How to Build a Custom Investment Policy Statement (IPS)

Introduction: Why an Investment Policy Statement Matters for Sudden Wealth

Imagine this: it's early 2026, and you're sitting at your kitchen table in Marietta, Georgia, staring at a brokerage statement showing $2 million. Your father passed away three months ago, and after the estate settled, you inherited more money than you've ever seen in your life. Your inbox is already full of pitches from brokers, insurance agents, and a cousin who wants you to invest in his restaurant concept. You feel a mix of gratitude, grief, and genuine fear of making a mistake you can't undo.

This scenario plays out thousands of times every year across the country. Whether wealth arrives through inheritance, a business sale, an NIL deal, or a legal settlement, the emotional weight of sudden money can paralyze even the smartest people. That's exactly why your first move shouldn't be picking stocks, buying real estate, or handing everything to the first advisor who calls. Your first move should be building an investment policy statement.

An investment policy statement (IPS) is a written roadmap that connects your wealth to your purpose. It spells out your investment objectives, defines how much risk you're willing and able to take, sets guidelines for what you will and won't invest in, and helps establish how decisions are made, who is accountable, and what standards will be used to evaluate results over time. Originally borrowed from endowments, foundations, and pension funds, the IPS concept has become essential for affluent clients and families navigating complex financial lives. An IPS provides a strategic roadmap for investment management, and investment policy statements help minimize unnecessary risks by replacing gut reactions with documented strategy.

At Third Act Retirement Planning, we're a fee-only fiduciary firm that helps sudden-wealth clients build custom investment policy statements grounded in modern portfolio research and biblical wisdom. We believe stewardship isn't just about growing money - it's about aligning every dollar with your God-given mission.

Here's what a well-built IPS delivers:

• Clarity - Your goals, values, and financial objectives are written down in one place, so decisions are never made in a vacuum.

• Discipline in volatile markets - When equities drop 20% and the news cycle turns apocalyptic, your IPS reminds you what you agreed to do in advance.

• Alignment with values - Faith-based screens, giving targets, and legacy intentions are baked into the plan, not bolted on as afterthoughts.

• Smoother work with investment managers - Everyone knows their role, the rules, and the benchmarks for success.

• A basis for measuring progress - You can evaluate investment performance against real objectives instead of chasing whatever fund was "hot" last quarter.

Step 1: Clarify Your Mission, Values, and Time Horizon

Every policy statement should begin with "why" before it ever touches "how." If you skip this step, you'll end up with a technically sound document that doesn't actually reflect what matters to you - and the first time markets get rough, you'll abandon it.

Before you invest a single dollar, sit down and wrestle with questions like these:

• What do I want this money to accomplish by 2036? By 2046? By the time my grandchildren are adults?

• Who should this wealth bless - my family, my church, specific charities, my community?

• What biblical or personal values should shape my investment policy?

• Am I building for independence, generosity, legacy, or all three?

Get specific. "I want financial security" is too vague to guide real decisions. Instead, define concrete goals with real dates. For example, a 45-year-old couple in 2026 might write something like this:

• Tithe 10% of annual portfolio income to their local church and two supported ministries

• Fund college for three children born in 2012, 2015, and 2018, beginning in 2030

• Retire at age 62 in 2040 with enough income to maintain their current lifestyle

• Leave a meaningful inheritance and charitable legacy for the next generation

Each of those goals has a different time horizon. The college fund for the oldest child is roughly four years away - a short-term goal requiring conservative, liquid investments. Retirement is 14 years out - a medium-term goal with room for growth. Legacy and charitable giving may span decades or multiple generations.

For clients interested in Christian financial principles, this is where stewardship language belongs. Proverbs 21:20 reminds us that "precious treasure and oil are in a wise man's dwelling," pointing to the wisdom of saving and purposeful use. First Timothy 6:17–19 calls the wealthy to "do good, be rich in good works, generous and ready to share." These verses aren't decoration - they set the tone for every guideline that follows.

