CRPC Flashcards
Retirement Planning Process Acronym
SMART
Specific
Measurable
action oriented
realistic
time oriented
planning steps and acronym
EGAD I MADE IT
EGADIM
Establish client relationship
Gather data
Analyze data
develop plan
implement plan
monitor plan
Statement of financial position(balance sheet)
Assets liabilities net woth
The pension protection act
encouraged employers to take more assertive roles in helping their employees plan for retirement. Act made it easier to offer auto enrollment for 401k plans
emergency fund amount for retirees 20 years or more out
3-6 months living expenses
retirees 10 years out estate planning recommendation
They should be reviewing estate docs to ensure language is up to date
5 years out social security for retirees recommendation
They should double check social security benefits . Make sure they understand how the timing works
defined benefits trend
business today are less likely to offer defined benefit plans. these are scarce because of increasing longevity of participants and risk to employers. Defined contribution plans are the replacement which make the employee the bearer of the risk.
trend with longevity
life expectancies increase, people underestimate how long they will live. longevity risk deals with how long clients live.
wellness trend
companies are recognizing healthy employees are happy ones. They are putting more into employer sponsored wellness plans
identify the current trends and challenges in retirement planning
businesses less likely to offer defined benefit plans(more likely to offer defined contribution plans)
increased focus on planning for longevity
expansion of employee wellness plans
expansion of plan distribution options
challenges with shift from defined benefit to defined contribution
risk is born by plan participants with DC plan and many employees have no financial expertise.
what is typically not included in assets
leased property and equipment but may be shown in footnotes
cash flow statement equation
cash inflows-cash outflows= net cash flow
what two qualities should retirement goals have to make them useful for planning
Need be be specific and goals need to be prioritized.
level payment
same thing all the time(500 a month forever)
serial payment
taking inflation into account. Savings rate grows
inflation adjusted yield formula
1.inflation
input 1.return
shift
%change
calculating retirement needs steps
- calculate net annual retirement income need
- adjust income deficit for inflation over predetermined period
- determine total retirement fund needed
- Determine savings amount needed- level payment and serial payments
when do you have calc in begin mode
when calculating an income stream in retirement
when is inflation adjusted return needed
when calculating lump sum needed at beginning of retirement
serial savings approach 3 steps
deflate lump sum needed at retirement into today’s dollars, using the inflation rate as the discount rate
calculate payment using discounted lump sum from step one as future value and an inflation adjusted return as interest rate(need to be in end mode for this)
once pmt solved, it will need to be adjusted for inflation for the first year so multiply by 1.x
what are income replacement percentages
rough guided used in determining the amount of income needed in retirement from a pre retirement standpoint
why should caution be used in applying income replacement percentages
because they are rules of thumb. clients have different retirement needs
in estimating clients retirement income needs, identify current expenses likely to decrease in retirement
what goes up
transportation costs
food and housing
term life insurance and disability premiums can be stopped entirely
dry cleaning, clothing and other costs associated with working
medical goes up
when you look through cash flow statements to identify assets that might produce income, don’t use
emergency funds
funds for college
value of personal residence
names of two strategies clients can employee in living off retirement assets
capital preservation
capital utilization
capital preservation
live off the income produced by assets without touching principal. large pool of assets required
capital utilization
both income and principal are tapped for retirement living expenses. retirees must make good estimates of life spans, otherwise risking outliving their money
identify several financial goals that may conflict with retirement goals
housing
education
emergency funds
care of elderly parents or a disabled child
describe method for several competing financial goals
one way to deal with competing goals is to work with client to prioritize goals. two is to sequence the gosld
investment policy purpose
provide foundation of goals, time horizon, and constraints in which client portfolio in constructed and to provide a basis for review, performance evaluation, and adaptation to changing conditions.
