determine the best asset allocation. Over a 35-year time frame, equities are the best value because they rise fairly consistently in the long-run, although they are unreliable in the short run. For the first 25 years, the portfolio can be mainly in equities (75% equities, 15% corporates, 10% Treasuries). For the years 25-35, the asset allocation will start to move towards safety (30% equities, 40% corporates, 30% Treasuries). To determine how large the monthly payments into the fund need… READ MORE

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Quoted Instructions for "Investment Plan" Assignment:

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This paper is for a Finance class and you should includes several financial terms in the paper. Someone who is familiar with financial investment should do this paper. You have to plan a contribution and investment strategy for how to accumulate money for the family (details below), then the investment strategy This is not a general paper so I would greatly appreciate someone who has a command on financial topics pick this .

Your research paper assignment is to write an investment policy statement for a family. The family*****s situation is described below. It is not necessary to restate the information given in this document, except as is necessary to explain anything you put into your paper.

John and Mary (both age 30) have a severely handicapped child named Paul, who is two years old. They want to set up an investment fund to take care of Paul in his later years when he will live in assisted living. Paul will never be able to work (or at least will not earn a substantial income). He will live with John and Mary until they are 65, but will need assisted living after the time they reach age 65. They honestly doubt Paul will live to age 85, but want to have funds available for him to support him until he reaches age 85. (Any leftover funds after Paul*****s death will go to charity.) Assisted living currently costs $3,000 per month and other living expenses (e.g., toiletries, clothing, etc.) will be about $500 per month. You should assume that these costs will rise at three percent per year. Do not worry about health care expenses as that is being handled separately.

Think in terms of at least two stages to this project. Between now and when John and Mary reach age 65 and Paul moves out, they are in the first stage of the project as they are accumulating funds. Stage two will be the use of the funds as Paul starts using the money they have accumulated for his care.

You have to think about how much money is required, the contribution and investment strategy for how to accumulate that money, then the investment strategy once Paul starts using the funds, and any other issues related to the topic that seem relevant.

John and Mary are counting on you to give them the guidance to take care of their son after they are gone. Whether Paul can live a decent lifestyle after his parents can no longer care for him will be determined by whether or not you give them good advice. Write them the plan they need.

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