Step 2: Define Specific Investment Objectives and Spending Policy

There's an important distinction between life goals ("retire at 62," "pay for college," "give generously") and investment objectives ("achieve a 4.5% real return over rolling 10-year periods"). Your IPS needs both. Life goals tell you where you're headed. Investment objectives tell you what the portfolio needs to deliver to get you there.

An IPS should include a statement of objectives, and those objectives should be numeric, measurable, and tied to realistic capital market expectations. Investment objectives include retirement, home purchase, or education funding - whatever matters most to you.

How to translate goals into return targets:

Consider a 55-year-old in 2026 with $3 million planning to retire in 2036. If they need $120,000 per year in retirement income (in today's dollars) and expect Social Security to cover $30,000, the portfolio must generate roughly $90,000 annually. That implies a sustainable withdrawal rate plus enough growth to outpace inflation. A reasonable objective might be: "Achieve a long-term after-inflation return of 4%–5% per year over rolling 10-year periods."

Now consider a 30-year-old NIL athlete who receives a $1.5 million windfall in 2026. With a 35+ year time horizon before traditional retirement, this investor can tolerate more volatility in exchange for higher expected growth. Their objective might read: "Grow the portfolio at 5%–6% real return annually over rolling 20-year periods while maintaining a 12-month liquidity reserve for living expenses."

Investment targets should include inflation estimates for sustainability and for risk management. Assume 2.5%–3% annual inflation when setting return targets - this keeps your objectives honest and your spending plan realistic.

What is a spending policy?

A spending policy defines how much to spend annually from your investment portfolio. For individuals, this is your sustainable withdrawal rate. For nonprofit organizations, foundations typically spend at least 5% of assets annually, and public charities spend an average of about 4.5% of assets yearly. Organizations must spend at least 5% of assets annually to maintain tax-exempt status.

For individual investors, the widely cited "4% rule" suggests a 4% initial withdrawal rate, adjusted for inflation, has historically survived most 30-year periods. However, current capital market forecasts from firms like Vanguard suggest lower expected returns for U.S. large-cap equities and bonds over the next decade, which means many financial professionals now recommend a more conservative 3.5%–4.0% starting rate for new retirees.

An IPS helps align investment goals with spending needs, preventing you from either overspending into ruin or underspending into unnecessary anxiety.

Example Spending Policy for a $2M Portfolio: Withdraw no more than 3.75% ($75,000) in Year 1, adjusted annually for inflation. Large irregular withdrawals exceeding $25,000 (home renovation, major gift, vehicle) require a 60-day planning review. Revisit spending policy annually or after any portfolio decline exceeding 15%.

Step 3: Assess Risk Tolerance, Capacity, and Liquidity Needs

Risk tolerance and risk capacity are two different things, and confusing them is one of the most common mistakes sudden-wealth clients make.

Risk tolerance evaluates an individual's ability to handle investment losses emotionally - how you feel when your portfolio drops 15% in a quarter. Risk capacity is financial: given your income, net worth, time horizon, and obligations, how much risk can you actually afford to take without jeopardizing your goals? When these two conflict, capacity should usually win. An IPS should define risk tolerance clearly so there's no ambiguity when markets turn ugly.

Risk includes capital loss, liquidity, and reputation factors. A well-built IPS addresses all three dimensions. And an IPS helps avoid emotional investment decisions - that's arguably its single most important function.

Concrete example: In 2022, the S&P 500 fell roughly 19% while bonds dropped around 13%. A 60/40 portfolio lost approximately 16%. Investors without a written plan panicked, sold at the bottom, and locked in losses. Investors with a documented investment policy statement that said "accepts temporary declines of up to 25% in a severe bear market without changing strategy" had a reference point. They didn't enjoy the downturn, but they didn't blow up their investment strategy either.

Here's how to document risk in your IPS:

• Use plain language, not just a numeric score: "The investor is comfortable with a maximum temporary portfolio decline of 20%–25% in a severe downturn, understanding that such periods historically recover within 3–5 years."

