Method of risk management and of achieving a recommended asset allocation and withdrawal strategy, and computer-readable medium, apparatus and computer program thereof

• US 6,985,880 B1
• Filed: 03/01/1999
• Issued: 01/10/2006
• Est. Priority Date: 03/01/1999
• Status: Expired due to Term

• Current Assignee: Ameriprise Financial, Inc.
• Original Assignee: Seligman Advisors Incorporated
• Inventors: Kadlec, Charles W., Hodgdon, Stephen J.
• Primary Examiner(s): PATEL, JAGDISH
• Application Number:
  US09/259,770
• Time in Patent Office: 2,507 Days
• Field of Search: 705/35, 705/36, 705/37, 705/10
• US Class Current: 705/36.00T
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/08 Insurance
• CPC Class Codes: G06Q 40/10 Tax strategies

Abstract

The new and improved method and apparatus of the invention generates a hypothetical illustration of a distribution of possible portfolio values and withdrawal amounts for a designated time period. The invention also provides a new and improved method and apparatus for determining a hypothetical distribution of investment outcomes for a specified portfolio based on a Monte Carlo analysis of historical rates of return for the portfolio and historical rates of inflation. The invention further provides a new and improved method for determining a withdrawal strategy using a combination of fixed dollar and fixed percent withdrawals. The hypothetical illustration of the invention is generated by interacting the combinations of fixed dollar and fixed percent withdrawals, with the hypothetical distribution of investment outcomes for a specified portfolio to facilitate a recommended asset and withdrawal strategy.

Claims

1. A method comprising:

obtaining data comprising rates of return for a plurality of asset classes and at least one rate of inflation;

obtaining for a particular individual a financial portfolio to be evaluated based on an initial investment allocated to at least one of the asset classes, and a desired withdrawal amount having a fixed dollar amount and a fixed percentage amount;

generating in a computer a prohabilistic distribution of investment outcomes for the financial portfolio on an incremental basis within a designated time period by determining a plurality of projected portfolio values using the rates of return for the asset classes and the rate of inflation; and

determining, for each of the projected portfolio values, a projected withdrawal amount that corresponds to the desired withdrawal amount by adding together the fixed percentage amount of the projected portfolio value and the fixed dollar amount.

2. The method of claim 1, wherein the distribution of investment outcomes is generated on an annual basis within a 30 year period.

3. The method of claim 1, further comprising the step of displaying to the individual an illustration of the distribution of investment outcomes for the financial portfolio.

4. The method of claim 3, further comprising the step of selecting an appropriate investment strategy by iteratively varying a variable selected from the group consisting of:

the fixed dollar withdrawal amount, the fixed percentage withdrawal amount, a composition of the financial portfolio, and combinations thereof, and reviewing the illustration of the distribution of investment outcomes.

5. The method of claim 3, wherein the illustration is a portfolio chart having an x-axis that ranges from a worst case scenario to a best case scenario, and y-axis that ranges, on the incremental basis, from the beginning to the end of the designated time period and the portfolio chart containing the projected portfolio values.

6. The method of claim 5, wherein the illustration further comprises a withdrawal chart having an x-axis that ranges from a worst case scenario to a best case scenario, and y-axis that ranges, on the incremental basis, from the beginning to the end of the designated time period and the withdrawal chart containing the total amount of the fixed dollar withdrawal amount and the fixed percentage withdrawal amount.

7. The method of claim 1, wherein the asset classes are selected from the group consisting of:

U.S. Large Cap stocks, U.S. Mid Cap stocks, U.S. Small Cap stocks, International Large Cap stocks, International Mid Cap stocks, International Small Cap stocks, Emerging Markets stocks, Corporate Bonds, Government Bonds, 30-Day U.S. Treasury Bills, and combinations thereof.

24. The method of claim 1, wherein the step of obtaining data comprising at least one rate of inflation comprises obtaining data comprising historical rates of inflation for a plurality of historical periods.

25. The method of claim 1, wherein the step of obtaining data comprising rates of return and at least one rate of inflation comprises obtaining historical data for a plurality of historical periods, the data comprising historical rates of return for a plurality of asset classes and historical rates of inflation.

26. The method of claim 7, wherein the initial investment is allocated among (1) 0%–

100% U.S. large-cap stocks;

(2) 0%–

15% U.S. mid-cap stocks, (3) 0%–

100% U.S. small-cap stocks, (4) 0%–

100% international large-cap stocks, (5) 0%–

20% international mid-cap stocks, (6) 0%–

10% international small-cap stocks, (7) 0%–

10% emerging markets stocks, (8) 0%–

100% U.S. long-term corporate bonds, (9) 0%–

100% U.S. government bonds, (10) 0%–

10% inflation index bonds and (11) 0%–

100% U.S. 30-day treasury bills.

27. The method of claim 26, wherein the initial investment is allocated among (1) 20%–

100% U.S. large-cap stocks;

(2) 0%–

15% U.S. mid-cap stocks, (3) 0%–

40% U.S. small-cap stocks, (4) 0%–

35% international large-cap stocks, (5) 0%-20% international mid-cap stocks, (6) 0%-10% international small-cap stocks, (7) 0%–

15% emerging markets stocks, (8) 0%–

60% U.S. long-term corporate bonds, and (9) 0%–

10% U.S. 30-day treasury bills.

