My Name Is Bond James Bond.
This line has belonged to Sean Connery since first spoken in Ian Flemings 1962 production, Dr. No.
Since that time, many of us have only fantasized about his travels to exotic places, living life on the edge, drinking dry martinis (shaken, not stirred), playing with cool toys and, because Im a happily married man, Ill just stop there.
In the twisted mind of the financial advisor though, I have to wonder about James Bonds financial plan. More specifically, I have to wonder if James Bond is a stock or truly a Bond. To answer this question, we need to evaluate his human capital.
In a nutshell, human capital represents todays value of the income we will receive through our working years and through our retirement years if we are receiving a pension. For example, if James Bond is fresh out of spy school and expecting to earn an income of $150,000 per year, with raises each year of three per cent until retirement age of 65 (if he makes it that far), he has a human capital value of $3,619,145 at age 25, assuming an investment rate of six percent.
However, if we also assume that James receives a generous British Government pension until he dies at his statistical age of 74 (after all, hes a smoker), his human capital value is actually $4,001,887.
This has three key implications:
1. Investment Portfolio: Despite his very dangerous profession, James has a government paycheque, awesome benefits, a monster pension plan and a totally predictable financial future.
If he couldnt be out gallivanting anymore, hed surely have a well-paid office position with MI-6. Starting to sound like a bond? So, if James human capital of $4,001,887 is like a highly predictable bond, does it not make sense that his investment portfolio contains a higher percentage in long term growth stocks?
If instead James was a mercenary, a soldier of fortune, dependent for his paycheque on each new assignment and lacking any pension or benefits of any sort, that would be a lot more volatile.
His human capital would resemble a stock and we would need to include a higher percentage of bonds in his investment portfolio to compensate for this human capital volatility.
2. Life Insurance: If James was to have gotten married at age 25 (yeah, right!) and wanting to leave his sweetheart 100 per cent of his future income if he died, hed need approximately four million dollars of life insurance.
3. Disability and Critical Illness Insurance: The same argument for life insurance would apply if James got sick or injured and didnt die. His human capital would need appropriate coverage to replace his income if he got sick or injured.
You may not live a 007 lifestyle but you face three key questions:
1. What is the value of your human capital?
2. Are you a stock or a bond?
3. Isnt it time you discuss this with your advisors?
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Richard is a senior financial advisor and branch manager with WealthSmart Financial Group/Manulife Securities Incorporated in Richmond.