• State what happens if the decline exceeds that threshold: "If the portfolio falls more than 30% from its peak, the investor and advisor will hold a special review meeting within 30 days to assess whether the investment policy still fits."

• Acknowledge that your tolerance may differ from your capacity and document which one governs the allocation.

Liquidity needs are equally critical. Liquidity needs specify immediate cash requirements for emergencies or expenses. Document them explicitly:

• Emergency fund: 6–12 months of living expenses in cash or money market funds

• Near-term spending: college tuition starting in 2028, a planned home purchase in 2029, scheduled charitable contributions

• Large planned gifts or capital calls

Your IPS should specify how much of the portfolio must remain in highly liquid assets - cash, money market funds, and short-term bonds - to support the spending policy and provide peace of mind. For many sudden-wealth clients, keeping 12–18 months of expenses liquid is appropriate during the first year while the full plan takes shape. If you use values-based screens, other considerations can be written in as well, including specific restrictions, ESG preferences, or mission alignment criteria.

Step 4: Design Your Strategic Asset Allocation and Investment Guidelines

Asset allocation is crucial for determining investment returns and managing risk. Research over decades has shown that your mix of asset classes - equities, bonds, real assets, cash - drives roughly 90% of long-term portfolio variability. Picking individual stocks or timing markets matters far less than getting this mix right and keeping it applied consistently.

A well-designed IPS includes asset allocation targets and limits. The IPS must outline asset allocation targets and ranges so that rebalancing triggers are clear and the portfolio doesn't drift into unintended risk territory. Asset allocation ranges help manage investment volatility effectively.

Two sample target allocations:

Balanced Growth (suited for a 45-year-old with a 15+ year time horizon):

• U.S. equities: 35% (range 30%–40%)

• International equities: 25% (range 20%–30%)

• Investment-grade bonds: 25% (range 20%–30%)

• Treasury Inflation-Protected Securities (TIPS): 10% (range 5%–15%)

• Cash and cash equivalents: 5% (range 3%–7%)

Conservative Income (suited for a 60-year-old nearing or in retirement):

• U.S. equities: 20% (range 15%–25%)

• International equities: 15% (range 10%–20%)

• Investment-grade bonds: 40% (range 35%–45%)

• TIPS: 15% (range 10%–20%)

• Cash and cash equivalents: 10% (range 7%–13%)

Those ranges matter. If U.S. stocks surge and drift from 35% to 42% of your portfolio, you know it's time to rebalance - not because stocks are "bad," but because your exposure now exceeds your agreed-upon limit.

Approved and prohibited investments:

Investment guidelines specify allowed and prohibited investments. Investment constraints can include legal, tax, or personal restrictions on investments. Your IPS should read like a clear rulebook:

Permitted:

• U.S. large-cap and small-cap stocks (individual or via index funds/ETFs)

• International developed and emerging markets equities

• Investment-grade corporate and government bonds

• TIPS and municipal bonds (where tax-advantaged)

• Real estate investment trusts (REITs)

• Cash equivalents (money market funds, short-term Treasuries)

Prohibited or restricted:

• Leveraged or inverse ETFs

• Options speculation or uncovered short selling

• Cryptocurrency beyond a small satellite sleeve (e.g., no more than 2% of portfolio)

• Concentrated single-stock positions exceeding 10% of portfolio

• Private equity or hedge funds unless the investor has sufficient liquidity, sophistication, and a written addendum

Values-based screens: For clients who want their investment portfolio to reflect their faith, the IPS can include mission-aligned criteria - for example, avoiding companies whose primary operations involve tobacco, gambling, or weapons manufacturing, or favoring companies with strong environmental and social governance. These screens should be documented clearly so that investment managers know the boundaries.

Diversification across asset classes, geographies, and investment types isn't just a textbook concept - it's the practical engine that keeps your portfolio resilient through every market cycle.

