02. Retirement Planning Accumulation & Distributions Flashcards
Define
“Financial Independence”
Being financially independent means being able to maintain the pre-retirement lifestyle during retirement and manage the adverse effects of inflation
Define
“Financial Preparedness @ Retirement”
Financially prepared at retirement means that a person has:
- Sufficient asset accumulation at retirement
- An appropriate investment plan
- A plan for taking distributions from savings.
Define
“Superannuation”
The risk that she outlives her available savings.
Define
“PWLE”
The prework life expectancy (PWLE) occurs prior to fully entering the workforce and generally extends to some point between ages 18 and 25
Define
“WLE”
Work-life expectancy (WLE) is the period of time a person is expected to be in the workforce.
Define
“RWLE”
The remaining work-life expectancy (RWLE) is the work period that remains at a given point in time prior to retirement.
Define
“RLE”
- Retirement life expectancy (RLE) represents the total amount of time expected during retirement.
- This period begins at retirement and extends until death.
Define
“Risk Tolerance”
The risk tolerance of an investor is essentially the willingness and ability to accept risk for potential returns.
Define
“Unrelated Business Taxable Income”
(UBTI)
Unrelated business taxable income (UBTI) is a term used to describe income earned by a tax-exempt entity that is subject to taxation.
Define
“Inflation”
- Inflation represents a general increase in the price of goods and a corresponding decrease in the purchasing power of money
- Inflation erodes the purchasing power of money throughout a person’s life, but especially during the retirement years
- Because retirement can last 20 to 40 years, the erosion of purchasing power resulting from inflation can be substantial
Define
“Retirement Needs Analysis”
Retirement needs analysis is the process of determining how much money a person needs to accumulate to be financially independent during retirement
(Capital Analysis or Retirement Funding)
Define
“Wage Replacement Ratio”
- The amount of money needed in retirement as a percentage of income earned prior to retirement is called the wage replacement ratio (WRR).
- It is calculated by dividing the retirement expenses by the pre-retirement income.
- Expenses in Retirement ÷ Pre-retirement Income = Wage Replacement Ratio
Describe
Top-Down Approach Method
to determine
Wage Replacement Ratio
- The top-down approach begins with 100 percent of pre-retirement income and adjusts the percentage up or down depending on expenses that may be eliminated or added.
- The top-down approach is more appropriate for planning for people who are young and for those not close enough to retirement to worry about great precision.
Describe
Bottom-Up (Budgeting) Approach Method
to determine
Wage Replacement Ratio
- Referred to as the budgeting approach because it determines total expenses in the same manner that is used to build a budget
- This approach is generally used by people who are very near retirement and can anticipate the expenses and changes that will occur once they retire.
Describe the
Annuity Approach
(4-Step Approach)
ref: pg 48
- Determine the funding amount in today’s dollars.
- Inflate the needs from step 1 to the beginning of retirement
- Determine the funding needs at retirement
- Determine the required annual savings amount
Which models provide a cushion in the event someone lives beyond their anticipated life expectancy?
- the capital preservation model
- the purchasing power preservation model
- the capitalization of earnings model
Describe
“Capital Preservation Model”
- The capital preservation model assumes that the accumulated fund balance necessary under the annuity model is preserved until life expectancy.
- In other words, the balance that a retiree had at retirement under the annuity method is also expected at life expectancy.
- This approach necessarily requires that additional funds are accumulated by retirement so that the original needs are maintained until life expectancy.
Describe
“Purchasing Power Model”
- Purchasing power model is even more conservative than the capital preservation model and assumes that the purchasing power of the accumulated fund balance necessary under the annuity model is preserved until life expectancy
- Requires that additional funds are accumulated by retirement so that the purchasing power of the original needs are maintained until life expectancy
Describe
“Capitalization of Earning Model”
The capitalization of earnings model is designed to produce a perpetual income stream
Describe
“Serial Payment”
- Another method of funding the necessary retirement accumulation is to increase the savings amount each year, which often correlates to typical salary increases over a career.
- The increase from one year to another can be equal to inflation or can equal any other reasonable assumption.
Define
“Monte Carlo Analysis”
Monte Carlo Analysis is a mathematical tool that illustrates the unpredictability of the “real” world and its effects on an individual’s retirement plan