essential elements of an investment policy and acronym
GRASP
Goals
Risk tolerance
asset allocation
strategies/ suitable investments
Periodic review
cash equivalent pro and cons
pros liquidity, low risk, adds diversity
cons low returns and inflation risk
stock advantage/disadvantage
growth/appreciation/income/ dividends
cons risky
fixed income pros and cons
moderate to low risk
steady income potential
disadvantage
reinvestment and call risk
interest rate risk
credit risk
purchasing power risk
real estate pros and cons
tax benefits
inflation hedge
leverage
disadvantages
illiquidity
management
high minimum investment
transportation costs
immobility of assets
economic and tax risk
total risk=
unsystematic risk(diversifiable), systematic risk(nondiversifiable),
unsystematic risk
diversifiable
business risk and financial risk
systematic risk
non diversifiaible
purchasing power risk
reinvestment rate risk
interest rate risk
market risk
echange rate risk
prime
purchasing power risk
caused by inflation or deflation
reinvestment rate risk
caused by variability interest rates and the need to reinvest income or principal as rates fall
interest rate risk
caused by changes in interest rates
market risk
resulting from investor reaction to tangible and intangible events
exchange rate risk
caused by changes in the relative value of foreign currency compared to the value of home country currency
business risk
associated with nature of business
financial risk
associated with the use of debt
political risk
associated with investing in foreign country’s
beta
measures volatility relative to market benchmark
beta <1 stock is less risky than stock market
beta>1 stock is more risky
measure of systematic risk
risk adjusted returns
Sharpe
Treynor index
Jensen index
sharpe
how much return did you get per unit of risk.(total risk)
treynor
relates the return of an investment or portfolio to the degree of systematic or market risk taken. Sharpe measures total risk
jensen(alpha)
for the risk they took they have extra return of…
compares expected return with actual return
what do i need to know about client to figure out asset allocation
time horizon
risk tolerance
need for current income
liquidity needs
taxation priorities
priorities and financial goals
need for inflation hedge
sequence of return risk
diversification
low or negative correlation
correlation
relative measure of the degree to which returns of two assets move together. Correlations range from +1 to -1
negative correlations are rare
further correlation is from +1., the more diversification
steps for asset allocation process
select asset classes
figure out what percentage to put in each
select individual securities
review and rebalance
strategic asset allocation
long term allocation strategy
utilizes rebalancing
aims to create efficient portfolios from different asset classes that provide optimal balance
tactical asset allocation
short term strategies to exploit changes in market conditions
often viewed as contrarian strategy
sound investment policy is
realistic, has long term perspective, and is clearly defined
why is a long term perspective essential as an element of investment policy
us market has positive bias toward investor but it usually plays out over time and short term fluctuations can be ignored
why is it important that investment policy be clearly defined
clear definition helps planner to avoid errors and reduces chance of dispute between planner and client
duration
measures price sensitivity of a bond to changes in interest rates
inflation risk
risk that inflation will reduce purchasing power of fixed income and fixed principal payments when they are received
negotiable cds
100k or more
commercial paper
short term unsecured ious of corporations. corporations use as alternative to borrowing from banks. maturities up to 270 days. normally sold at discount with interest payable at maturity
bankers acceptances
time drafts issued at discount that are used to finance international trade.
maturities between 30 to 180 days
credit risk
risk bond will be downgraded
marketability risk
risk asset cannot be converted to cash quickly at or near its current market price
event risk
risk that unexpected event could hurt value of security
core satellite asset allocation
combo of strategic and tactical that divides portfolio in those two components
balanced mutual fund
objective of current income and capital appreciation (total return)
purpose of asset allocation
apportion funds in way that meets clients objective goals and dampens effects of market fluctuations
two factors that can alleviate retirement investors concerns with security price volatility are
time nd asset allocation
target retirement funds
mutual funds that have set retirement dates and adjust allocation over time
managed account
managed by money manager who creates portfolio tailored for individual.
target funds advantage and disadvantage
easy for people to invest because they make allocation decisions and you only need one fund
one size fits all approach may not be in line with risk tolerance of investor
specialist sentiment vs contratian
they are not opposite like contrarian.
put to call ratio
technical researches believe more puts being bought is indication of bottoming and buying calls of top
efficient market hypothesis
current market prices reflect all available information. trying to find imbalances is waste of time
value investing
client commits to increasing portfolio value by certain dollar amount each period
guidelines for low P/E investing
low pes fine but only if companies have solid performances
diversify into 15-20 stocks with 10-12 industries
only buy medium to larger companies listed on NYSE and AMEX or actively traded over the counter
4 rules of thumb for value investing developed by Benjamin Graham
buy stocks for 2/3rds or less of net current assets
earnings price ratio should be twice current AAA bond yield
div yield should be no less than two thirds of the AAA bond yield
avoid companies that are currently losing money or have more than 60% debt to total assets
traits of growth stocks
high profit margin
esp growth 15% or more
sales and earnings dependent on general economy
usually small if any dividends
high bets
high price to book ratio
high price to earnings ratio(as much as ttwo to 4 times as much as s and p stocks)
high expectations for continued growth
distinctive products
small firm effect
market anomaly that enables investors in small cap companies to reap returns greater than the associated risk explains
what types of clients are suitable for small stock strategy investing
for clients with high risk tolerance, entrepreneurial instincts and long time horizons.