Step 5: Set Rules for Rebalancing, Monitoring, and Working With an Investment Manager

Rebalancing isn't optional - it's a core part of risk management. Without it, a portfolio that starts at 60% equities and 40% bonds can quietly drift to 75/25 after a strong equity rally, exposing you to far more volatility than you signed up for. Define rebalancing procedures to maintain desired asset allocations, and make sure the IPS defines the procedure for portfolio rebalancing in precise terms.

Rebalancing rules (document these in your IPS):

• Time-based: Review the portfolio quarterly (e.g., using a su mo tu we th fr sa calendar reminder); rebalance at least annually

• Threshold-based: Rebalance whenever any major asset class drifts more than 5 percentage points from its target allocation

• Tax-aware: When possible, rebalance using new contributions, dividends, or withdrawals before selling holdings that would trigger taxable gains

Rebalancing guidelines should specify acceptable deviation limits. For example, if your target for U.S. stocks is 35% and they rally to 41%, you'd trim equities and redirect the proceeds to bonds or cash to restore your targets. This forces buying low and selling high - the opposite of what most investors do instinctively.

Roles and responsibilities:

The IPS should summarize roles and responsibilities of relevant parties. Mapping roles helps clarify responsibilities in the IPS and prevents confusion during volatile markets.

• Investor's role: Set goals, define values, approve the investment policy, communicate life changes, review performance with the advisor

• Investment manager's role: Execute the investment strategy within approved guidelines, monitor holdings, rebalance as needed, report results, recommend IPS changes when circumstances warrant

• The IPS should define who selects investment managers and under what criteria changes would be made

Key participants may include trustees and investment committee members, especially for families with trusts or more complex governance structures. Delegating authority does not absolve fiduciary responsibilities - the investor remains accountable for oversight even when day-to-day decisions are handled by advisors or managers.

Performance measurement:

Investment monitoring guidelines should include performance benchmarks. Compare your portfolio returns to a blended benchmark consistent with your target asset allocation - for example, 60% MSCI ACWI / 40% Bloomberg U.S. Aggregate Bond Index - over rolling 3-, 5-, and 10-year periods. Investment monitoring should assess risk profiles consistently, not just when things feel wrong.

Establishing performance measurements increases accountability and reduces risks. Your IPS should include guidelines for evaluating investment managers: are they adhering to the approved strategy? Are returns reasonable relative to the benchmark after fees? Has the firm's organization or investment team changed materially?

Reporting schedule:

• Monthly account statements (secure online portal or mailed summary)

• Quarterly performance reports comparing results to benchmarks

• Semi-annual review meetings (e.g., each April and October) between the investor and advisor

• Annual IPS review meeting to assess whether objectives, risk tolerance, and allocation still fit

Step 6: Address Taxes, Estate & Legacy Planning, and Charitable Giving

A well-crafted IPS doesn't exist in a vacuum. It should align with your tax planning, estate documents, and charitable intentions so that every piece of your financial life supports the same mission.

Tax-aware investing strategies:

• Asset location: Place tax-inefficient investments (REITs, high-yield bonds, actively managed funds) inside tax-advantaged retirement accounts. Hold growth-oriented equities with lower turnover in taxable accounts where capital gains treatment is favorable.

• Tax-loss harvesting: In volatile years (like 2022), selling positions at a loss to offset gains elsewhere can save thousands. Your IPS should authorize the manager to harvest losses opportunistically.

• Required minimum distributions (RMDs): Retirees in their 70s must plan for mandatory withdrawals from tax-deferred accounts. Build RMDs into the spending policy and plan for their tax impact on brackets and Medicare surcharges.

Charitable giving and stewardship:

Consider a scenario: in 2030, you sell a business for $4 million. Rather than facing a massive capital gains tax hit, you coordinate with your advisor to fund a donor-advised fund in the same tax year, accelerating several years of charitable contributions into a single deduction. You can then distribute grants from that fund to your home church, a favored ministry, or a nonprofit you support over the following decade.

