Anyone can explain me why for question 16 the answer A) Her time horizon is wrong?

Based on the exhibit the client is 59 years hold, expects to retire in 4 years at 63 years old and is in good health (expects to live to age 85).

The advisor writes in the IPS that the client has a multi-stage time horizon: the first stage is four years, until her intended retirement, followed by a second stage of 22 years.

For me this comment is right, but it isn’t according to CFA solutions

What does the solution say? Single-stage (i.e. life expectancy = 26 years)?

The client might not have any significant disbursements until his death (supporting his children’s education, for example), so his time horizon might as well be single-stage.

It has one cut off point measured by their income (CFs inflow/outflow) rapid change, thus is the exactly 2-stage horizon or somewhere multistage horizon term is used for all but single stage horizon. Individual CFs crucial changes are fundamental things to determine the stages.

The question was that the advisor made 3 statements in the IPS and the only correct one should be chosen. I thought the comment above was right, but it seems it isn’t and I don’t understand why.

It was a multiple choice mock. One of the option was: multi-stage time horizon, the first stage is four years, until her intended retirement, followed by a second stage of 22 years.

But it seems it isn’t correct and this is the reason why I am asking, I don’t understand it!

The other two possible answers are unrelated with the time horizon. The point still is, why is this wrong? In the answer nothing is said, but only the correct answer is justified.

the only thing I can think of is that, as Flashback has pointed out, that there are no changes in cash inflows/cash outflows until his death. His time horizon is probably single-stage here (i.e. life expectancy)

look at the guideline answer for question 7d of the 2015 AM exam. This is a similar case (4 years until retirement). The guideline answers says the time horizon has two stages here though --> 1) 4 years until retirement and 2) retirement until death, BUT during the 4 years until retirement, we need to support our child’s education. This will stop in 4 years.

–> After 4 years, we have a major change in cash in/out flow pattern. Maybe there was no such pattern in your example, therefore single-stage?

Draw a line with changes in cash flows patterns (typically situations: pre-retirement, retirement with no annuity receives if applicable, retirement with annuity if applicable followed with post-annuity retirement, funding children scholarship, etc.).

I agree on the first stage, but the support for Anna is at least until she is 35 years old (now she is 3) that means for 32 years. But 59 year +32 years = 91years ???

Thanks for pointing out my mistake! Hmm, in this case I would opt for a single-stage horizon. She will support Anna until her expected death. Whether or not she retires in 4 years does not matter here, because she is already supporting Anna today and will continue doing so.

didn’t this question also indicate that Marjorie is going to fund Anna’s college tuition where she’d require 1.3 million when Anna reached age 18, which is 15 years ahead.