Maximizing the Client Experience During the Retirement Planning Process

Question 1

Ordinary Annuity vs. Annuity Due

Answer 1

1) An annuity is paid at the beginning of the period. (2) An ordinary annuity is paid at the end of the period. (3) All else remaining equal, the present value of the annuity due is larger than the value of the ordinary annuity, because the recipient has the use of the money for the length of the period.

Question 2

Retirement Planning Process

Answer 2

(1) Establish and define the client-counselor relationship, (2) gather client data and determine goals and expectations, (3) determine the client’s financial status by analyzing and evaluating, (4) Develop and present the retirement plan, (5) Implement the plan, (6) Monitor the plan

Question 3

Retirement Plan Qualities

Answer 3

(1) Specific, (2) Prioritized

Question 4

Statement of Financial Position components

Answer 4

(1) Assets, (2) Liabilities, and (3) Net Worth

Question 5

Cash Flow Statement

Answer 5

(1) The cash flow statement is a financial statement that describes cash inflow (from salaries, investment returns, rents, etc.) and cash outflows (for living expenses, loan payments, savings, taxes, etc. (2) Cash inflows - Cash outflows = Net Cash surplus (deficit)

Question 6

Income Replacement Percentages

Answer 6

(1) Income replacement percentages are rough guides used in determining the amount of income needed in retirement, using pre-retirement income as a base. (2) For example, most American retirees need 70-80% of pre-retirement income in order to maintain current living standards.

Question 7

Caution with Income Replacement Percentages

Answer 7

(1) Income replacement percentages are simply “rules of thumb.” (2) Because their retirement lifestyle goals differ greatly, no two clients will need the same percentage of pre-retirement income to make ends meet. (3) Income replacement percentages are useful in influencing and thinking of younger clients. (4) Knowing income and assets are not enough for calculating income replacement percentages.

Question 8

Client Expenses likely to decrease during retirement

Answer 8

(1) Transportation Costs: train, bus, and auto expenses will likely drop to work ends. A car may be eliminated. (2) Food and Housing costs: because mortgages are paid and children are out of the home (3) Term life insurance and disability premiums: can typically be stopped entirely (4) Dry cleaning bills, professional fees, clothing expenses, and other costs associated with working diminish.

Question 9

Client Expenses likely to increase during retirement

Answer 9

(1) Medical and dental expenses, and (2) Expenditures on hobbies, recreation, and travel.

Question 10

Calculating post-retirement income

Answer 10

As you go through the statement of financial position. (1) Identify current assets that could be used to generate retirement income. (2) Subtract any non-amortized liabilities tied to assets, such as margin accounts, (3) Group resources according to how they will be taxed upon distribution.

Question 11

Assets that should not be included as retirement income producers

Answer 11

When looking through statement of financial position to identify assets that might generate income during retirement, do not include: (1) Emergency Funds, (2) College Funds, (3) Personal Residence

Question 12

Strategies for living off Retirement Assets

Answer 12

(1) Capital Preservation: followers of this strategy live off the income produced by their assets without touching the principal. This ensures they will not outlive their incomes. A very large asset pool is required to follow this strategy. (2) Capital Utilization: both income and principal will be tapped for retirement income expenses. These retirees must make a good estimate of their life spans; otherwise they risk superannuation.

Question 13

Prudent Approach for Estimating Retirement Planning

Answer 13

(1) Use average life expectancy figures as a starting point, (2) Make conservative adjustments based upon the client’s personal health, habits (smoking, drinking, exercise, current fitness, etc.) and family history of longevity, (3) Add 5 to 10 years for good measure, (4) If a couple is involves, base the estimate of the life of the individual expected to live the longest.

Question 14

Financial Goals that may conflict with retirement goals

Answer 14

(1) Housing, (2) Education, (3) Emergency Funds, (4) Care of elderly parents or a disabled child

Question 15

Competing Financial Goals

Answer 15

(1) Prioritize the goals, and (2) Sequence them.

Question 16

Leased Property and Equipment

Answer 16

Typically shown in the footnotes of the statement of financial position.

Question 17

Saving on a level basis

Answer 17

Means do not use the inflation adjusted rate of return. Use the return given and ignore inflation.