Your IPS can set a giving target - for example, 10% of annual portfolio income - and specify the vehicles used (direct gifts, donor-advised funds, charitable remainder trusts). This ensures generosity is intentional, not sporadic.

Estate and legacy alignment:

Reference your key estate planning documents - wills, revocable trusts, powers of attorney, beneficiary designations - in the IPS. State your overall legacy goals clearly: "Pass assets to children and grandchildren in a way that encourages wisdom and stewardship rather than entitlement." If you're establishing trusts for minors, note the board or trustees responsible for oversight until beneficiaries reach a specified age.

This section should remain practical, not legalistic. Coordinate with a qualified estate attorney and tax professional alongside your investment manager. Your IPS documents the intent; your legal team documents the structure.

Step 7: Document the IPS Formally and Review It Regularly

Your finished investment policy statement should be a 5–10 page written document, dated and signed by the investor (and spouse, if applicable) and the advisor. Store it securely - both digitally and in hard copy - alongside your estate documents.

Typical IPS structure:

1. Introduction and mission statement (your "why")

2. Investment objectives and spending policy

3. Risk tolerance and capacity statement

4. Target asset allocation with ranges

5. Investment guidelines (permitted and prohibited investments)

6. Monitoring, rebalancing, and performance measurement

7. Tax and legacy planning notes

8. Roles and responsibilities

9. Signatures and date

An IPS should be reviewed regularly to ensure it aligns with changing goals. Schedule a formal review at least annually - put it on your calendar every January or at whatever date works for your financial year. But also trigger a review after major life changes:

• Marriage or divorce

• Birth or adoption of a child

• Sale of a business or receipt of a large inheritance

• Serious health event

• Significant regulatory or tax law changes

• Retirement or job loss

Annual review checklist:

• Are my goals still the same? Has my time horizon shifted?

• Has my risk capacity changed (age, income, new obligations)?

• Do my values and mission still apply as written?

• Are my spending needs the same, or have expenses changed?

• Have capital market expectations shifted enough to warrant adjusting return targets?

• Are permitted and prohibited investments still suitable?

• Is my advisor or manager still the right fit?

Revisions should be thoughtful, not reactive to short-term market news. One core function of the IPS is to protect investors from emotional decisions in turbulent years. If you find yourself wanting to rewrite the entire document because markets dropped 10% last month, that's a sign the IPS is doing its job - and you should avoid the common mistakes that come from reacting too quickly.

Recommend including language in the IPS itself about how and when updates are made, ensuring the document remains a living guide instead of a one-time exercise that collects dust.

How Third Act Retirement Planning Helps You Build and Live Out Your IPS

Third Act Retirement Planning is a fee-only fiduciary firm in Marietta, Georgia that specializes in helping sudden-wealth clients turn windfalls into long-term retirement income and lasting legacy impact. We don't sell products or earn commissions - our only job is to serve your best interests.

Our process for building your custom IPS:

• Discovery call - We listen to your story, understand how the wealth arrived, and begin identifying your goals, fears, and values

• Data gathering and analysis - We review your complete financial picture: assets, debts, income, tax situation, estate documents, and insurance

• Drafting your custom investment policy statement - We create a personalized IPS that reflects your objectives, risk profile, asset allocation, and stewardship priorities

• Refining together - We walk through the IPS line by line, adjusting until it fits you perfectly

• Ongoing wealth management - We implement the strategy, monitor results, rebalance as needed, and meet regularly to keep your plan current

We integrate biblical wisdom with modern portfolio research, focusing on stewardship, generosity, and contentment rather than fear or greed. Our broader planning services - retirement planning, tax planning, estate and legacy planning, healthcare planning, and charitable giving strategies - all connect back to the IPS as your central governing document.

If you've recently come into significant wealth and want a plan that aligns your money with your God-given purpose, we'd love to hear from you. Schedule a complimentary discovery call to begin building an investment policy statement that brings clarity, confidence, and peace of mind to your financial future.