1. Wealthcare Case Study “The Boones”

2. © Copyright Financeware, Inc 2003 All rights reserved 2 The “Boones” In 1992 Randy - Age 43 & Lori – Age 42 –Children: Brian - Age 11 & Megan - Age 9 Household Income: $300,000 Situation in 1992: $1,250,000 in Assets: –Brokerage accounts totaling $500,000 Split between 3 brokers Hodgepodge of stock “ideas” –Some from Randy & some from brokers –IRAs totaling $750,000 $200,000 from traditional IRAs (balanced & international mutual funds) $550,000 in New IRA rollover (CASH) –Randy just took new job…rollover from pension & 401k –Referred to you by another client With more than $1 million to invest, Randy & Lori think it is time to take things seriously The Boone’s CPA suggested you too!

3. © Copyright Financeware, Inc 2003 All rights reserved 3 In 1992 – Your Actions: First, identify investment objective: –“Growth” ’87 Crash/Gulf War still fresh in their mind Conservatively allocate 80% stocks/20% bonds Suggest a “conservative” 11.3% return assumption –Last 14 years (’78-’91) compound was 15.4%

4. © Copyright Financeware, Inc 2003 All rights reserved 4 In 1992 – Your Recommendations Consolidate brokerage accounts with you –Sell the “trashy” stock ideas, keep some of the “Blue Chips” –Add diversified “Blue Chip” portfolio of individual stocks –Muni bond ladder for bond allocation in brokerage accounts In the IRAs –Keep the international fund (Templeton World Fund originally sold by insurance agent with 8% load – avoid switch letter) –Sell the balanced funds (No-loads Randy bought) and buy more stocks so you can control asset allocation –Buy High Yield GNMA mutual fund for fixed allocation Buy a technology mutual fund as the “aggressive” piece of both IRA and Brokerage accounts THE BOONES BUY ALL OF YOUR RECOMMENDATIONS!

5. © Copyright Financeware, Inc 2003 All rights reserved 5 A Year Later…In 1993 The accounts have done well versus your 11.3% “benchmark” Their $1,250,000 in assets is now worth $1,500,000 Stocks are a tad over-weighted due to performance, but it was too hard to check

6. © Copyright Financeware, Inc 2003 All rights reserved 6 A Few More Years Go By…In 1996: Their accounts total $2.4 million Versus your 11.3% assumed return –Things look great! Your Portfolio 11.3% Stock allocation is getting really over-weighted

7. © Copyright Financeware, Inc 2003 All rights reserved 7 By the end of 1999: Their accounts total $4 million They have compounded at over 17% They want to talk to you about retirement –Could they retire now and generate $140,000 after tax lifetime income? –Plus finish paying for Brian & Megan’s schooling? (about $40,000 annually for 6 more years?)

8. © Copyright Financeware, Inc 2003 All rights reserved 8 Can They Retire? To analyze this you take the $4 million: –Set aside $240,000 for the kid’s education (6 years @ $40k) –With $3.8 million left for retirement Assuming a “super conservative 8% return” Less 3% for taxes (and commissions) –$190,000 looks like a no-brainer (5% of $3.8 million) You tell them: –No problem paying for education and generating $140,000 –You’ve done so well, even at a measly 8% return…(they’ve been doing 17%)…after tax they could spend $190,000 –They should rebalance their portfolio if they retire It is 90% in stocks at this point They tell you:

9. © Copyright Financeware, Inc 2003 All rights reserved 9 “I Wish We Would Have Named Our Son After You…” They retire… There is no way they would spend $190,000 But…they did spend $160,000 Next year’s tuition/board will be $42,000 And their portfolio…well… –Was down 4.0% or $160,000 –With $160,000 in retirement income, $40,000 in education and another $60,000 in taxes… –It is now worth $3,580,000 You tell them… “Stick with it…we are long-term investors”

