Rebecca and Peter Jonah, both aged 54, are residents of U.S. They have twin sons who will enter a four- year university program in a year's time. Rebecca is a long-time employee of a telecommunications company. Peter is a self-employed sales consultant.

Peter's annual income is now steady after years of extreme highs and lows. The Jonahs have built an investment portfolio through saving in Peter's high-income years. The Jonahs' current annual income is equal to their total expenses; as a result, they cannot add to savings currently. They expect that both their expenses and income will grow at the inflation rate. All medical costs, now and in the future, are fully covered through government programs.

The Jonahs worry about whether they have saved enough for retirement, and whether they will be able to maintain the real value of their portfolio. Inflation is expected to average 5% for the foreseeable future.

The Jonahs have approached Joseph David to help them analyze their investment strategy and retirement choices. The Jonahs disagree about the appropriate investment strategy. Rebecca prefers not losing money over making a high return. This is partly a result of continued regret for a loss experienced in an equity mutual fund several years ago. Peter's history of making frequent changes in their portfolio greatly annoyed Rebecca. She thinks Peter focused only on potential return and paid little attention to risk.

The Jonahs currently have all their assets in inflation-indexed, short-term bonds that are expected to continue to earn a return that would match the inflation rate after taxes. After retirement, they are willing to consider changing their investment strategy if necessary to maintain their lifestyle.

The Jonahs are eligible to retire next year at age 55. If they do, Rebecca will receive annual payments from her company's defined-benefit pension plan and both Rebecca and Peter will receive payments from the U.S. government pension plan. Peter does not participate in any company or individual retirement plan. David has compiled financial data and market expectations for the Jonahs' retirement, shown in Exhibit 1. Currently, David estimates that the Jonahs' investment portfolio will grow to $2,200,000 by their retirement date next year.

Exhibit 1 Financial Data and Market Expectations

Rebecca and Peter Jonah

Expected annual expenses

Annual pension income (after-tax)

Rebecca's company plan Combined government pension

Retirement at Age 55 (2014) $ 165,000

$ 50,000 $ 50,000

Expected annual inflation 5.0% Expected annual after-tax portfolio return 4.0%

Pension income from both Rebecca's company plan and the government pension plan is fully indexed for inflation. David expects a tax rate of 20% to apply to the Jonahs' withdrawals from the investment account. The Jonahs expect to earn no employment income after retirement. The Jonahs' residence is not considered part of their investable assets.

The Jonahs have the option to delay retirement until age 60. The Jonahs intend to retire together, whether it is in 2014 at age 55 or in 2019 at age 60.

David determines that if the Jonahs retire at age 55, their risk tolerance is below average. If they retire at age 55, they plan to pay off their mortgage and pay associated taxes by withdrawing $900,000 from their portfolio.

Another consideration for the Jonahs relates to funding university expenses for their sons. If the Jonahs retire at age 55, each son will receive a scholarship available to retiree families from Rebecca's company that will cover all university costs.

If the Jonahs retire at age 60, their combined pension income would increase and would almost meet their annual spending needs. The Jonahs would though have to pay all university expenses from their investment portfolio through an arrangement with the university. The arrangement, covering both sons, would require the Jonahs to make a single payment of $ 200,000 at age 55.

a) Prepare the return objectives portion of the Jonahs' investment policy statement (IPS) that will apply if they retire at age 55. No calculations are required.