28. The method of claim 27, wherein 10% or less of the initial investment is allocated among (1) U.S. mid-cap stocks, (2) U.S. small-cap stocks, (3) international mid-cap stocks, (4) international small-cap stocks, and (5) emerging markets stocks.

29. The method of claim 27, wherein between 15% and 25% of the initial investment is allocated among (1) international large-cap stocks, (2) international mid-cap stocks, (3) international small-cap stocks and (4) emerging markets stocks.

30. The method of claim 26, wherein, if the particular individual is a retiree, at least 60°

% of the initial investment is allocated among U.S. large-cap stocks, U.S. mid-cap stocks, U.S. small-cap stocks, international large-cap stocks, international mid-cap stocks, international small-cap stocks, and emerging markets stocks.

31. The method of claim 26, wherein about 10% of the initial investment is allocated among cash, cash equivalents or U.S. 30-day treasury bills.

32. The method of claim 1, wherein obtaining the desired withdrawal amount comprises:

identifying total income from social security, pensions and other fixed income sources;

determining the individual'"'"'s “

needs”

by identifying expenses that must be met and other fixed obligations;

determining the individual'"'"'s “

wants”

by identifying expenses that are discretionary;

calculating the fixed dollar amount by expressing the “

needs”

as a percent of the initial investment; and

calculating the fixed percentage amount by expressing the “

wants”

as a percent of the initial investment or the projected portfolio value.

33. The method of claim 32, wherein the desired withdrawal amount is selected from the group consisting of:

(1) 6% fixed dollar amount and 0% fixed percentage amount, (2) 5% fixed dollar amount and 2% fixed percentage amount, (3) 4% fixed dollar amount and 4% fixed percentage amount, (4) 3% fixed dollar amount and 6% fixed percentage amount, and (5) 2% fixed dollar amount and 8% fixed percentage amount.

34. The method of claim 32, wherein obtaining the financial portfolio to be evaluated comprises:

defining an income target equal to at least half of the needs; and

allocating the initial investment among the asset classes so that dividend and interest provide the income target.

35. The method of claim 34, wherein, based on the fixed dollar amount and the income target, the initial investment is allocated among equity assets, fixed income assets and cash as shown in the table below:

Fixed DollarPORTFOLIO ALLOCATIONAmountIncome TargetEquityFixed IncomeCash6%3.0%60%30%10%5%2.5%65%25%10%4%2.0%70%20%10%3%1.5%75%15%10%2%1.0%80%10%10%

36. The method of claim 1, wherein the fixed dollar amount ranges from 0 to 10% and the fixed percentage amount ranges from 0 to 12%.

8. A computer-readable medium having computer-executable instructions, comprising instructions for:

obtaining data comprising rates of return for a plurality of asset classes and at least one rate of inflation;

obtaining for a particular individual a financial portfolio to be evaluated based on an initial investment allocated to at least one of the asset classes, and a desired withdrawal amount having a fixed dollar amount and a fixed percentage amount;

generating a probabilistic distribution of investment outcomes for the financial portfolio on an incremental basis within a designated time period by determining a plurality of projected portfolio values using the rates of return of the asset classes and the rate of inflation; and

determining, for each of the projected portfolio values, a projected withdrawal amount that corresponds to the desired withdrawal amount by adding together the fixed percentage amount of the projected portfolio value and the fixed dollar amount.

9. The computer-readable medium of claim 8, wherein the distribution of investment outcomes is generated on an annual basis within a 30 year period.

10. The computer-readable medium of claim 8, further comprising instructions for displaying to the individual an illustration of the distribution of investment outcomes for the financial portfolio.

11. The computer-readable medium of claim 10, further comprising instructions for selecting an appropriate investment strategy by iteratively varying a variable selected from the group consisting of:

the fixed dollar withdrawal amount, the fixed percentage withdrawal amount, a composition of the financial portfolio, and combinations thereof, and reviewing the illustration of the distribution of investment outcomes.

12. The computer-readable medium of claim 10, wherein the illustration is a portfolio chart having an x-axis that ranges from a worst case scenario to a best case scenario, and y-axis that ranges, on the incremental basis, from the beginning to the end of the designated time period and the portfolio chart containing the projected portfolio values.

13. The computer-readable medium of claim 12, wherein the illustration further comprises a withdrawal chart having an x-axis that ranges from a worst case scenario to a best case scenario, and y-axis that ranges, on the incremental basis, from the beginning to the end of the designated time period and the withdrawal chart containing the total amount of the fixed dollar withdrawal amount and the fixed percentage withdrawal amount.

14. The computer-readable medium of claim 8, wherein the asset classes are selected from the group consisting of U.S. Large Cap stocks, U.S. Mid Cap stocks, U.S. Small Cap stocks, International Large Cap stocks, International Mid Cap stocks, International Small Cap stocks, Emerging Markets stocks, Corporate Bonds, Government Bonds, 30-Day U.S. Treasury Bills, and combinations thereof.

