Chapter 2 Flashcards
What are the the two components to objectives-based planning approach to discovery?
- The values and objectives that motivate an investor
- Understanding what phase of wealth accumulation clients are in and their outlook on potential life transition. This is called the ‘discovery process’.
The objectives-based planning approach focuses on what?
Values and goals, not products
What are the two categories that questions can be divided into?
- Current state questions: Focus on where the client is now.
- Future state questions: Focus on where the client wants to be and how to get there.
During the discovery process, the advisor should aim to accomplish the following:
- Make the client feel comfortable to gain trust.
- Help the client and advisor get to know each other and hopefully find some commonalities.
- Personalize the financial planning process.
- Have a road map, which will involve more focused questions down the road.
What are the six broad areas that form the basis of the discovery system and who came up with it?
- Lifestyle and leisure
- Visions and values
- Health
- Work/careet
- Financial comfort
- Relationships
Barry La Valley
La Valley Helped With Financial Relationships
What are the major accumulation needs in the mid-life or pre-retirement stage?
- Topping up children’s RESPs
- Additional RRSP savings.
- Debt reduction
- Upgrading home and/or vacation property
- Supporting elderly parents or children
Seed money can grow and be used for the following purposes:
- To purchase a home
- To pay for a child’s education
- As an emergency fund
- To fund retirement
- To pay off high-interest debt
What needs to determined to analyze the amount of money required to fund one’s retirement?
- Cash flow required after retirement
- income from all sources.
- If there is a surplus or shortfall.
- If there is a shortfall, the assets required to cover the shortfall.
What are the three popular methods used to determine periodic (recurring) cash flow?
- An itemized list of expected expenses.
- Net income adjusted for pre-retirement expenses that will not continue in retirement.
- An estimated percentage of current (pre-retirement) income that will be required in retirement.
Method #1: An itemized list of expenses and what it is often referred to as:
- The most precise method, provided that the expenses are forecasted accurately.
- It is the most time-consuming.
Square one approach
Method #2: Net income adjusted for pre-retirement expenses that will not continue in retirement:
- Add up the current after-tax income (for both spouses).
- Determine which expenses will no longer exist in retirement, such as RRSP contributions, commuting costs to work, etc.
- Deduct #2 from #1 to determine the net income needed in retirement and estimate in income taxes that would be owned each year to determine the pre-tax retirement living expenses (RLE).
Method #3: Estimated percentage of current income required in retirement:
The easiest but the least accurate.
The rule of 20:
Multiply the annual income required in retirement by 20 to estimate how much savings the individual required in order to generate that income.
The 4% rule:
This rule states a client can withdraw 4% of the portfolio in the first year, then adjust for inflation each subsequent year (ie. increase the withdrawal by the rate of inflation) and not run out of money for 30 years.
What is the sustainable withdrawal rate (SWR)?
What is it impacted by?
Is based on the assumption that the portfolio will generate the required income for the specified number of year with no probability of its becoming depleted.
The time horizon and the asset mix.