barbell
short maturities on one side and long on other
importance of social security
with decline in pension plans social security will be peoples only source of guaranteed inflation adjusted lifetime income. social security was never meant to be retiree’s sole source of retirement income
quarter of coverage(social security)
this is a measurement used to determine a workers insured status(fully or currently), and therefore the amount and type of benefits available under social security
fully insured(social security)
individual must work and pay into system for 10 years. must also obtain 40 work credits. 1 credit per quarter. you earn a credit when you pay 1,510 in social security. max 4 quarters a year. earnings can come all in one month or can be spread throughout year, once worker earns 6040 in 2022, they get 4 credits.
need 1 credit for each year since 21
currently insured
must have at least 6 credits during previous 13 quarter periods before death/disability. eligible for child benefits, mother or father benefits, and lump sum death are available if worker is only currently insured at death.
total risk measure of
standard deviation
AIME
average indexed monthly earnings
used to determine the amount of social security you will receive
top 35 years of earnings(indexed for inflation)/420(number of months in 35 years).
PIA
primary insurance amount
Amount of monthly social security income at full retirement age equals a worker’s PIA
when you start early than FRA(full retirement age)
payment reduced 5/9 of 1% for each month filed before FRA up to 3 months
payment reduced 5/12th of 1% for months over 36
delayed retirement credit
8/12th of 1% for ever month past FRA
*approx 8%.
Delayed retirement benefits stop at age 70
social security max amount that can be taxed
most you pay income tax on is 85%
file for benefits with social security
should be filing 3 months before you want your payments or eligibility to begin
solutions for social security instability
decrease retirement benefits
increase FICA
make into a needs based program
privatize some portion of social security
eliminate trust fund and use federal government general funds
raise retirement age
invest some of social security in stocks and or bonds outside of federal government bonds
spousal ss benefits eligibility
eligible age 62 or any age if caring for a child under 16 or disabled
married for at least one year
one spouse must file for the other to claim spousal benefits
these all can receive up to 50% of spousal pia
spouses retirement benefit comes from two places
that persons work history and their spouses work history
surviving spouse ss eligibility
need to be married at least 9 months
can begin reduced benefits as early as age 60
must be currently unmarried or remarried after age 60
all this up to 100% of spouses PIA including delayed retirement credits earned.
divorce benefits ss and eligibility
eligible
married for at least 10 years
currently unmarried
claimant must be 62+
benefits are
spousal and survival benefits(1 half of workers PIA)
no impact on ex spouses benefit
if divorce is at least two years ago, ex spouse need not have claimed own benefit but must be 62+
ends if you remarry, die, or become entitled to retirement or disability benefit that equals or exceeds one half of workers PIA
active duty
full time military personel in the armed services
guard and reserves
currently part time military personnel but the reserves are playing a more active role in current military operations then past
pay grades military
officers(O1- thru O-10) and
enlisted(E-1 thru E-9)
pay military and tax
most types of pay are taxable and subject to social security taxes
allowances /military and tax
moneys that are paid to members for specific needs
such as food(BAS)
or housing(BAH)
clothing
family separation allowance- 250 per month for member with dependents who serves unaccompanied tour
most allowances are not taxed nor are subject to social security taxation. Commissary and exchange privileges
Traditional military retirement pension
Uses defined benefit pension plan
general*- 20 years of service of more usually required. 2.5% of basic pay per year out of service.
benefit determined by multiplying years of service(must be at least 20) by retirees basic pay. This is then multiplied by 2.5% to determine initial benefit
The basic pay for retirement is defined differently depending on when retirement began.
most people on active duty today in the traditional retirement plan are under the High-36. This is average of retirees highest 36 months of pay
Final pay plan says basic pay is retiree’s final basic pay on the day of retirement.