15. An apparatus for facilitating asset allocation and withdrawal strategy, the apparatus comprising:

a storage device;

a processor connected to the storage device;

a program stored in the storage device and configured to control the processor; and

the processor operative with the program to;

obtain data comprising rates of return for a plurality of asset classes and at least one rate of inflation;

select for a particular individual a financial portfolio to be evaluated having an initial investment allocated to at least one of the asset classes, and a desired withdrawal amount having a fixed dollar amount and a fixed percentage amount;

generate a probabilistic distribution of investment outcomes for the financial portfolio on an incremental basis within a designated time period by determining a plurality of projected portfolio values using the rates of return of the asset classes and the rate of inflation; and

determining, for each of the projected portfolio values, a projected withdrawal amount that corresponds to the desired withdrawal amount by adding together the fixed percentage amount of the projected portfolio value and the fixed dollar amount.

16. The apparatus of claim 15, wherein the distribution of investment outcomes is generated on an annual basis within a 30 year period.

17. The apparatus of claim 15, wherein the processor is further operative with the program to display to the individual an illustration of the distribution of investment outcomes for the financial portfolio.

18. The apparatus of claim 17, wherein the processor is further operative with the program to select an appropriate investment strategy by iteratively varying a variable selected from the group consisting of the fixed dollar withdrawal amount, the fixed percentage withdrawal amount, a composition of the financial portfolio, and combinations thereof, and to review the illustration of the distribution of investment outcomes.

19. The apparatus of claim 17, wherein the illustration is a portfolio chart having an x-axis that ranges from a worst case scenario to a best case scenario, and y-axis that ranges, on the incremental basis, from the beginning to the end of the designated time period and the portfolio chart containing the projected portfolio values.

20. The apparatus of claim 19, wherein the illustration further comprises a withdrawal chart having an x-axis that ranges from a worst case scenario to a best case scenario, and y-axis that ranges, on the incremental basis, from the beginning to the end of the designated time period and the withdrawal chart containing the total amount of the fixed dollar withdrawal amount and the fixed percentage withdrawal amount.

21. The apparatus of claim 15, wherein the asset classes are selected from the group consisting of U.S. Large Cap stocks, U.S. Mid Cap stocks, U.S. Small Cap stocks, International Large Cap stocks, International Mid Cap stocks, International Small Cap stocks, Emerging Markets stocks, Corporate Bonds, Government Bonds, 30-Day U.S. Treasury Bills, and combinations thereof.

22. A computer program in a computer-readable memory device, the computer program comprising:

first program means for obtaining data comprising rates of return for a plurality of asset classes and at least one rate of inflation;

second program means for obtaining for a particular individual a financial portfolio to be evaluated based on an initial investment allocated to at least one of the asset classes, and a desired withdrawal amount having a fixed dollar amount and a fixed percentage amount; and

third program means for generating a probabilistic distribution of investment outcomes for the financial portfolio on an incremental basis within a designated time period by determining a plurality of projected portfolio values using the rates of return of the asset classes and the rate of inflation, and determining, for each of the projected portfolio values, a projected withdrawal amount that corresponds to the desired withdrawal amount by adding together the fixed percentage amount of the projected portfolio value and the fixed dollar amount.

23. A method comprising:

obtaining data comprising historical rates of return for a plurality of asset classes for a plurality of historical periods and data comprising at least one rate of inflation;

obtaining for a particular individual a financial portfolio to be evaluated based on an initial investment allocated to at least one of the asset classes, and a desired withdrawal amount comprising a fixed dollar amount and a fixed percentage of the projected portfolio value;

generating in a computer a probabilistic distribution of investment outcomes for the financial portfolio on an incremental basis within a designated time period by determining a plurality of projected portfolio values using the historical rates of return of the asset classes and the rate of inflation; and

determining, for each of the projected portfolio values, a projected withdrawal amount that corresponds to the desired withdrawal amount by adding together the fixed percentage amount of the projected portfolio value and the fixed dollar amount and adjusting for the rate of inflation.

37. A method of selecting a withdrawal strategy and asset allocation that best balances a desire for income with a risk of running out of money for a specific client given their individual financial situation and financial obligations, the method comprising:

receiving (1) a client'"'"'s name, (2) a client'"'"'s total initial investable assets, and (3) a withdrawal amount having a fixed dollar withdrawal amount and a fixed percentage withdrawal amount;

determining a recommended asset allocation of the initial investable assets; and

generating in a computer a probabilistic distribution of investment outcomes for the recommended asset allocation and the withdrawal amount on an annual basis for 30 years, from the worst 10% of the time, to the best 10% of the time.

38. The method of claim 37, further comprising allowing the client to make an informed selection of the asset allocation most suitable for themselves by iteratively (1) varying a variable selected from the group consisting of the fixed dollar withdrawal amount, the fixed percentage withdrawal amount and the asset allocation, (2) generating in the computer the probabilistic distribution of investment outcomes and (3) displaying to the client the probabilistic distribution of investment outcomes.