Competency 18 Section 4

Question 1

1. The distribution of underfunding from minimum needs tends to show the most severe outcomes for the fixed SPIA income strategy.

Answer 1

False. The worst outcomes are generally observed with the constant inflation-adjusted withdrawal amount strategy. (LO 18-5-1)

Question 2

2. Relative to the other strategies, the withdrawal percentages based on remaining life expectancy strategy tends to support spending amounts which increase over the retirement period.

Answer 2

True. (LO 18-5-1)

Question 3

3. In the case study observed, minimizing the probability that spending will fall below minimum needs tends to reduce the opportunity for the client to achieve their lifestyle spending goal.

Answer 3

True. (LO 18-5-1)

Question 4

4. An important outcome measure described in the video is the failure rate, or the probability of financial wealth depletion.

Answer 4

False. Failure rates do not serve a purpose in this analysis. Among other reasons, they are not compatible with partial annuitization approaches, or when income sources are available from outside the financial portfolio. (LO 18-5-1)

Question 5

5. Even if current interest rates are much lower than historical averages, it is an acceptable practice to base an analysis of systematic withdrawals on historical average bond returns and to base payout rates for single-premium immediate annuities on the current market rates.

Answer 5

False. These two approaches are not consistent. Lower interest rates imply lower bond returns for systematic withdrawals. (LO 18-5-2)

Question 6

6. Fixed SPIAs generally offer higher payout rates than inflation-adjusted SPIAs.

Answer 6

True. (LO 18-5-2)

Question 7

7. Holding a reserve of liquid financial assets can be a useful technique to manage a variety of risks facing retirees

Answer 7

True. (LO 18-5-2)

Question 8

8. The analysis shows that a variable annuity with a GLWB rider is often part of the efficient frontier due to its unique ability to provide both downside protection and upside potential.

Answer 8

False. The analysis shows that downside protection and upside potential can be more effectively found by combining other approaches, such as a mixture of fixed SPIAs and stocks. (LO 18-5-2)

Question 9

9. A retiree should expect to meet a smaller percentage of their lifestyle spending goals as the value of these goals grows as a percentage of retirement date assets

Answer 9

True. (LO 18-5-2)

Question 10

71. Which of the following statements concerning a portfolio withdrawal approach that has a constant inflation-adjusted increase in withdrawals each year is (are) correct? (LO 18-4-1)
    I. It provides a smooth and predictable income stream for as long as wealth remains.
    II. With this approach, wealth is more likely to run out than if annual withdrawals are adjusted for market conditions.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 10

71. The answer is C. Both statements are correct

Question 11

98. All of the following statements concerning factors related to the decision to buy a SPIA today versus waiting another year (assuming interest rates, aggregate mortality rates, and annuity provider business conditions stay the same) are correct EXCEPT (LO 18-4-2)
    A. By waiting, one has avoided the possibility of having annuitized assets and then not surviving another year.
    B. By waiting, one maintains both flexibility and liquidity.
    C. By waiting, the payout rate typically decreases.
    D. By waiting, one has avoided exposure to the annuity provider’s credit risk.

Answer 11

98. The answer is C. If assumptions remain the same, the payout rate increases as the client ages