Stephenson case: age 55 yrs (plans to retire in another 15 yrs by age 70) has investable asets woth 2 mn will be receiving an inheritance in near future of 2 mn Wanted to list his time horizon? is this 2 stage or three stage: - pre-retirement until he recieves the inheritance - pre-retirement after he has recieved the inheritance till age 70 (when he retires) - retirement years (after 70 yrs till he paases away) thanks
It depends what the rest of his circumstances that we’re looking at here… If “near future” means that he’ll be receiving it in the next 3 months, than it is deducted from the current “total assets” when determining the required return. If it’s 2 years from now, it MAY mean that he has another time horizon IF: the change makes a SIGNIFICANT difference in his IPS. So, if he only has expenses (not covered by cash or income) of 2,000 than it doesn’t matter because it the inheritance doesn’t make much of a difference since his needs are covered regardless… If he spends 350k each year from portfolio assets, than it DOES constitute a new TH because his required return was just cut in half.
Mcleod, if it is to be received in 3 months, shouldn’t it be added to total assets since it will increase the total size of the portfolio and hence reduce the required return? aspirant, what was the answer to the question?
Barring other info…I’d say two stage, as the inheritance is “near term”.
i thot it shud be 3 becoz inheriance is almost doubling the portfolio size from 2 mn to 4 mn … it shud be a significant thing. but guideline answer suggests it remains a 2 stage time horizon (not 3)
The key is “near term”. If the inheritance is near term you are designing your IPS as if the money is already there…thus you are figuring on $4M (even though half of it comes in the “near term”). Same mindset that you’d subtract the value of a purchase (like a house) if it was to be in the first year (as an example)…you’d subtract it out as if it was never there.