10. © Copyright Financeware, Inc 2003 All rights reserved 10 By the end of 2001… After spending another $160,000 with $50,000 in taxes And paying $42,000 in tuition/boarding And another 3% portfolio decline ($108,000 loss) Their portfolio is now worth: $3,220,000 –(bonds are a little over weighted) They want to talk about that formula you used to calculate retirement income…how’d that work again? –Assuming a “conservative 8%” (the last 2 years they are down 7%) –Less 3% for taxes –Leaves 5% of portfolio – on $3.2 million that’s $160,000 They half jokingly ask you if the 8% was positive or negative

11. © Copyright Financeware, Inc 2003 All rights reserved 11 By September of 2002… They are down ANOTHER 17% or $550,000 Fortunately they won’t have much in taxes –Because there is nothing WITH GAINS TO SELL Their retirement spending is running at $150,000 Brian got a job flipping burgers so tuition/boarding will only run $38,000 Still…their portfolio is now worth: $2,482,000 Your 5% formula shows $124,000 for retirement income And there is still four years of schooling left! Fortunately…they stopped calling about $250,000 ago

12. © Copyright Financeware, Inc 2003 All rights reserved 12 In October 2002…You stop at to pick up some Halloween Candy And who do you see? RANDY!

13. © Copyright Financeware, Inc 2003 All rights reserved 13 Forensic Finance…What Went Wrong? Just like each of you would have done… This advisor: –Identified investment objective –And client’s risk tolerance –Diversified the portfolio In quality stocks –Rebalanced at the market peak –Used VERY conservative assumptions –And compounded at better than 17% (at least prior to the bear market) –Life to date compounded at 9.2% THROUGH SEPTEMBER!

14. © Copyright Financeware, Inc 2003 All rights reserved 14 The advisor may have managed the portfolio well… But the portfolio was there to accomplish their goals… One of the goals was to avoid being a GREETER! Let’s rewind to December of 1992 –And see if we can determine what would have happened with: Wealthcare

15. © Copyright Financeware, Inc 2003 All rights reserved 15 The “Boones” In 1992 Randy - Age 43 & Lori – Age 42 –Children: Brian - Age 11 & Megan - Age 9 Household Income: $300,000 Total Investment Assets & Resources: –IRAs (Saving $8,000 a year) – $750,000 –Brokerage Accounts (Saving $37,500 a year) – $500,000 –Willing to save an additional $25,000 annually if necessary 1987 Crash and Gulf War still in their mind, but can tolerate 80% equity exposure Goals: –Retire at 57 (last year of schooling – 2005), no later than 60 –On at least $140,000 of income, maybe $160,000 –Educate kids 100% of private undergrad, but at least public –Leave $1 million in today’s dollars to Green Peace –Travel in retirement to age 70 – ($20,000 a year budget)

16. © Copyright Financeware, Inc 2003 All rights reserved 16 The “Boones” In 1992 Randy - Age 43 & Lori – Age 42 –Children: Brian - Age 11 & Megan - Age 9 Household Income: $300,000 Total Investment Assets & Resources: –IRAs (Saving $8,000 a year) – $750,000 –Brokerage Accounts (Saving $37,500 a year) – $500,000 –Willing to save an additional $25,000 annually if necessary 1987 Crash and Gulf War still in their mind, but can tolerate 80% equity exposure Goals: –Retire at 57 (last year of schooling – 2005), no later than 60 –On at least $140,000 of income, maybe $160,000 –Educate kids 100% of private undergrad, but at least public –Leave $1 million in today’s dollars to Green Peace –Travel in retirement to age 70 – ($20,000 a year budget) We should have asked these few simple questions

