02. Retirement Planning Accumulation & Distributions

Question 1

Define

“Financial Independence”

Answer 1

Being financially independent means being able to maintain the pre-retirement lifestyle during retirement and manage the adverse effects of inflation

Question 2

Define

“Financial Preparedness @ Retirement”

Answer 2

Financially prepared at retirement means that a person has:

1. Sufficient asset accumulation at retirement
2. An appropriate investment plan
3. A plan for taking distributions from savings.

Question 3

Define

“Superannuation”

Answer 3

The risk that she outlives her available savings.

Question 4

Define

“PWLE”

Answer 4

The prework life expectancy (PWLE) occurs prior to fully entering the workforce and generally extends to some point between ages 18 and 25

Question 5

Define

“WLE”

Answer 5

Work-life expectancy (WLE) is the period of time a person is expected to be in the workforce.

Question 6

Define

“RWLE”

Answer 6

The remaining work-life expectancy (RWLE) is the work period that remains at a given point in time prior to retirement.

Question 7

Define

“RLE”

Answer 7

• Retirement life expectancy (RLE) represents the total amount of time expected during retirement.
• This period begins at retirement and extends until death.

Question 8

Define

“Risk Tolerance”

Answer 8

The risk tolerance of an investor is essentially the willingness and ability to accept risk for potential returns.

Question 9

Define

“Unrelated Business Taxable Income”

(UBTI)

Answer 9

Unrelated business taxable income (UBTI) is a term used to describe income earned by a tax-exempt entity that is subject to taxation.

Question 10

Define

“Inflation”

Answer 10

• 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

Question 11

Define

“Retirement Needs Analysis”

Answer 11

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)

Question 12

Define

“Wage Replacement Ratio”

Answer 12

• 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

Question 13

Describe

Top-Down Approach Method

to determine

Wage Replacement Ratio

Answer 13

• 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.

Question 14

Describe

Bottom-Up (Budgeting) Approach Method

to determine

Wage Replacement Ratio

Answer 14

• 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.

Question 15

Describe the

Annuity Approach

(4-Step Approach)

ref: pg 48

Answer 15

1. Determine the funding amount in today’s dollars.
2. Inflate the needs from step 1 to the beginning of retirement
3. Determine the funding needs at retirement
4. Determine the required annual savings amount

Question 16

Which models provide a cushion in the event someone lives beyond their anticipated life expectancy?

Answer 16

• the capital preservation model
• the purchasing power preservation model
• the capitalization of earnings model

Question 17

Describe

“Capital Preservation Model”

Answer 17

• 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.

Question 18

Describe

“Purchasing Power Model”

Answer 18

• 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

Question 19

Describe

“Capitalization of Earning Model”

Answer 19

The capitalization of earnings model is designed to produce a perpetual income stream

Question 20

Describe

“Serial Payment”

Answer 20

• 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.

Question 21

Define

“Monte Carlo Analysis”

Answer 21

Monte Carlo Analysis is a mathematical tool that illustrates the unpredictability of the “real” world and its effects on an individual’s retirement plan