Meet The Rolfes

Meet your newest clients: John (51) and Rebecca (49) Rolfe and their two children, Thomas (17) and Elizabeth (9). John and Rebecca have considered their most important financial goals and have decided that they want to send both of their children to college, buy a sailboat once Thomas is through school, and replicate their current income in retirement. They have determined how much money they will need to reach each individual goal and are now looking to you to help achieve these financial goals.

The Rolfe family has a father, mother, son and daughter.

You would like to give the Rolfes, and all of your clients for that matter, a customized plan that is optimized to meet their exact goals. But with so many clients, it would simply be impossible to provide each of them that high level of customization. With your current financial planning tool, you are stuck with limited options—choosing between a few pre-canned asset allocations models and (hopefully) selecting the one that will negatively affect your client the least. There is a better way. 

Introducing CMPAS, the innovative new financial planning tool from Caravel Concepts.

CMPAS benefits both clients and advisors and makes doing the right thing the easy thing. Clients can prioritize and protect their most important goals from the worst 5 - 10% of bad market returns. Advisors benefit from the small number of portfolio modules (typically 5 or 6) that assemble into an endless number of customized investment strategies. CMPAS also makes the advisor’s job easier with built-in progress monitoring, account-level optimization, and de-risking strategies. 

Let’s revisit the Rolfes to illustrate exactly how all these features work. 

The Rolfes would like to achieve all of their goals, but in reality they all have different levels of priority. For example, a secure retirement is a NEED because even if the next Great Depression happens, they want to be able to meet their basic needs. 

Paying for their children’s college fund is a WANT. They would like to achieve that goal very much, but again, if the worst market were to occur, it is not an essential goal. If market returns were severely depressed when it was time for Thomas and Elizabeth to go to college, they could always take out student loans. Similarly, the sailboat is something the Rolfes can truly live without, so it is considered a DREAM.

With CMPAS, NEEDS, WANTS and DREAMS have different levels of protection that can be changed to reflect your client’s preferences. How bullet proof do they want their goals to be? How much risk are they willing to take? CMPAS is designed to meet NEEDS even if financial market returns are very disappointing compared to history. WANTS and DREAMS require somewhat better market returns in order to be achieved, but for these goals the plan will also require less savings and therefore fewer sacrifices in the Rolfes’ current lifestyle.​ In this case, the Rolfes have decided that they want a 90% chance of achieving their NEEDS, 80% for WANTS, and 70% for DREAMS. So what does this actually mean? 

If you say that you want a 90% chance of achieving your NEEDS, then CMPAS assumes that between now and when you need to fund that goal, market returns are as bad as the worst 10% of periods ever experienced by US investors.

If it’s a 10-year goal, we build a plan that can fund that goal even if markets are as bad as they were from 1910 - 1920, or 1969 - 1979, or 1998 - 2008. 

If you say WANTS should have an 80% probability of success, we build a plan that works if markets are as bad as the worst 20% of history.  DREAMS require markets to be closer to average returns.

A chart showing the historical 10 year real total returns of US large Cap stock. The purpose of this image is to show how much upside potential the markets have had historically.

Three Key Takeaways:

  1. You don’t have to make every goal a NEED. You can give every goal the highest priority, but remember that the more protection you build into each goal the more savings and sacrifice you will need to make in your current lifestyle.
  2. Each goal is independently funded. If the Rolfes’ buy the sailboat and the day after that purchase the market crashes, it has no impact on the security of their retirement.
  3. 70% of historical periods have been better than they are planning for. That means there is plenty of upside to their goals if markets are kind.

Plan for the worst, hope for the best. 

Let’s continue with this example.

Here is the quick input screen for the Rolfes’ goals.

They can assume simulated inflation, which means use Monte Carlo scenarios. If they want to be more conservative, they can bump up the simulated inflation.

The Rolfes have decided that if markets are bad when they hope to buy the sailboat, they are willing to defer that goal for up to two years. That tends to be how people behave and means they won’t have to save as much to make that goal happen with a 70% probability.

This is the financial workbench that shows how well the plan can be met. The workbench tells us that retirement and college are taken care of, but there isn’t enough money to fund the lowest priority goal – the sailboat.

The software lets you know that in order to make this plan feasible, they either have to save more or drop the goal from $82k to $74K.

Dropping the sailboat goal to $62,000 allows for all goals to pass with a small $725 surplus in their taxable account.

More info on this report:

You can give the Rolfes more information by testing scenarios and checking to see how well the plan works if they don’t change to your recommended strategy.

Importantly, CMPAS provides an optimized investment strategy customized for the Rolfes’ specific goals, using your input asset allocation strategies and finding the combination of your existing portfolios that best suits the Rolfes and their life goals.

The Rolfes don’t need the standard 60/40 plan. They need lots of cash and bonds to fund Thomas’s imminent college expenses, they need an intermediate risk portfolio for the sailboat and Elizabeth's college, and their longer term retirement goals are best met through a higher risk, equity-centered strategy. 

CMPAS provides specific strategy guidance at the account level, based on the goals that account needs to fund.

The Rolfes taxable account is funding retirement, healthcare, Elizabeth's college and their sail boat. With this information, the advisor is presented with a great opportunity. Have the Rolfes maxed out their retirement contribution? Do they have a HSA account that they are saving to? Can they save more in their 529 account? With this level of detail the advisor is able to recommend potential tax strategies that could enhance their client's after tax returns.  

​​As Elizabeth gets closer to college, CMPAS automatically calculates the appropriate de-risking needed to keep the Rolfes on track to meeting their goals as time passes and goals need to be funded.

Taking a look at the Rolfes’ 529 account, we can see that it is heavily concentrated in cash and short maturity bonds because Thomas is 17 and headed to college soon. There are many uncertainties inherent in the investment process, but one thing we know for sure is that Thomas will keep getting older and those goals will keep drawing nearer. CMPAS automatically calculates the appropriate portfolio recalibrations scenarios to reduce risk over time and stay on track to fund goals on time.

Progress monitoring and automatic portfolio recalibrations and de-risking are just some of the features that let CMPAS help you work smarter, not harder.

Schedule a demo today to learn more.

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