GF590 Unit 9 Household Investment Policy Statement Example

Goals Before Accounts: A Unit 9 Investment Policy Statement for a Pharmacist and a Teacher

[Student Name]

Purdue University Global

GF590: Personal Financial Planning

Unit 9 Investment Policy Statement

[Instructor Name]

[Date]

The household, its accounts, objectives and figures are composite and illustrative; the articles cited are real.

1. Purpose and Scope

This statement sets the rules for investing the household's retirement and college savings. It covers the pharmacist's 403(b) plan ($186,000) and Roth IRA ($31,000), the teacher's 403(b) plan ($22,500), together $239,500, and the two 529 plans for the children. The emergency reserve is excluded by name and stays in insured savings. The brokerage account is also excluded because the plan sells it to clear the credit card.

2. Retirement Goal

Horizon. Twenty-one years to the planned retirement at 62 and 59, then about thirty-six years of withdrawals.

Return objective. At least 6.3 percent a year, nominal, over rolling ten-year periods. This is the return the retirement analysis requires for retirement at 62 and 59 at the plan's saving rate, so the policy and the plan share one number.

Risk limit. In the meeting, the couple agreed that a one-year fall of $60,000 in these accounts would not lead them to sell. The target mix described below has an estimated one-year loss at the fifth percentile of about 16.9 percent, roughly $40,500 on today's balance, inside that limit. Expressing the limit in dollars matters because the couple reacted more clearly to an amount than to a percentage. Risk tolerance measured through questions about past behavior and comfort with losses is a better guide than age alone (Grable & Lytton, 1999).

Target allocation. 85 percent stocks and 15 percent bonds across the three accounts, with stocks divided about 60 percent United States and 40 percent international.

3. The Pension as a Bond

The teacher's pension is not an account, but it shapes how the accounts should be invested. If she retires at 59 with 35 years of service, it will pay about $39,060 a year for life with a cost-of-living adjustment. Valued today, that stream is worth roughly $506,000.

Counting the pension as a bond-like asset, the household's retirement wealth is about $745,500, and the 85 percent stock allocation in the accounts is only about 27 percent of that total, which is why the accounts can hold so much in stocks.

A guaranteed lifetime income behaves much like a large holding of bonds, and treating it that way is long established in pension economics (Bodie, 1990). Most of the household's bond exposure therefore sits outside the accounts.

4. College Goals

Each 529 plan follows an age-based track. The older child's account, with seven years to enrollment, holds about 60 percent stocks now and moves to 20 percent by the first tuition bill. The younger child's account holds about 80 percent stocks and follows the same path over eleven years. The college return objective is the 6 percent used in the education funding calculation.

5. Costs

The weighted average expense ratio across all accounts must stay at or below 0.20 percent. This rules out the pharmacist's 403(b) default fund, which charges 0.95 percent, in favor of the plan's index funds. On $186,000, the difference is about $1,400 a year. Since allocation explains most of the variation in portfolio returns over time, there is little reason to pay higher fees for active selection (Brinson et al., 1986).

6. Asset Placement

Bonds are held in the two 403(b) plans, where interest grows tax deferred. Stocks with the highest expected growth are held in the Roth IRA, where growth is never taxed. The overall 85 and 15 mix is measured across all three accounts together, not in each one.

7. Rebalancing

The accounts are rebalanced once a year in January, or sooner if stocks drift more than 5 percentage points from the target. Rebalancing uses new contributions first and exchanges inside the tax-advantaged accounts second, so no taxable sales are needed.

8. Permitted and Excluded Holdings

Permitted holdings are broad index funds for United States and international stocks, a total bond market fund and the 529 plans' age-based portfolios. Excluded are individual stocks above 5 percent of the accounts, including shares of the pharmacist's employer, sector funds, funds that borrow to magnify returns or bet on declines, and annuity products inside the 403(b) plans. The exclusions keep the accounts diversified and cheap, and they protect the household from adding job risk to investment risk.

9. What the Couple Agrees to Do in a Falling Market

If stocks fall sharply, the couple agrees to keep contributing at the planned rate and to rebalance back toward 85 percent stocks at the next January review. Any request to sell after a decline is discussed with the planner first and compared with the $60,000 limit recorded in Section 2.

10. Review

The statement is reviewed every January and after any major event: a job change, an inheritance, a birth or death, or a change in the retirement date. The return objective is updated whenever the retirement analysis is updated.

11. Responsibilities

The couple makes contributions and approves changes. The planner monitors allocation and costs and reports quarterly.

12. Signatures

Pharmacist, date. Teacher, date. Planner, date.

References

Bodie, Z. (1990). Pensions as retirement income insurance. Journal of Economic Literature, 28(1), 28-49.

Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of portfolio performance. Financial Analysts Journal, 42(4), 39-44. https://doi.org/10.2469/faj.v42.n4.39

Grable, J. E., & Lytton, R. H. (1999). Financial risk tolerance revisited: The development of a risk assessment instrument. Financial Services Review, 8(3), 163-181. https://doi.org/10.1016/S1057-0810(99)00041-4