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Retirement > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

Work life expectancy is usually…

A

The time beginning after education and ending at retirement. The complete time period available to work and earn in order to save for retirement.

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2
Q

Generally the work life expectancy period has been ___ - ____ years

A

30-40 years, but has been decreasing due to advanced education and early retirement.

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3
Q

Remaining work life expectancy is…

A

The period of time remaining to save for future goals.

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4
Q

______ is typically the time period in which a financial planner has to develop strategies and savings goals.

A

Remaining work life expectancy.

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5
Q

Retirement life expectancy.

A

Period from the time of retirement to the time of death. Women 20 years vs 17 years for men. Typically planners want to extend beyond the average to make sure the client does not outlive their money especially since life expectancy is increasing over time.

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6
Q

T/F Planning to age 90 or beyond may be a reasonable assumption.

A

True

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7
Q

WLE and RLE Realationship

A

As WLE increases, RLE decreases. As RLE increases, WLE decureases. As WLE decreases, RLE increases. IN general, a change in one variable could increase additional funds needs, or decrease funding needs.

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8
Q

What are the three savings issues?

A

The savings amount, the savings rate, and the timing savings.

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9
Q

What are the three investment issues?

A

The asset classes invested in, the inflation rates, the client’s risk tolerance.

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10
Q

Savings amount 25,35

A

10-13 percent.

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11
Q

Savings 35-45

A

13-20 percent.

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12
Q

Savings 45-55

A

20-40 percent.

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13
Q

Investment benchmarks for age range 25, 30, 35, 45, 55, 65

A

.20:1: .6-.8: 1, 1.6-1.8:1, 3-4:1, 8-10:1, 16-20: 1

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14
Q

The average savings amount is based on ___.

A

Consumption

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15
Q

The earlier a person begins to save, the _____ the number of future compounding periods available prior to retirement.

A

greater.

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16
Q

The greater compounding periods equals the ____ required savings rate and the ____ accumulation of capital.

A

Lower, larger.

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17
Q

What are some key inputs that must be considered in investment planning?

A

Risk tolerance and time horizon

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18
Q

What are some considerations of investment planning?

A

Must consider impact of inflation on future costs and must consider risk and return of asset classes.

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19
Q

Inflation causes a ____ of purchasing power.

A

Loss

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20
Q

Generally _____ outperform inflation and taxes

A

Small-capitalization and large capitalization stocks.

21
Q

Taxable vs nontaxable accounts

A

One must consider the tax consequences of different types of accouters and investments.

22
Q

Unrelated Business taxable income.

A

Taxation of unrelated income earned by tax exempt entities. Retirement accounts are subject to these rules. UBTI occurs in retirement accounts when the plan: operates a trade or business, owns an interest in a partnership or S corporation, uses debt to generate porfolio income.

23
Q

What are two factors that increase needs for income?

A

Health care costs, travel costs.

24
Q

Possible decreases needs for income include:

A

mortgage elimination, payroll/social security taxes no longer paid, no longer need to save, work-related expenses.

25
Q

Health care increased retirement needs

A

Health care costs have been fairly unpredictable and the inflation for healthcare has been well above the consumer price index.

26
Q

T/F Pretax and After-tax planning is effective provided all the parties understand the assumptions

A

True

27
Q

T/F After tax planning is typically more accurate the closer a client is to retirement.

A

True

28
Q

Top Down Approach to Wage Replacement Ratio

A

Uses % to estimate retirement needs. Typically more appropriate for clients who have a longer time before retirement. Uses percentages and common sense.

29
Q

Bottom-Up Approach to Wage Replacement Ratio

A

Determines which preretirement expenses and expenditures will persist during the retirement years. Reviews each current expense and is more accurate for older individuals as the expenses are not as likely to change as much.

30
Q

If you spend 100,00 today and inflation is 3% then the purchasing power of that 100,000 in 20 years will be ____

A

55,367

31
Q

What are some common sources of retirement income?

A

Social Security. Private and Company-Sponsored Retirement Plans. Personal Retirement Plans, such as: IRAs, Roth IRAs. Personal Savings- taxable savings accounts. Continued Employment.

32
Q

What are some qualitative factors in retirement?

A

Involuntary vs. Voluntary retirement. Emotional and psychological facts such as loss of esteem fro job and boredom. Relocation decisions. Travel expectations.

33
Q

Work Life Expectancy risk vs mitigator

A

Risks: untimely death, disability, unemployment. Mitigation- insurance, education, training.

34
Q

Retirement life expectance risk and mitigator

A

Risk- lengthened. Mitigator- adequate capital accumulation.

35
Q

Savings Rate, Amount, Timing Risk and mitigator

A

Risk: too low and too late. Mitigator: save enough start early.

36
Q

Inflation risk and mitigator

A

Risk: greater than expected. Mitigator conservatively estimate inflation and needs.

37
Q

Retirement risk and mitigator

A

Risk: underestimated. Mitigator use wage replacement ratio

38
Q

Investment returns risk and mitigator

A

Risk: inadequate to create necessary capital. Mitigator: investment diversification and proper asset allocation.

39
Q

Sources of income risk and mitigator

A

Risk: overestimation of ss, pension plans, or personal income. Mitigator: use conservative estimates and monitor projections and plans.

40
Q

What is capital needs analysis?

A

The process of calculating the amount of investment capital needed at retirement. Uses both objective and subjective criteria to determine retirement income needs. Has three main methods.

41
Q

T/F The Annuity method is the hardest way to determine retirement needs

A

F, Simplest way.

42
Q

T/F The annuity method assumes the individual saves for a period of time, begins taking distributions at retirement, and then dies with a zero accumulation balance on the projected life expectancy date.

A

True

43
Q

What are the steps for the basic annuity model?

A

First calculate wage replacement income, determine gross dollars needs in today’s dollars, determine net dollar needs, inflate net dollar needs by consumer price index to retirement age, calculate capital needed at retirement.

44
Q

The capital preservation model assumes that at life expectancy, as estimated in the annuity model, the client has ______ account balance as he started with at retirement

A

The same

45
Q

The capital preservation model is designed to be more _______ than the annuity approach in which your _____ dollar is spent at exactly the life expectancy thus there is some risk of _____ the money. The capital preservation model builds a ____ of savings in case factors change.

A

conservative, last, outliving, cushion.

46
Q

The purchasing power preservation model assumes that the client will have a ____ ____ of equal purchasing power at life expectancy as he did at retirement. The purchasing power preservation model is designed to be even more ____ than the other two methods.

A

capital balance, more conservative.

47
Q

What is sensitivity analysis?

A

Changing variable assumptions to determine the effects to retirement plan by rotating a variable towards increased risk.

48
Q

What is monte carlo analysis?

A

A mathematical tool used to utilize a probabilistic distribution of returns and their effects on an individual’s retirement plan.

Retirement (11 decks)

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