17. © Copyright Financeware, Inc 2003 All rights reserved 17 The “Boones” In 1992 Randy - Age 43 & Lori – Age 42 –Children: Brian - Age 11 & Megan - Age 9 Household Income: $300,000 Total Investment Assets & Resources: –IRAs (Saving $8,000 a year) – $750,000 –Brokerage Accounts (Saving $37,500 a year) – $500,000 –Willing to save an additional $25,000 annually if necessary 1987 Crash and Gulf War still in their mind, but can tolerate 80% equity exposure Goals: –Retire at 57 (last year of schooling – 2005), no later than 60 –On at least $140,000 of income, maybe $160,000 –Educate kids 100% of private undergrad, but at least public –Leave $1 million in today’s dollars to Green Peace –Travel in retirement to age 70 – ($20,000 a year budget) And, understood their PRIORITIES

18. © Copyright Financeware, Inc 2003 All rights reserved 18 The “Boones” In 1992 Based on these priorities, our recommendation might have looked like this: (Focus on Estate Target, Education & Travel)

19. © Copyright Financeware, Inc 2003 All rights reserved 19 By 1996, Their Lower Risk Portfolio… Wouldn’t have grown to $2.4 Million…. But would have still grown to $2.2 Million

20. © Copyright Financeware, Inc 2003 All rights reserved 20 By 1999, They would have fallen into “Unnecessary Compromise” With diligent rebalancing the portfolio would have only grown to $3 million

21. © Copyright Financeware, Inc 2003 All rights reserved 21 Their Current Plan is Clearly Taking Unnecessary Risk

22. © Copyright Financeware, Inc 2003 All rights reserved 22 In fact, they can be reasonably confident of achieving all of their ideal goals…

23. © Copyright Financeware, Inc 2003 All rights reserved 23 Based on this, you recommend they adopt their “Ideal” plan… They are taking unnecessary risk Move to the conservative growth portfolio (55% bonds) Retire a year earlier – Age 57…their “Ideal” Increase planned retirement income to $160,000, $14,000 more than they were planning on Stop saving the additional $12,500 they had planned

24. © Copyright Financeware, Inc 2003 All rights reserved 24 Based on this, you recommend they adopt their “Ideal” plan… They are taking unnecessary risk Move to the conservative growth portfolio (55% bonds) Retire a year earlier – Age 57…their “Ideal” Increase planned retirement income to $160,000, $15,000 more than they were planning on Stop saving the additional $12,500 they had planned At the end of 2000, after taxes and tuition, this leaves their portfolio at $2.98 Million

25. © Copyright Financeware, Inc 2003 All rights reserved 25 And a year later…. With $2.9 million… Their comfort zone dropped from 83 to 81

26. © Copyright Financeware, Inc 2003 All rights reserved 26 By the end of 2001, after taxes, tuition, etc…(not to mention a bad market) Their comfort zone fell to 77

27. © Copyright Financeware, Inc 2003 All rights reserved 27 There was nowhere to hide in 2002… By September, even their conservative portfolio declined 10% Their comfort zone for all of their “Ideal” goals fell to 70 They still take your phone call though… And NOW is the time to be proactive! So you design two alternatives for them: 1- Moving risk back up a notch in risk to “Moderate Growth” and reduce retirement income to $155,000 OR 2- Keeping the conservative growth allocation, delay retirement to 58 on $151,000 retirement income It probably wouldn’t hurt if you reminded them that your ORIGINAL RECOMMENDATION Had them in a “Moderate Growth” portfolio Retiring at AGE 58 On a $145,000 income

28. © Copyright Financeware, Inc 2003 All rights reserved 28 So, you proactively present the choices: Move up risk, tweak retirement income:

29. © Copyright Financeware, Inc 2003 All rights reserved 29 So, you proactively present the choices: Delay retirement a year, reduce income a little more:

30. © Copyright Financeware, Inc 2003 All rights reserved 30 Think about the difference! $20,000 travel budget Educational goals met Estate goal met Retirement income still more than they had been planning on for years Retirement age is the same as ORGINAL projection, WITH MORE income With Wealthcare: Ignored Flipping Burgers??? Least of worries now Wal-mart Greeter Without Wealthcare: