IPS Test - What would you say?

Let’s create a thread with scenarios for individuals or institutionals and come up with risk tolerance objective.

First one:

35 year old employed person with 20 years until retirement. Portfolio is $1 million and annual expenses of $125,000 currently being met by after tax salary. Strong bequest desire. Expects to maintain lifestyle. He has average willingness.



50 year old about to retire next year. No income other than portfolio in retirement. No bequest motive. $15 million portoflio and $200K of annual expenses expected to remain until death. Below Average willingness.



60-year old retiree with $5 million portfolio. $150K ongoing expenses with strong bequest motive. No other income. Above average willingness.


First One Ability:

Multi-stage Time Horizon with the first 20 year period leading up to retirement followed by the retirement stage. Time horizon is relatively long long term allowing for income to offset potential losses. Annual Expenses are relatively large compared to the portfolio (approximately 10%), however these are covered by annual after tax salary and should not place heavy liquidity constraints on the portfolio. In light of the relatively long time horizon and low liquidity needs this person has an above average ability to accept risk in the portfolio.

  1. Medium to above average ability given he has significant asset base compare to his annual spending needs. He will be retiring next year and will be looking for support his annual expenses from investment portfolio.

Overall - Below given his low willingness

  1. Low - Already retired and taking money out of portfolio for annual expenses. He has strong desire to bequest so will be looking to maintain real value of portfolio.

For the first one, what if at retirement he has $1 million (he’s a lousy investor or just bad luck with market) and expenses in real terms are still $125,000. Safe to say his ability drops to below average. Then combine with above average willingness, would you average and say average tolerance or default to the lower and say below average overall tolerance?

Agree. I would say above avg ability and low willingness dominates so low overall risk tolerance.

yes if he has only 1mm at retirement and he will be looking to support his retirement out of this portfolio, his risk tolerance ie very low even if his willingness is high. I would go with below average overall if I am not given any more information to decide.

Hmm good point. Over the accumulation stage, I think he’s in good shape because his income supports his lifestyle so the million dollar portfolio doesn’t need to be drawn upon and can be used primarily to build wealth for retirement. So the long time horizon and the lack of liquidity constraints support above average risk tolerance.

I’m assuming his portfolio will grow in order to support retirement (maybe to purchase an annuity or something). So the basis for my decision depends on the situation as of right now where he’s in good shape all the way through the retirement phase.

The only point in favor of lower risk tolerance is the relatively low asset base. If the situation at retirement is as you say, then his risk tolerance is alot lower. It would probably be best to monitor client circumstances along the way, and if the portfolio has not grown significantly or has even experienced losses … then his ability should be lower.

Edit: If it’s given he has 1 Million at retirement, then I’d say he has below average risk tolerance as of right now.