"Retirement" as part of time horizon.

The 09 CFA AM test questions mentioned the clients retirement as part of their time horizon The custoemr only had one year until retirement and had to have the portfolio paying them out, with no adding to the portfolio after retiring. The question I have : a) since they are going into retirement in a year, why is that not a “short” time horizon? It is described in the answer to Part Di in Question 1 that the time horizon is long, because it is one year till retirement, the a long (25 years) retirement. This implies that the only time horizon is short is if the question reads “Bob has pancreatic cancer and aids he will die in 7 months…” I mean everyone will retire, so that implies everyone is going to have a long horizon… b) In most cases that adds to risk tolerance, but since they will be retiring in a year and require the portfolio outflow, their risk tolerance is low… Seems like a lot of weirdness…anyone want to discuss it?

a) Because you have to manage the portfolio taking into account that they’re going to be living ~25 years after retirement. b) Because they have no other sources of income other than the portfolio, and therefore can’t afford to have the portfolio drop in value substantially.

But in this case, long time horizon doesn’t imply higher risk tolerance, correct?

rolo550 Wrote: ------------------------------------------------------- > But in this case, long time horizon doesn’t imply > higher risk tolerance, correct? In isolation, it does. Taking into account other factors, maybe/maybe not.

Correct. Typically, a longer time horizon would imply a higher risk tolerance, but in this case you have to watch out for the fact that they’re completely dependent on their living expenses, and the overall size of the portfolio isn’t substantially large…