Let’s say Mr. Smith who is 45 years old earnes $50,000.00 in salary per year, he has $3,500.000 investable assets. His expenses last year was $150,000.00 and will be adjusted 3% per year for inflation. My answer was he has an “above average” ability to take risk since the return requirement is relatively small compare to his assets, but my answer was wrong. What did I miss? Could anyone explain as to why he has a below-average ability to take risk. Thanks you.
50,000 - salary and 3500 of investable assets brings total to 53,500 and his yearly expense is 3 times of his assets (150K). How the hell he can have above avg ability?
He has $3.5 M in assets, not $3,5000.00.
I dont see how there is enough info to answer this quesiton. Where are the objectives and contstraints?
ok so that was a type about 3.5m and not 3.5k. Agree with Grey that there is not much info about determining his ability and willingness of risk tolerance. We need to find some information regarding his past experience with risk taking, his statements about capital markets etc.
I would say there is a problem is you spend more than you make. This would indicate below average ability to me. That is bc he is dependant on his investable assets.
Thanks mpnoonan, I think that’s what it is. He spends more than what he makes and his livelihood depends on income from his portfolio.
The guy is “basically retired.” Relying on his portfolio for most of his income already.
^ How do you know he is retired. He is still making annual salary and is only 45. We can’t assume this.
st6337 Wrote: ------------------------------------------------------- > Let’s say Mr. Smith who is 45 years old earnes > $50,000.00 in salary per year, he has $3,500.000 > investable assets. His expenses last year was > $150,000.00 and will be adjusted 3% per year for > inflation. > > My answer was he has an “above average” ability to > take risk since the return requirement is > relatively small compare to his assets, but my > answer was wrong. > > What did I miss? Could anyone explain as to why > he has a below-average ability to take risk. > > Thanks you. He is 45. This means that he has to take 100K from the portfolio for a VERY long time (150k expenses - 50K salary = 100k burden on the portfolio). He is spending 3x what he makes. He will actually have to take more than 100k because his 50k of salary will be taxed. His time horizon until distributions is zero since he is already taking money off the portfolio. If he was 85 this is a totally different question. He is 45 and it may need to last another 40 years. Not good. Volatility really screws this up.
why do you not take the expected return into consideration. If he has income of 50k, expenses of 150k he needs a return of 100k to meet expenses. return is approx 3% to cover expenses, pretty minmimal no?
why do you not take the expected return into consideration? If he has income of 50k, expenses of 150k he needs a return of 100k to meet expenses. return is approx 3% to cover expenses, pretty minmimal no?
^ That is what I am thinking Grey. We need the more detail here to conclude anything. OP - Can you post the full problem here?
This question also says nothing about his salary increasing with inflation, but his expenses will every year. Edit: Assuming this is the way the question was actually written.
He is relying on his portfolio for 2/3 of his income and he’s only 45. I’m not saying he’s retired (as given by his $50k salary) but we can treat him like he is. He needs his portfolio to generate $100k (plus inflation increases) every year he works and 150k when he finally does retire. He’s young so his portfolio has to last a long time. On every single one of these portfolio mgt questions we will need (want more information). Does he want to consume his entire portfolio… is he planning on leaving a certain amount to his heirs/charity at death/life expectancy, etc. Main point is… he is really young and and spending about 4% a year (will be 6% when he does retire) plus inflaiton is eroding away. Probably needs it to last 50 years… a big drop early on will decimate his lifestyle. Hence, low ability to take risk.