UC Berkeley Haas School of Business Fisher Investments

UGBA 137 Case Study # 1 – John Smith's Retirement

John Smith needs your help. At 60 years old, he's nearing retirement and starting to think about his long-term financial future. Imagine you're John's recently hired money manager.

Though John's career is slowing down, in life he's just getting started. He's in excellent health and recently married 34-year-old Jane, and both Smiths are active adventurers. Since she works only part-time at a non-profit, they have plenty of time to travel. They plan to go hiking in the Andes, skiing in the Swiss Alps and rock climbing in Yosemite once John retires, so they want to ensure they can afford an annual travel budget of $10,000 (they like to travel in style).

The Smiths have $700,000 to invest right now, but in two years they plan to leave their rented apartment and buy a new home, and they'll withdraw $200,000 for the down payment. Once John retires, they'll need to start taking some income from the portfolio, but he's hoping to add about $20,000 in each of the next five years to give them more of a cushion. He also plans to do some freelance consulting work occasionally, perhaps earning around $25,000 per year, and Jane makes $15,000 at her part-time job (though she may work less after the birth of their first child, who's due in four months). But in addition to their travel expenses, they have a $2,500 monthly rent (and their future mortgage may be around $3,000), and their other living and entertainment expenses usually hit $30,000 annually—and they'd rather not adjust their lifestyle once John retires.

If you asked John, he'd tell you he wants to spend his last dollar the day he dies. Jane would beg to differ though, since she wants to be taken care of well after John passes on. They also plan to have another child within the next few years, and they'd like to cover college tuition costs for both kids, which would temporarily add at least $30,000 to their annual expenses in 18 years. Jane hopes their portfolio grows to at least $1.5 million by then.

Questions

  1. What are John's investment goals? How long is his investment time horizon?
  2. Given inflation, market volatility, and John's ongoing cash flow needs, is the portfolio's terminal value objective reasonable?
  3. Are John's portfolio cash flow objectives reasonable? What advice would you give him to increase the likelihood of meeting his long-term goals?
  4. How would you advise John to invest his $700,000 today?