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HS 353 > Competency 6 > Flashcards

Competency 6 Flashcards

1
Q

Retirement income planning involves adapting the client’s budget to their changing needs throughout retirement

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2
Q

The research indicates that the overwhelming majority of surveyed advisors first selects the products to provide retirement income and then selects an approach that will best implement the products they have chosen

A

False. The research indicates that the overwhelming majority of surveyed advisors (over 78 percent) first selects an approach to provide retirement income and then selects and manages the products needed to implement the approach

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3
Q

The bucket approach (also known as the time segmentation or age-banding approach) could be defined as classifying a client’s retirement expenses as essential or discretionary. Low-risk investments or annuity guarantees are then selected to fund the essential expenses. A mix of medium- and higher-risk investments is selected to fund the discretionary expenses. Income is drawn from the respective pools to cover essential and discretionary expenses

A

False. This describes the flooring approach. The bucket approach could be defined as setting up separate pools of investments with lowest risk investments in the near- term time horizon “segment,” somewhat higher risk investments in the next segment, and riskiest portfolio in the longest-term segment. Income is then drawn from one segment at a time

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4
Q

One acceptable guideline for a withdrawal strategy is to take an initial withdrawal of the portfolio at retirement and then adjust the withdrawal for inflation regardless of the current value of the portfolio

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5
Q

One acceptable guideline for a withdrawal strategy is to take an initial withdrawal
of the portfolio at retirement and then adjust the withdrawal for inflation regardless of the current value of the portfolio. However, if the portfolio value is more or less than a specified value, make adjustments to the percentage withdrawn
accordingly.

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6
Q

The systematic withdrawal approach is better than the bucket approach from a behavioral economics standpoint because clients can better tolerate market volatility in systematic withdrawal approach

A

False. The bucket approach may have more appeal to clients than the systematic withdrawal approach from a behavioral economics standpoint because the bucket approach segments some investments for a later time period and this allows market volatility to be better tolerated

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7
Q

Even though the bucket approach segments investments, the bucket approach may lead to the same portfolio allocation that was envisioned in the original systematic withdrawal portfolio approach

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8
Q

When using the flooring approach to retirement income planning, the floor must be created with immediate annuities

A

False. The floor can be created with immediate annuities, but it is not always created with immediate annuities. There are several other ways to create a floor

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9
Q

Sometimes the flooring approach is thought of as annuitization for the core piece and invest for the rest

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10
Q

According to the “Financial Adviser Retirement Income Planning Experiences, Strategies, and Recommendations” research study, the overwhelming majority of clients getting decumulation advice are considered validators (do-it-yourselfers who want an advisor to give second opinions and occasional advice).

A

False. The overwhelming majority of clients getting decumulation advice are considered deemed delegators (clients who know they need to participate in the process but expect their advisor to take primary responsibility for their financial success) as opposed to “validators

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11
Q

According to the “Financial Adviser Retirement Income Planning Experiences, Strategies, and Recommendations” research study, the most popular approach to providing retirement income to clients is the flooring approach

A

False. According to the study, the most popular approach to providing retirement income to clients is the systematic withdrawal approach

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12
Q

According to the “Financial Adviser Retirement Income Planning Experiences, Strategies, and Recommendations” research study, many surveyed advisors
adjust the amount of the systematic withdrawal on an on-going basis using various dynamic withdrawal strategies.

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13
Q

Under the systematic withdrawal of retirement income planning, the amount of the portfolio that can be withdrawn each year to create income depends upon the time horizon used in the calculation, the inflation adjustments made each year to the withdrawal, and the asset allocation of the portfolio.

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14
Q

Under the systematic withdrawal of retirement income planning, a larger amount of the portfolio should be invested in stocks if the client desires to use a higher withdrawal rate

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15
Q

The withdrawal rate strategy identifies the amount that can be taken out each year and have the portfolio last under all projected scenarios for 30 years

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16
Q

Historically, using a safe withdrawal rate of 4 percent meant that 10 percent of the time the client would have his or her principal left over.

