Erik and Anne Hamilton are married, both 65 and are

Erik and Anne Hamilton are married, both 65 and are retiring in the coming months. The couple have two adult children who are independent.

Erik is retiring from his retail business. He had a salary of €90,000 per annum after tax before retiring. He has manged to save a personal pension of €1,700,000 which is currently on deposit until he makes a decision about how next to invest.

Anne is a lawyer and draws a salary of €80,000 after tax per annum. She intends to retire with Erik. Anne has also saved €300,000 which currently sits on a deposit account with a gross yield of 0%.

The couple currently own their home but have an outstanding mortgage on the property of €250,000. They want to be debt free in retirement in order to avoid incurring monthly mortgage payments. The couple estimate that normal living expenses will be €3000 a month in retirement. A further €1500 a month is spent on luxury items/holidays for the couple and their medical insurance costs €10,000 a year.

Importantly, the Hamilton’s personal tax rate is 30% on all earnings or any portfolio returns from the Hamilton’s investments. Inflation is expected at 1% in long term.

When presented with investment options, Erik and Anne consistently select the low risk choice. The Hamilton’s have some investment experience and are familiar with downside risk. They have asked a wealth management adviser, Jack Jameson, to assess their case for retirement. The Hamiltons have specified that they would like to invest with a strong orientation toward sustainable investing.

The Hamilton’s have also expressed a desire to leave all their assets to Claire and Dara on their deaths and would like requirements in the future noted in the plan. As additional background to the case, it is worth noting that the global economy is growing strongly but inflationary forces are still benign. Unemployment is running at circa 6% and disposal income levels have significantly improved. Currently ECB interest rates are 0%.

Mr Jameson prepared an investment policy statement for the Hamilton’s which is shown below:

Personal Information

Hamilton Investment Policy Statement – Report Prepared By Mr J. Jameson:

Return Objective: Yearly income requirement is €90,000 after tax to reflect the previous earnings of Erik. Total return requirement is around 7% annually which is very manageable to achieve with a highly leveraged property portfolio, because the outlook really positive for property, and we could invest the remaining portfolio in US and European bonds and commodities.

Risk Tolerance: The couple say they are low risk investors but it is preferable to put them into high risk invest products given their age and significant disposable assets.

Time Horizon: A single time horizon. The clients are retiring in good health so therefore the time horizon is 8 years from the age of 65.

Liquidity Needs: The couple should be fully invested as no cash is needed.

Tax: Tax rate is 30% on all earnings or portfolio returns

Legal and Regulatory: No special considerations exist.

Unique Circumstances: The couple want to invest sustainably but that will damage returns.

Jameson Investment Recommendation: “Very appropriate for the couple to engage in a property only investment strategy and I would potentially invest in commodities as I think inflation will be really weak after the impact of COVID. Outside that, the remaining portfolio should be in sovereign bonds”.

A: Evaluate the appropriateness of Hamilton’s investment policy statement, as prepared by their advisor (10 marks)

i. Return Requirement

ii. Risk Tolerance

iii. Time Horizon

iv. Liquidity Needs/ Unique Circumstances

B. Comment on the investment recommendation which has offered by Mr. Jameson. What additional considerations should he consider when designing a portfolio for the couple to invest in? ( 6 marks)

C. Outline the risks which are faced by the Hamilton as they move from pre to post retirement. Discuss how the couple can mitigate the risks before they retire and after they retire (6 marks)

After 5 years, you are reviewing the Hamilton’s investment policy statement. Erik decided to invest on his own judgement during the past 5 years

• Erik’s portfolio is now worth €1,700,000 after paying off €250,000 for the mortgage, and using capital for living expenses over the past five years.
• Anne has had to enter a nursing home, costing €15000 per year, which falls outside the couple’s medical insurance coverage.
• Erik and Anne living expenses have dropped to €2,000 per month in retirement. The couple continue to spend €6,000 per annum on healthcare insurance.
• Long term inflation is expected at 1%
• The couple have specified that their downside tolerance in any one year is 15%

D: Redraft the Hamilton’s investment policy statement, using the updated information provided above. (10 marks)

E: From the table above, select the allocation strategy that is most appropriate for Erik Hamilton based on the new information provided, and justify your selection with three supporting reasons (8 marks)