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Investment Strategies For Five Stages Of Life

June 21, 1987

A financial plan is a highly individual statement. Risk tolerance, for example, is largely dependent on the temperament of the investor. However, certain considerations are basic to any plan. The following table aims to incorporate age, income and lifetime goals across a broad spectrum of individual investors. It makes some fundamental assumptions: an overall return on investment of 8% and an inflation rate of 5%; the monetary amounts given are in 1987 dollars. Further, it assumes that before they start investing, the fictional investors below have three to six months of actual living expenses set aside in safe, highly liquid instruments. The table was prepared by Alexandria C. Phillips, tax principal at Arthur Young in Los Angeles.

Age group 25-35 Marital status Single Annual income $35,000-$40,000 Children None Funds available to invest

GOAL 1: Purchase house ($100,000) in five years Strategy: Put 5% of gross income into savings at 8% return; $25,500 will be required for 20% down payment Pursue low-to very low-risk investments with high liquidity GOAL 2: Purchase new car ($25,000) Strategy: Defer until Goal 1 has been met unless savings rate of greater than 5% is achieved Pursue medium-to low-risk investments GOAL 3: Create investment portfolio Strategy: Defer until Goal 1 has been funded Establish annual savings program Incorporate employer-provided savings plan Establish annual IRA even if non-deductible INVESTMENT CHOICES Very low risk: Money-market funds Treasury bills Short-term CDs Savings bonds

Age group 30-40 Marital status Married Annual income $40,000-$60,000 Children One age 2 Funds available to invest $10,000-$15,000

GOAL 1: Purchase house ($175,000) in three years Strategy: Boost annual savings rate to 13% annual gross income; $40,500 will required for 20% down payment Pursue medium-to low-risk investments with high liquidity Goal 2: Provide for college education for child at $10,000 per year Strategy: Assuming 8% return, set aside $2,400 a year to fund education costs Defer until Goal 1 is funded Diversify among medium-to low-risk investments Goal 3: Create investment savings Strategy: Defer until Goals 1 and 2 are met Establish annual savings program Incorporate employer-provided savings plan Diversify among high-to low-risk investments INVESTMENT CHOICES Low risk: Short-and intermediate-term funds Ginnie Mae funds Treasury bonds Annuities

Age group 40-49 Marital status Married Annual income $50,000-$75,000 Children Two, ages 9 and 11 Own home with small mortgage Funds available to invest $25,000-$30,000

GOAL 1: Provide for college education for both children at $20,000 per year Strategy: Contribute $10,000 annually to children's education fund, assuming 8% return. Fund immediately Transfer assests to children; up to $1,000 in earnings is taxed at lower rates Home equity is an additional source of future funding Diversify among medium-to low-risk investments GOAL 2: Buy a boat Strategy: Funding now will jeopardize Goal 3 If boat is purchased within five years, diversify among medium- to low-risk investments If purchase of boat will occur in more than five years, diversify among high- to low-risk investments GOAL 3: Retire at age 60 with $45,000-a-year life style Strategy: Maximize personal savings Diversify among high- to- low risk investments Incorporate employer-provided savings/retirement plans Establish annual IRA even if non-deductible Evaluate fund annually INVESTMENT CHOICES Medium risk: Balanced mutual funds Long-term bond funds High-yield stocks Medium-term bonds

Age group 50-59 Marital status Married Annual income $75,000-$110,000 Children Two, ages 19 and 21 Own home with small mortgage Funds available to invest $40,000-$60,000

GOAL 1:Finish educating children Strategy: $36,700 is currently required to fully fund education Transfer assests to children; all income taxed at children's tax bracket Pursue low- to very low- risk investments with high liquidity GOAL 2: Retire at age 65 with $60,000-a-year life style Strategy: Maximize personal savings; more will be available once children finish school Incorporate employer-provided savings/retirement plans Diversify among medium-to low-risk investments Evaluate fund annually GOAL 3: Buy a vacation home ($90,000) Strategy: Defer until Goal 1 is funded Funding Goal 3 will jeopardize Goal 2 Is second home is purchased within five years, pursue medium- to low-risk investments INVESTMENT CHOICES High risk: Aggressive growth mutual funds Sector funds Growth funds Growth stocks Long-term bonds

Age group 60-plus Marital status Married Annual income $90,000-$125,000 Children Two, ages 29 and 31 Own home, paid for Investment portfolio of $300,00 $60,000 annual pension at age 65

GOAL 1: Retire in three years with $75,000 a-year life style Strategy: Pension and investment earnings already almost meet life style requirements throughout retirement Additional annual savings of 10% of gross income required Diversify among medium- to very low-risk investments Evaluate fund annually GOAL 2: Take a world cruise ($20,000) Strategy: Designate portion of excess annual savings as travel fund Assuming 8% return, $4,350 annual savings required over five-year period Diversify among medium- to low-risk investments GOAL 3: Buy a Mercedes Benz or yacht Strategy: Defer until after retirement and life style requirements are better defined Assuming 8% return, $13,000 required in annual savings over five years Diversify among high-to very low-risk investments INVESTMENT CHOICES Very High risk: Options Futures contracts Commodities Over-the-counter stocks New issues

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