A

False. 96 percent of the time a client will have their principal left over

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17
Q

Historically, using a safe withdrawal rate of 4 percent meant that at the median level, wealth was decreased by 50 percent

A

False. Using a safe withdrawal rate of 4 percent means that at the median level, wealth is increased by a factor of 1.6

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18
Q

The safe withdrawal rate approach to retirement income planning focuses on making the client’s assets last for the specified period (e.g., 30 years) under a worst-case scenario for investments.

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19
Q

The safe withdrawal rate approach to retirement income planning can be considered by planners to be like an autopilot program

A

False. Safe withdrawals are not an autopilot program

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20
Q

The “4 percent number” used in the systematic withdrawal approach to retirement income planning can be increased if the portfolio rates of return outpace the withdrawal rates

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21
Q

The “4 percent number” used in the systematic withdrawal approach to retirement income planning can be increased if the client is willing to decrease spending in tough economic times.

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22
Q

The “4 percent number” used in the systematic withdrawal approach to retirement income planning can be increased if the client is invested in a more globally diversified portfolio.

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23
Q

Under the systematic withdrawal approach to retirement income planning, the
portfolio needs to account for all the client’s spending needs

A

False. The portfolio does not need to solve all spending needs. There are other assets like Social Security, legacies, and the house that may help determine the burden of the portfolio and consequently affect the safe withdrawal rate

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24
Q

In the research underlying the systematic withdrawal approach to retirement income planning, optimal asset allocation is typically 50 to 75% in equity (fixed over the retirement period

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25
Q

Under the systematic withdrawal approach to retirement income planning, annuity, Social Security, and pension income all factor into what a reasonable withdrawal rate is for the client

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26
Q

Using a higher withdrawal rate than the Bengen research indicates will not work well for middle-income clients trying to squeeze their assets as tightly as possible to provide retirement income that continues their pre-retirement standard.

A

False. Even though the Bengen research (with or without inflation adjustments) provides a great frame of reference for what can be done, it may be unrealistic for clients who are not super affluent. The 4 percent rate may not enable middle-class clients to continue their standard of living. These clients are more interested in living on their money than having 96% of principal left when they die. For this reason, using a higher withdrawal rate (5.5-7.5%) but setting up standards that would adapt withdrawals to meaningful changes in the underlying value of the portfolio works best for the middle-class cohort

27
Q

The industry standard for the time horizon used in setting the systematic withdrawal approach is 30 years; however, planners should make the time horizon client specific.

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28
Q

The tighter it is for the client, the more important it is to focus on the expense side, not the income side

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29
Q

Glide path refers to the integration of systematic withdrawals with the minimum distribution rules.

A

False. Glide path refers to the change in equity allocation over time.

30
Q

According to Professors Milevsky and Woerheide, the percentage of the retirement portfolio allocated to equities should not change over time

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31
Q

Retirement models need to be changed so they do not count a shortfall of a few dollars as the same as a shortfall of a significant amount of money

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32
Q

The focus of the bucket approach is to break up retirement into distinct time increments and choose investments that deliver specified outcomes at different times.

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33
Q

In the bucket approach to retirement income planning, assets needed for the most remote time segment (the last few years of retirement) may be invested in laddered bonds or they may use some other liquid or cash position

A

False. The assets needed for the near-term (immediate) time segment may be invested in laddered bonds or they may use some other liquid or cash position. Assets used for the long-term time horizon are invested in riskier investments with the potential for growth

34
Q

Under the bucket approach to retirement income planning, the planner and client think of the overall portfolio as separate buckets that are invested according to when the money will be distributed.

