Unit 11 Cases.
Case 1. Goals and Portfolio Selection (P.891)
Vanessa Avoletta is a very successful self-employed
freelance writer of romantic novels.
She has a reputation for writing rapidly and is able to
complete at least four books a year,
which net after expenses $25,000 to $50,000 per book per
year. With this much income,
Avoletta is concerned with both sheltering income from taxes
and planning for
retirement. Currently she is 40 years old, is divorced, and
has a child who is entering high
school. Avoletta anticipates sending the child to a quality
college to pursue a degree in
computer sciences.
While Avoletta is intelligent and well informed, she knows
very little about finance and
investments other than general background material she has
used in her novels. Since she
does not plan to write prolifically into the indefinite
future, she has decided to obtain your
help in financial planning.
At your first meeting, you suggested that Avoletta establish
a tax-sheltered retirement
plan and consider making a gift to her child, perhaps in the
form of future royalties from
a book in progress. Both of these ideas intrigued Avoletta,
who thought that funds were
saved, invested to accumulate over time, and then
transferred to heirs after death. While
Avoletta wanted to pursue both ideas, she thought
approaching one at a time made more
sense and decided to work on the retirement plan first. She
asked you for several
alternative courses of action, and you offered the following
possibilities.
1. An IRA with a bank with the funds deposited in a
variable-rate account.
2. A self-directed Keogh account with a major brokerage
firm.
3. A Keogh account with a major mutual fund.
4. An account with a brokerage firm to accumulate common stocks
with substantial
growth potential but little current income.
Avoletta could not immediately grasp the implications of
these alternatives and asked you
to clarify several points:
1. What assets would be owned under each alternative?
2. What are the current and future tax obligations
associated with each choice?
3. What amount of control would she have over the assets in
the accounts?
4. How much personal supervision would be required?
How would you reply
to each question? Which course(s) of action would you suggest
that she pursue?
Finally how would each of the following alter your advice?
1. Avoletta has a record of poor health.
2. Avoletta would like to write less and perhaps teach
creative writing at a local college.
3. Avoletta has expensive tastes and finds saving to be
difficult.