REDUX defines basic pay as being highest 36 months of basic pay. Adds criteria of 1% decrease for any years less than 30. allows for 30k bonus lump sum payment at 15 years. if this was accepted it came with requirement to serve through 20 years.
these are all old plans. All new enrollments go to Blended retirement system
Survivor benefit plan
like a joint life annuity that can continue retirement benefits to the spouse of a service member. Highest SBP is 55%. This is major issue because service members often decide they can’t afford SBP. That means the spouse would lose retirement income when the service member dies
blended retirement system
and continuation pay
combined a lowered traditional defined benefit plan with a 401k like thrift savings plan component
All new recruits since 2019 are in the BRS
traditional military retirement portion retains 20 year cliff vesting with 2.0% year of basic pay(down from 2.5%/year
continuation pay- bonus at 12 years for agreeing to serve at least four more years
thrift savings plan contributions
BRS thrift savings plan
The Blended retirement system includes TSP contributions with two year cliff vesting
auto 1% employer contribution after 6 months lasts for 26 years
after two years, DOD(Department of defense) adds 4% match(now totaling up to 5%). accounts 100% vested after 2 years of service.
Default fund is a lifecycle fund in TSP with 5% auto-enrollment contribution
roth elective deferrals allowed
Thrift savings plan L FUND
TSP have auto contributions of 5% into this L fund for people who do nothing. Can be changed at any time.
L funds start at 2025 and continue in 5 year increments to 2065
L income fund is essentially 75% fixed income (G and F funds) and 25% equities (C,S, and I funds
TSP core funds and fees
tsp has 5 core funds options and then lifestyle funds and an income fund where the allocation stays the same
G- government securities(capital preservation with returns above short term us treasury securities)
F- fixed income( designed to match the performance of the Bloomberg Barclays us aggregate bond index
C- common stock designed to match the performance of the S&P 500 index
S- small cap stock(Designed to match the performance of the Dow Jones US completion Total Stock Market Index
I- International stock(designed to match the performance of the MSCI EAFE index
the TSP has extremely low annual fees due to its large size
National Guard and Reserve Retirement benefits
part time pay
skills training
Tricare reserve select health coverage when not on active duty
education( members of 6 years can get 3 years of educational assistance)
commissary and exchange privileges(food/department store shopping
BRS
Va benefits
veteran affairs
GI Bill(education related):
Va home loans: no down payment, but increased initial mortgage insurance fees
life insurance for service members and family
health care
military health care
Tricare covers
illness, injuries, functionality, quality of life
family members can be eligible
Federal government employees
Importance of GS(general schedule) job including classifiactions including “steps”
Full range of employee benefits
federal government retirement plans
FERS for new hires since 1984. CSRS essentially for those continuously hired since before 1984
New hires since essentially 1984 are in social security. Those hired prior to 1984 were not in social security
FERS
how are retirement benefits determined under this plan
1% of the high 3 years times the number of years worked
The defined benefit plan for federal gov employees entering service in 1984 or later
state and local government benefits
insurance variability
defined benefit plans
will they actually stay a long time? Rule of 80/rule of 90
did the municipality opt out of social security? if so, the WEP and GPO come into play. Very few that opted out of social security opted out of Medicare
public safety officers might be able to retire at 50 without the 10% EWP
possible underfunding issues
457(b) quirks
usually not subject to the 10% EWP
Employee contribution limit is also the maximum contribution for the worker and the employer
funding a 457(b) does not make you an active participant for IRA deductibility
contributions to a 457 plan do not limit your ability to contribute to a 403(b), 401(k), etc
may include independent contractors
403(b) plans
often used for educational employees(k-12) and or public universities
investment limited to mutual funds and annuities
normal maximum worker contribution depends on age
20,500 for those under age 50 in 2022 with an age 50 catch up of 6,500
special long service catch up for those with a least 15 years of service with a qualified, not for profit employer(HER organization- health care, education, and religion
original intent of social security system
created in 1935 with intent of protecting families from poverty after a workers retreiemnt
total fica tax is ___. the employer and employee each pay____ for old age, survivors and disability insurance(OASDI) and _____ each for hospital insurance
15.3%
6.2%
1.45%
social security wage base is ______________
147k
fred makes 100k working for ABC corp. How much fica does he pay as an employee
100k * .0765=7,650
discuss important role social security plays in planning for retirement
social security represents half or more of total retirement income for 53% of married couples and 74% for unmarried. social security is for most retirees only source of income that protects from inflation, market risk and longevity risk.
