Ch17 - The Retirement Income Planning Process: Part 2 Flashcards
What are the THREE prevalent conversion strategies to generate income during retirement?
a) the “ systematic withdrawal approach” (Diversity investment based on client’s risk profile)
b) the “time-based segmentation approach” (set up buckets or age-banded investment accounts for ages 60-70, 70-80 etc. Put cash in short-term buckets and riskier investments in long-term buckets)
c) the “essential-versus-discretionary approach” (aka – flooring where safe investments fund the essential expenses)
Investing has many risks. Define the following types of investment risk that specifically impact retirement income planning?
(a) market risk
(b) interest rate risk
(c) liquidity risk
(d) sequence-of-return risk (aka - longevity risk)
(a) market risk - the risk of financial loss resulting from movements in market prices
(b) interest rate risk - a risk for bond owners due to fluctuating interest rates (immunization to match spending to bond income)
(c) liquidity risk - the inability to sell assets quickly
(d) sequence-of-return risk – a risk during retirement when a portfolio is in the withdrawal stage
Financial planners use several schools of thought about creating guidelines for safe withdrawals from year to year. What are the THREE systematic withdrawal approach guidelines?
fixed amount adjusted for inflation
fixed amount not adjusted for inflation
variable amount based upon prior year-end value
What are THREE ways a financial professional could manage inflation risk?
a) build realistic estimates of long-term inflation when calculating
b) rely on inflation-protected income sources such as investments with an inflation hedge (eg - TIPS, real estate, living rider)
c) picking a withdrawal strategy and build a contingency fund
What should a client’s asset liquidation priority be when deciding to liquidate and withdraw an asset?
A client should sell the asset or assets whose federal tax cost would be LOWER than if another account asset were sold or would generate a useful tax benefit such as a capital loss.
What are the TWO purposes of a tax-efficient withdrawal strategy?
1) to extend the longevity of retirement assets and
2) to minimize federal income tax liability.
If a minimum distribution is NOT made in a timely manner, the plan participant is required to pay a ____% excise tax on the amount of the shortfall.
50%
What are the THREE major risks that are exacerbated by longevity risk for a retirement income plan?
inflation risk
long-term care risk
market risk
What are the THREE ways a financial professional could address longevity risk?
a) select realistic expectation for life expectancy (65 to 95)
b) maximizing sources of income that provide income for life (deferring Social Security or electing life annuity payments options from employer retirement plans)
c) other streams of income (reverse mortgage or dividend-paying stocks)
The FPA defines the essential-versus-discretionary approach as…
Classifying the client’s retirement expenses as essential or discretionary. Low-risk investments are used to fund the essential expenses and a mix of medium- and higher-risk investments is used for discretionary expenses. Income is drawn based on the essential and discretionary need.
Besides having a cash reserve or liquidating investments during retirement, other alternatives to meet short-term liquidity needs can be achieved using what THREE strategies?
a) borrowing from a life insurance contract
b) home equity line of credit
c) reverse mortgage line of credit
Long-term capital gains TAX RATES can be up to 28%, but are often _____%.
15%
What is an engagement letter? (4)
It informs a client as to the scope, fees, and responsibilities of the parties during the planning process.
What are TWO examples of the “essential-versus-discretionary approach” (aka – flooring) strategy?
- buying annuities to build a floor of income
- creating a bond ladder