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35
Q

Under the bucket approach to retirement income planning, it is common to choose
30 to 35 time segments, one for each year of retirement

A

False. It is common to choose three 10-year time segments representing the
30 years of retirement

36
Q

The bucket approach can compensate better than other approaches for the fact that the client faces different risks in different phases of retirement

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37
Q

Under the bucket approach to retirement income planning, the last bucket (assets to be used in the last few years of retirement) is invested more aggressively than the first bucket (money used for near-term expenses) because the retiree has a longer time period to ride out market swings

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38
Q

The bucket approach always waits for one bucket to be consumed before the income in the first bucket is reallocated.

A

False. Some planners end one bucket before starting another. However, another approach suggested in the Principal Group study allows buckets to be redistributed over time. At a regular frequency, the first bucket will need to draw from the second to continue to meet its intended use of covering expenses over the next five-year period and the second bucket will be replenished by the third bucket.

39
Q

Both the bucket approach and the systematic withdrawal approach rely on self- management of assets and call for the systematic drawdown of assets

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40
Q

One reason the bucket method may make more sense than the systematic withdrawal method is that if the systematic withdrawal portfolio has one required rate of return, there is a mismatch between term risk and portfolio return, which does not occur in the bucket method, which accounts for matching up term risk and portfolio return.

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41
Q

Bucket approach investing works better from the behavioral economics standpoint than systematic withdrawal investing

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42
Q

The bucket approach (also known as age banding) cannot be combined with the flooring model

A

False. We can floor and combine that with the bucket (age banding) approach

43
Q

Changing from one phase of retirement to the next always occurs gradually

A

False. Changes during retirement can be sudden or gradual

44
Q

Changing from one phase of retirement to the next always should account for the non-financial side of retirement.

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T

45
Q

An activity portfolio is a document that specifies how a client will stay engaged as they move through the different phases of retirement

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46
Q

The bucket approach to retirement income planning may appeal to the client from a behavioral economics standpoint because it can address the client’s preference
for smaller simplified issues and because it helps take a large problem and parcels it into manageable pieces.

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47
Q

The bucket strategy of retirement income planning allows the client to adapt the investment portfolio to accommodate the natural fluidity of retirement and life changes

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48
Q

The bucket strategy of retirement income planning allows the client to adapt the portfolio to a changing economy

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49
Q

The focus of the bucket approach to retirement income planning is to distinguish between essential and nonessential retirement income needs and create an investment strategy to address both.

A

False. The focus of the flooring approach is to distinguish between essential and nonessential retirement income needs and create an investment strategy to address both

50
Q

Under the flooring approach to retirement income planning, once assets are set aside to meet basic income needs, the remainder of the portfolio is managed to meet discretionary spending goals

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51
Q

To ensure income smoothing over the life cycle, the optimal strategy is to meet basic income needs with assets that do not exhibit volatility

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52
Q

Those who live longer than expected in retirement also have greater exposure to market risk, inflation risk, and health and long-term care risk.

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T

53
Q

Immediate annuities may be more desirable if they are framed in an investment frame as opposed to a consumption frame

A

False. Annuities may be more desirable if they are framed in a consumption frame as opposed to an investment frame.

54
Q

Annuities prevent a client from consuming assets too quickly and they are an excellent way to cope with excess withdrawal risk.

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55
Q

The irrevocable and absolute nature of the immediate annuity could be responsible for a client’s aversion to the product.

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56
Q

Under utility theory, since the most utility is gained for spending on basic expenses, it makes sense to ensure that the funds are available to meet those expenses in
retirement by choosing assets that do not demonstrate volatility.

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57
Q

The advantage of building an income floor with an annuity is that it addresses longevity risk

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58
Q

The bucket strategy will have the greatest difficulty managing reinvestment risk because the near-term bucket must be replenished with short-term investments like bonds, CDs, and other investments that are particularly sensitive to reinvestment risk.

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59
Q

The flooring strategy creates the greatest liquidity and legacy risk problem because of the use of an annuity to create the floor

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60
Q

Product diversification means combining financial products with different strengths and features to protect the client against risks and implement the chosen strategy

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61
Q

Considering that almost all retirement income plans have the Social Security floor should enable the planner to think differently about retirement risks

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HS 353 (8 decks)

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