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