social security important ages
50- when disabled surviving spouses can start receiving retirement benefits(71.5% of pia if starting this early)
60- nondisabled survivors can receive benefits
62- earliest one can start receiving benefits at reduced rate. if you are disabled before reaching 62, you can qualifiy for ss benefits with fewer than 40 credit
65-67- full retirement age depending on birth year
70- delayed retirement age. This is max benefit you can get.
explain COLA associated with social security
There is a cost of living adjustment that accounts for inflation as reflected by CPI
you calculate minimum number of credits needed by each age by subtracting age by
22
discuss factors that one should consider when deciding whether to file for the social security retirement benefit
current resources
life expectancy
breakeven age
whether you are still employed(earnings test reduction)
what does breakeven age mean as it relates to social security retirement benefits
the age at which the total value of the higher benefits you will receive from delaying benefits starts to exceed what you would have received if you collected payments sooner.
what are the earned income restrictions
in 2022, if you are under your FRA, you will lose $1 in ss benefits for every $2 earned above the earnings cop of 19,560(indexed to inflation)
what is provisional income
a calculated figure used to determine whether a portion of social security benefits are taxable
calculated as your adjusted gross income plus tax exempt income(muni bonds and excluded foreign income) plus one half of your social security benefits
tax rate in relation to provisional income
25k single/32k married= no social security income taxable
25k-34k single(32-44 married)= 50%
more than 34k single(44 married)= 85%
family maximum
maximum monthly amount that can be paid on an individual workers record; it includes all benefits paid to family members of the wage earner, both while the earner is alive and after death
explain when the windfall elimination provision may come into play
WEP applies when an individual is eligible for social security due to their work in a covered position but is also receiving a pension from work at a noncovered position. Due to WEP, any pension they received based on their government work may reduce social security benefits.
for 2022 max reduction under provision is $512 per month, or one half monthly pension benefit, whichever is less.
Amount of reduction depends on how many years worked in covered position and earned “substantial earnings”.
WEP impact is reduced for each year over 20 of substantial earnings you have in covered position.
completly phased out for individuals who have 30+ years substantial earnings in covered position
when will government pension offset come into play
GPO will apply is cases where individual qualifies for a pension based on their own non social security covered employment and a social security spousal benefit based on a spouses work in social security covered employment. GPO provision will reduce the spousal or survivor benefit by 2/3 of the amount of the pension
tax benefit military with residence
active duty members frequently move and can claim prior state residence as home of record. If they end up in state with no income tax then they can claim that state for rest of careers.
combat zone tax exclusion
working in a combat zone for just a day of the month entitles entire months pay to be excluded from taxable income
grey area reservists
member of the reserve component of the military who has completed their drilling but has not yet started collecting military retirement pay
post 9/11 gi bill benefits include
tuition and fees
money for housing
money for books and supplies
money to move from a rural area to go to school
Montgomery GI Bill
may get up to 36 months of education benefits paid monthly
Veteran affairs disability
VA disability offers a monthly tax free payment to veterans who become sick or injured while serving in the military and to those whose service made an existing condition worse
VA other benefits
veterans association provides benefits for burials
pensions for certain wartime veterans.
support for veteran small business
different types of military discharge
honorably discharge- highest status
general discharge under honorable conditions- person mostly served well but there were areas of difficulty.
