Ch16 - The Retirement Income Planning Process: Part 1

Question 1

One strategy in addressing retirement income shortfalls is to simply save more and spend less. What are THREE pre-retirement strategies that a client could use to save more and reduce spending?

Answer 1

1) extending the length of savings time
2) deferring retirement or even social security
3) saving in the most tax-efficient manner (consider advantages of using a taxable, tax-deferred, tax-exempt, nondeductible tax-deferred account, or converting to a Roth)

Question 2

What is the impact of taking Social Security benefits prior to full retirement age?

Answer 2

5/9 of 1% for each of the first 36 months

5/12 of 1% for each next 24 months

Question 3

Spending less could make more income available to save or to increase the longevity of existing assets. What are FOUR post-retirement strategies that a client could use to reduce spending?

Answer 3

a) downsizing to a smaller home/area
b) selling assets that cost money to maintain (for example, vacation home, boat, recreational vehicle)
c) work part-time
d) using home equity, including a reverse mortgage

Question 4

To help with envisioning retirement, a financial services professional will engage and work with the client by dividing the retirement period into what THREE stages?

Answer 4

1) the “go-go years” (a period beginning at retirement during which a client has no health concerns and wants to maximize recreational activities)
2) the “slow-go years” (a period of declining health and the slowing of individual activities)
3) the “no-go years” (severe health issues that severely limit activities)

Question 5

Retirement income planning is the process of planning around what FOUR objectives?

Answer 5

a) replacing pre-retirement income with stable sources of postretirement income
b) meeting financial objectives in retirement (for example, legacy, travel, purchasing a second home)
c) eliminate or minimize risks that could disrupt retirement income
d) plan for any shortfalls of postretirement income

Question 6

During Step 1 of the retirement income planning process, a financial services professional should secure information that is material to the design and implementation of the retirement income plan. What are the THREE subject areas that provide this information?

Answer 6

a) demographic data (familial or advisors)
b) qualitative data (personal needs and goals)
c) quantitative data (assets and liabilities, income and expenses)

Question 7

provisional income formula

Answer 7

AGI + (tax-exempt interest) + (HALF of Social Security benefit)

Question 8

The period during which a retirement income plan comes into plan is referred to as the _______ phase.

Answer 8

deaccumulation

Question 9

What is the difference between the decumulation phase risk tolerance and the accumulation phase risk tolerance?

Answer 9

decumulation – the possibility of depleting the retirement portfolio (retiree no longer earning an income, may be less willing to accept risk)

accumulation – the possibility of between risk (losing principal) and the amount of a portfolio’s return

Question 10

Risk tolerance means determining how much concern the client has about a reduction in spending during retirement. How would a risk TOLERANT client differ to a risk ADVERSE client in regards to a reduction in spending?

Answer 10

A client who is risk tolerant is willing to spend more to enjoy retirement in the early retirement years (the “go-go years”)- even though it might mean a reduction in spending later. A risk adverse client is much more concerned about having a reduction in spending.

Question 11

What are the TWO steps in the expense method of estimating the retirement income need?

Answer 11

1) list and prioritize into essential, conveniences and luxuries
2) calculate the client’s aggregate retirement expenses (potential changes in expenses over time)

Question 12

Retirement income generating sources are divided into what TWO categories?

Answer 12

a) individual sources (IRAs, taxable accounts, business interests, real estate, residual commissions, cash value life insurance, HSAs, part time work)
b) employer sourced retirement income sources (DB plan, 401k, or other non-qualified plans)

Question 13

What are TWO examples of individual-sourced retirement income?

Answer 13

a) Social Security
b) nonqualified deferred annuities

Question 14

What are the tools used by a financial services professional to identify a client’s goals and objectives?

Answer 14

a) software applications
b) a conversation with the client

Question 15

What are the TWO methods used to estimate the retirement income need?

Answer 15

expense method (the BEST METHOD that base the income need on expected expenses)

ratio replacement method (“ballpark estimate” like 60-80% of gross salary and best used for younger clients)

Question 16

What are some best practices for a financial services professional in the preparation of a retirement income plan?

Answer 16

a) Explain that projections are a best estimate that could be affected by any number of factors.
b) Prepare several estimates using different projections and assumptions.
c) Life expectancy projections should be conservative.
d) Client should adopt the plan AFTER considering several estimates.
e) Explain that plans needs a periodic review.

Question 17

A financial services professional should secure supporting documentation from his/her client while gathering the quantitative data the to follow the mantra…

Answer 17

“Trust but verify”