Loading...

Patton Wealth Management, Inc.

Form CRS
  Reports

Recent Inheritance

Robin and John have been married for nearly 40 years. The couple have two adult children, both are married and live relatively close and have growing families which has made Robin and John happy grandparents.

John is a CPA and Robin spends her time out of their home between their grandchildren and volunteering part-time at a local animal shelter. John has steadily grown his practice and client base which has result in a stable and growing income. Robin and John have always lived well within their means and have accumulated significant assets positioning John to retire in about 4 years.

Robin’s father was a successful businessman and entrepreneur. Robin and her two siblings always knew her parents had accumulated some wealth but were all surprised upon their father’s death that he left them about $7.5 million. This inheritance would be split among the three of them.

Robin is well educated, manages the family checkbook, and is reasonably well informed about the investments John has made on their behalf. All of that said, Robin was feeling uncomfortable about her investment knowledge and feeling a significant amount of responsibility to become more informed given her sizeable inheritance.

Robin and her two siblings had multiple meetings with the advisors their father had used for many years. Unfortunately Robin came out of these meetings feeling more confused and overwhelmed. The current advisors were stock and bond pickers. The portfolio consisted of about 50 individual stocks and about the same number of individual bonds. During the meetings they would talk about their stock and bond picks, the analysis they had done, their outlook for the economy and more. This is not the advice and help Robin needed.

John and I met several years ago when their CPA firm hired me and my firm to be the advisor for their firm’s 401(k) plan. John and I developed a good relationship over the years and he reached out to me to see if I would meet with he and Robin to discuss the inheritance.

  • The Rule of 72: divide your expected rate of return into 72 to determine how many years it takes your money to double in value. For example, a return of 6% annually will result in money doubling every 12 years (72 / 6% return = 12 years).
    24-Year Time Horizon
  • @ 6% return annually, $1 million will grow to $4 million
  • @ 9% return annually, $1 million will grow to $8 million

Fact: small incremental improvements in long-term returns can have a tremendous impact!

During our visit we discussed many things but among the most important was about their goals and risk tolerance. Their only goal at this point was to invest their money wisely and position it for future growth although there was some conversation about the possible purchase of a second home in the future.

Our conversation then turned to risk tolerance. I already knew that John’s tolerance for risk was very high but Robin’s was not so much. We discussed the tradeoffs of better expected returns coming with more risk and visa versa.

We also discussed their investment time horizon. Both Robin and John are 63 so I reminded them they have an investment time horizon of 25 years or so. That said, it is unlikely that they will ever spend all of this inheritance so it is money that will likely pass on to their two children. Therefore, they should really be thinking about a time horizon that is well beyond 25 years…it is now their children’s time horizon.

I reminded both Robin and John of the Rule of 72 (see sidebar). For simple math sake, let’s assume a time horizon of 24 years. If they get a return of 6% annually their money will double every 12 years. But instead if they get a return of 9% annually, their money now doubles every 8 years. This is a big deal! The difference is twice as much money in 24 years!

This was the conversation Robin was looking for. She was simply looking for a plan and needed to understand the long-term pros and cons of various choices.

We built a Super-Diversified Portfolio for Robin and John that has a growth orientation. In other words, on a risk scale of 1-5 this portfolio is about a 3.5. The goal and expectation is that this will grow by 9% annually or more over time. This portfolio of course comes with risk (maybe a loss of 25-30% when the stock market falls 50%). Both Robin and John understand and agree they can tolerate this risk for the potential long-term gains it offers. Furthermore, as is the case with all Super-Diversified Portfolios, it is entirely liquid so that if they decide to make a major purchase such as a second home, cash can easily and quickly be generated.

Robin and John are both now able to give very serious consideration to the possible legacy they can leave for their family.

You may also read


Have a question? Ask Patton