How do I construct an Individual Investment Policy Statement using the RRTTLLU framework?

The RRTTLLU framework is the backbone of individual IPS construction on the CFA Level III exam. Each element must be addressed for the specific client scenario presented.

The Framework:

Complete Example — Helena and Robert Nakamura

Helena (58) is a hospital administrator earning $185,000/year. Robert (60) is retiring next month from his engineering firm with a $2.4M lump-sum pension payout. They have:

• Combined portfolio: $3.8M (including the pension lump sum)
• Primary residence: $650,000 (no mortgage)
• Annual living expenses: $140,000 (after-tax)
• Helena plans to work 5 more years
• Robert has a chronic health condition requiring $25,000/year in uncovered medical costs
• They want to fund $80,000 for their daughter's graduate school in 2 years
• Helena inherited a concentrated position in Broadleaf Technologies (15% of portfolio) and has an emotional attachment to the stock
• They live in a state with no income tax

R — Return Requirement:

During the next 5 years (Helena working):

• Expenses covered by salary: $185,000 gross ≈ $148,000 after federal tax
• Surplus from salary: $148,000 - $140,000 = $8,000 (expenses mostly covered)
• Additional medical costs: $25,000/year from portfolio
• Required return from portfolio ≈ $25,000 / $3,800,000 = 0.66% plus inflation (assume 2.5%)
• Pre-retirement required return ≈ 3.2% nominal

After Helena retires (year 6+):

• Full expenses ($140,000 + $25,000) must come from portfolio
• Required return increases to approximately $165,000 / $3,800,000 = 4.3% plus inflation ≈ 6.8% nominal

R — Risk Tolerance:

• Ability: Above average — large portfolio relative to current needs, 5 years of salary remaining, no mortgage
• Willingness: Below average — Robert's health creates anxiety about portfolio losses; Helena is emotionally attached to a concentrated stock position (suggests comfort with concentration but possibly not with active risk management)
• Overall: When ability and willingness conflict, CFA guidance says adopt the lower of the two → Below average to average

T — Time Horizon:

Two stages:

1. Pre-retirement: 5 years (Helena still working)
2. Post-retirement: 25-30+ years (longevity risk, especially with Robert's medical needs)

Overall: Long-term, multi-stage

T — Tax Considerations:

• No state income tax (favorable)
• Federal income tax and capital gains tax apply
• The Broadleaf Technologies position has a very low cost basis — selling would trigger a large capital gains tax bill
• Consider tax-loss harvesting opportunities elsewhere in the portfolio

L — Liquidity Needs:

• $80,000 for daughter's graduate school in 2 years (known, near-term)
• $25,000/year ongoing for medical expenses
• Emergency reserve: recommend 6 months of expenses = $70,000

L — Legal/Regulatory:

• No trusts or special legal structures mentioned
• Standard prudent investor rule applies
• Pension lump sum may have rollover requirements (IRA rules)

U — Unique Circumstances:

• Concentrated Broadleaf Technologies position (15% of portfolio) — needs diversification plan, but tax implications and emotional attachment must be managed
• Robert's health condition — portfolio may need to fund long-term care costs
• Helena's emotional attachment to Broadleaf — may require gradual reduction rather than immediate liquidation

Exam Tip: On the CFA Level III exam, each RRTTLLU component is typically worth separate points. State the factor, justify your assessment with specific facts from the vignette, and quantify where possible (especially return and liquidity). Never leave a factor blank — even if it's "no specific legal constraints," state that explicitly.

For more IPS practice, explore our CFA Level III private wealth management materials.