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24

CHAPTER 2

power of $75,000 now could be drastically different 10 years from now. Based upon an inflation rate of 4 percent, in 10 years you would need about $111,000 per year! That means that in a decade you will need nearly 50 percent more in income just to keep up with the rising cost of living.

With my clients, once we have identified and prioritized their objectives and goals, I create an asset allocation model that compares their current portfolio to a proposed portfolio. It shows over a given number of years what happens if they stay invested in the same mix they are currently in, versus the proposed mix that I will follow. (See Figure 2.2.)

Asset Value

2002

2004 2006 2008 2010 2012

2014 2016 2018

2020 2022 2024 2026 2028 2030 2032

Current

Recommended

Portfolio

Portfolio

Year

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

Sample Portfolio

Figure 2.2. The hypothetical graph shows future asset value, with the current line representing the client’s present mix. The proposed line shows following the investment strategy in asset allocation. The x-axis is the year and the y-axis is the dollars. Hypothetical clients retire in year 2002 at the age of 55. Mr. and Mrs. Client have $400,000 in their 401k plans and will receive a lump sum pension of $600,000. We assumed they would withdraw $40,000 after taxes per year, and that their average tax rates would be 20 percent for federal and 4.1 percent for Michigan. The pro- posed investment strategy is using a moderately aggressive risk approach.

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