Assignment 12 - Wealth Management and Distribution Planning Flashcards
**a process for managing resources that seeks to meet an indiv.’s needs and achieve their obj. by integrating a diverse range of services
- use of the holistic approach
- if managed correctly, should result in greater asset accumulations, less overall fin. risk, reductions in tax liabilities, cost reductions in mgmt of resources and efficiency of cash flows and reducing debt
wealth management
a method of regular, systematic investing in which an indiv. invests the same dollar value on a periodic basis in equity inv.
- regardless of current mkt value of the investment
dollar cost averaging
- No fixed assumptions
- vary assumptions
- yield probabilities of success or failure depending on repeated iterations of the model
- use statistical techniques
Stochastic models
**in a qualif’d retirement plan, the distrib. of a partic’s entire acct balance or of the entire amt of the partic’s accrued benef. as a singe cash pmt
- EE’s death, attainment of 59 1/2, or separation from service
lump sum distribution
- use set of fixed assumptions
- illustrate risk
- by running model several times
- varied assumptions
EXP= model projects asset accum. based on current holdings and an assumed savings rate given assumptions about inv. return and slry increases
Deterministic Models
occurs when a deceased person was entitled to items that would have created gross income for the year of death.
- no step-up in basis
- treated as gross income to the recipient
- subject to substantial taxation
- can create substantial wealth for recipient
income in respect of decedent (IRD)
**Distrib. from retirement plans must commence by April 1 following year of attaining age 70 1/2 after terminating employment
Required Minimum Distribution (RMD)
how does WM link asset accum. w/ distrib. planning?
- positions retirement resources so they conform to future planned obj.
- assets are configured to produce retirement income when distrib. phase of retirement commences.
Forces that have served to support a shift to WN approach
- Chg in ER-EE employment contract: move to DC plans and indiv. responsibility
- chg in gov’t policy: more uniformity to plans; increased protability; indiv. responsibility
- mktplace forces and competition by mkt partic.: new products and services; move to using external vendors for admin
- enhancements in tech. and recordkeeping services
decision elements for accum. and distrib. wealth to support retirement needs
- developing the retirement resource target
- assessing the efficiencies of fundign structures
- examining the funding structures
- investment selection, risk mgmt and strat. allocation of resources
- dsitrib. planning and execution
- monitoring excesses or deficiencies relative to retirement income needs
- final disposition of excesses or curtailment of deficiencies
(3) models used by fin. advisors to target retirement resource needs
- deterministic model
- stochastic model
- mixed model
- mixture = fixed (deterministic) assumptions adn variable assumptions (stochastic)
- allow a certain set of assumption to vary
- attempt to gauge probabilities of success or failure
- EXP = Monte Carlo simulation
Mixed Models
Factors for assessing the efficiences of retirement savings structures
- assessing tax efficiencies
- costs assoc. w/ the inv. products
- risks of either asset classes or specific inv.
Universal WM principles
- diversification
- attainable efficiencies - taxes and costs
- eliminate duplication of benefits
- question traditional assumptions
Wealth building opportunities
- means to diversification
- dollar cost averaging
- risk transfer at favorable pricing
- strategic asset positioning
- preemptive tax planning
- beneficiary planning
- balance b/w active and passive mgmt
Distribution Options
- annuity pmt options
- periodic pmts
- intermittent (nonperiodic) pmts
- lump-sum distrib.
- lump-sum w/ rollover into IRA
- combining various pmt options
Annuity Pmt (distrib. option)
*guarantee of lifetime income by the plan or the insurer
*indiv. can’t outlive the income source
Types: immediate life; deferred life; fixed; variable
This decision requires retirement plan annuities to use unisex mortality tables to make pmts for men and women the same based on the same age
Arizona Governing Committee v. Norris
Key difference b/w annuities offered directly through a retirement plan versus annuities offered through an insurer outside a plan
- directly through retirement plan - must use unisex mortality tables with pmts same for men and women who have attained same age (Arizone Governign Comm. v. Norris)
- sold by insurers outside plan - may use different annuity tables for men and women b/c women’s life expectancies exceed those of men
important considerations for retirement income strat.
- assess retirement income needs
- know ongoing expenses that will incur during retirement
- assess risks and possibility of expenses associated w/ those risks
- costs and tax implications
- simplest form of WM models and easy to do
- plug in some key items to determine how much you need for retirement: current age, slry, age when you plan to retire, what you currently have saved
deterministic models
**added on to the deterministic models approach
- how much you will need in retirement (%age)
- assumed interest rate
- assumed tax rate
- assumed inflation rate
Stochastic Models
EE’s cost basis in a retirement plan includes:
- aggregate of prior ins. costs (PS-58)
- any A/T contribs. made by EE
- defaulted loans that have been treated as taxable distribs.
amt of premium costs that a partic. must include as taxable income
PS-58 costs