other than honorable discharge- major problem happened. Forbids reentry and negative implications for future employment
bad conduct discharge- court involved and may be prison
dishonorably discharged-all military benefits forfeited . worst category
3 main compensation categories for military personnel
basic pay
allowances
special/incentive pay
which department of defense form is used when military members separate from service
DD 214 is the doc used
name government program that helps military members transition out of military
TAP- Transition Assistance program
What are the 4 types of benefits under FERS
Full retirement annuity
Reduced benefits for early retirement
Deferred benefits for separating from federal service
Annuity supplement for long term employees
Full retirement annuity
Type of benefit under FERS
1% of the high 3 years times the number of years of work
Reduced benefits for early retirement
People with 10 years of service can retire early if they have reached minimum retirement age. 5%/year reduction in benefits
FERS benefit
Deferred benefits for separating from federal service
FERS benefit
Employees with at least 5 years of service can start receiving benefits at age 62
10 years can start at minimum retirement age with 5% reduction per year before turning 62
Annuity supplement for long term employees
FERS benefit
Long-term employees receive an additional retirement annuity amount. Available at age 55 for those with at least 30 years of service and at age 60, 20 years of service
CSRS
Civil service retirement act
In 1920 established retirement system for federal employees. It was replaced by FERS
CSRS is defined benefit plan
Reduced survivor benefits for CSRS AND FERS
both allow retiree to split annuity into survivor and non Survivor benefits
Disability benefits under FERS
Those with at least 18 months of service with the federal government under FERS are eligible for disability retirement benefits
explain how the number of federal employees compares to the number of state and local gov employees
there are about 6.7 times more state and local then civilian fed employees.
what is the name for the classification system for federal civil service employees
general schedule classification (GS Levels). The gs level ranges from gs-1 to gs-5
name 2 types of defined benefit retirement plans for federal civil employees .
FERS(benefits don’t get reduced because they were contributing to social security)
CSRS- there might be a reduction because they werent paying into it.
Do CSRS recipients receive Medicare coverage
yes, even though the government did not have their in employees paying into social security, all fed employees were paying into medicare
who has retirement benefits under FERS
employees who entered service with the federal government in 1984 or later
Selena worked for fed gov for 30 years. highest consecutive 3 years average was 50k. what is her monthly retirement benefit if she retires at 62 or later
50,000* .01*30=15,000 per year
How are spousal survivor benefits calculated under FERS
under FERS the survivor benefit is only 50%(not 55% like CSRS) and it costs 10% of the full retirement amount. Alternatively, the survivor benefit for a spouse can be 25%. This costs 5% of the initial retirement amount
rules for contributions to thrift savings plan
fed gov contributes 1%.
gov has 100% match for up to 3% of employees compensation and 50% match of next 2%
contribution limit is 10% of compensation(max 20500 for workers under 50 with catch up of 6500 for over 50)
roth elective deferrals and in plan roth conversions
2 important issues with state and local pension plans
pension plans for some state and local gov employers can reduce their workers benefits from social security according to WEP and GPO provisions.
many defined benefit plans are underfunded and people counting on these plans need to be aware of that.
contribution limits for 403b and special catch up provisions
max elective deferal by workers under age 50 is limited to 20,500
regular catch up of 6500 for 50 and up
someone who has worked for same qualifying(HER) employer for at least 15 years to increase their contribution limit by an amount equal to the lesser of 3k, 15k reduced by amounts previously deferred under the special catch up , or 5k multiplied by the employees years of service with the employer, less the sum of all prior salary deferrals. Her organization are involved in health care education and religion. public school employees who serve for at least 15 years are eligible for this catch up.
contribution rules for 457 plans
similar to 401k and 403b. employee making over 20,500 can contribute up to 20,500 in 2022. 6500 catch up
special catch up- during last 3 years of employment before plans normal retirement age, limit of elective deferrals is increased to the lesser of compensation or twice the amount of the regular elective deferral limit(41k in 2022) or
the sum of the otherwise applicable limit for the year plus the amount by which the applicable limit in the preceding years exceeded the participants actual deferral for those years. In other words, this catch up is limited to unused deferrals in prior years
unique issues to 457 plan
withdrawals usually not subject to 10% early withdrawal penalty. if money is rolled into a 457 plan from retirement account or ira, that money and its earnings are subject to 10% EWP
the 20,500 limit for employees in 2022 is actually also the limit for employer and employee contributions
contributions to a 457b do not make the worker an active participant in an employer retirement plan
some people work with more than one employer during the year. The normal rules say workers below the age of 50 are usually limited to total salary deferrals in 2022 of 20,500 cumulatively between 401k and 403bs. However, the contributions to 457 plans do not limit the contributions to other employer plans like a 401k 403b or simple plan
What is the unit benefit formula percentage used by the BRS program?
2%
Since 1982, the growth rate of federal employees has
remained relatively flat
Social Security provides individuals with protection against which of the following risks?
inflation risk
longevity risk
market risk
