Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CRPC > Module 1 Chapter 1-3 > Flashcards

Module 1 Chapter 1-3 Flashcards

1
Q

Average retirement saving

A

48% 55 or older have less than $100,000

1/3rd less than 25,000

2016 Retirement Confidence Survey:
21% of Americans are confident in being able to retire

Social security supplies only 39% of pre retirement income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Planning for retirement if you have 20 years

A

Emergency fund of 3-6 months

Contribute enough to 401K to get match

Consider consolidating accounts and have a diversified portfolio of assets and tax type

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

If you have 10 years

A

Brainstorm big ticket financial items

Review estate documents for wills, POA, living will, health care proxy, revocable trusts

Reallocate investment portfolio with focus on PER risk, and expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

5 years out

A

Identify retirement needs and wants, make sure you can meet needs easily

5 year plan to increase funds

Explore social security option and double check earnings reported

Run tax projections to make sure taking advantage or IRAs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Trends in Retirement

A
  1. Defined benefit plans (monthly income) are less likely. Being replaced by defined contribution plans, which have risks borne by employees
  2. Increased planning for longevity (most people not prepared)
  3. Expansion of employer-sponsored financial wellness initiatives (more happy employee benefits company)
  4. Expansion of plan distribution options- More interest in these types of vehicles
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Chapter 1 review

  1. Identify three trends
  2. Challenges associated with shift from defined benefit to defined contribution
A
  1. -Defined benefits plans are becoming more rare
    - Expansion of interest in distribution assets
    - expansion of employee sponsored financial wellness programs
    - Increased focus on longevity
  2. Instead of a plan that focuses on income in defined benefit plans, employers are shifting to defined contribution which requires employees to take more responsibility,
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Six steps to retirement

A

EGADIM (EGAD I Made it)

  1. Establishing and defining client-planner relationship
  2. Gathering client data including goals
  3. Analyzing and evaluating the client’s financial status
  4. Developing and presenting recommendations
  5. Implementing recommendations
  6. Monitoring the implemented recommendations as necessary

If any changes need to be made return to step 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Role of retirement counselor

A

Make recommendations based on client’s needs, goals, attitudes and resources

Trust is gained through- integrity, ability to provide technical advice, experience, and concern for client

Should mutually understand the scope of services being offered
Accomplished by:
-Identifying the services to be offered
-disclosing counselor compensation
-client and counselor relationships
-establish duration of engagement
-any other info to define and limit scope

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Chapter 2 Review

Six Steps of retirement planning

A
  • Establish and define client relationship
  • Gathering client data
  • Analyze and evaluate financial situation
  • Develop/present recommendations
  • Implementing recommendations
  • Monitor recommendations and make changes if needed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Gathering client Data (step 2)

A

Should gather the following info:

  • Family info and basic
  • Assets, liabilities and net worth
  • future employment and comp
  • info on owned business
  • insurance situation
  • current retirement plans, savings and investments
  • anticipated retirement date/children college
  • current health
  • risk tolerance (should revisit occasionally)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Statement of Financial Position (balance sheet)

A

Assets, liabilities, net worth

Assets should include things not fully paid for and shown at FMV

Long term liabilities are included on BS, Short term on Cash Flow statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Different Types of assets

A

Cash and cash equivalents

Invested assets

Use Assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Cash Flow Statement

A

Cash inflows - Cash outflows= net Cash Flow

Represents a period of time (BS represents a specific date)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Determining Goals

A

Goals help measure success overtime and prevent underachievement

Should also PRIORITIZE and SPECIFY when they will occur #SMARTGoals

Foundation goals- Goals that are needs based

Lifestyle or discretionary goals tend to be wants and fall behind foundation goals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Hierarchy of Financial Goals

A

Bottom to top:

  1. Basic Needs
  2. Safety (insurance, wills, emergency funds)
  3. Managing finances- Credit card, mortgage and other debts
  4. Esteem- Increased savings for discretionary goals
  5. Self actualization
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Chapter 3 Questions
1. Identify and describe three components of financial position

  1. Describe the cash flow statement and the equation that defines it
  2. What two qualities should retirement goals have to make them useful
A
  1. Assets- Include cash/cash equivalents, Invested assets and use assets

Liabilities- Long term liabilities, usually short term are only put on cash flow statement

Net worth= Assets- Liabilities

  1. Cash flow statement= Inflows-outflows= net cash flow

Determines whether you are a net saver or spender

  1. They should be specific as to how much and when they are to be achieved.

They should also be prioritize in order of basic needs , safety, managing finances, esteem and self actualization

17
Q

Chapter 4: Analyzing client information to determine savings needs

Income Needs

A

Income needs often are not static throughout retirement and can be sometimes higher

Recommended that a budget is made analyzing with costs of living expenses estimated out

Paid off home is not expense fee with taxes, utilities insurance and repairs

Food, housing, transportation, apparel, personal care all typically fall in retirement

Health care as expected usually increases

18
Q

Income replacement percentages

A

Most financial advisers state that retirees need 70% to 80% of pre-retirement income to support similar lifestyle

50% of workers believe they will need less than $500k to provide a comfortable retirement

Clients will vary greatly based on retirement goals

Most useful to young clients for long term planning

19
Q

4 steps for determining a retirement savings need

A
  1. Calculate net annual retirement income needed- Subtract sources of inflation adjusted income (Social Security and Pension Benefits)
  2. Adjust income deficit for inflation over preretirement period- Determine income needed for first year of retirement
  3. Determine Total Retirement Fund Needed- Calculate lump sum on day one. This should generate annual income payment equal to income deficit, which will grow with inflation
  4. Determine Savings amount needed
    - Annual level savings amount or
    - Serial payment adjusted for inflation
20
Q

Step 1: Calculate net annual retirement income need

A

Subtract inflation-adjusted (Social security and pension) income from total income need

Rare case would be this income is enough to satisfy all expenses

Income need - Social security = retirement income deficit

21
Q

Step 2: Adjust income deficit for inflation over pre-retirement period

A

Adjusting today’s deficit for inflation

PV * (1 + inflation)^Years till retirement

Or on financial calculator need to enter
PV, N (years), I/YR (inflation

And solve for FV

If income deficit is 22,000 and there are 22 years till retirement. Inflation is expected to be 3% then

22,000 * (1.03)^22= 42,154 needed in year 1

22
Q

Step 3: Determine total retirement fund needed

A

Using first year retirement amount to determine lump sum needed for entire term

If all assumptions are correct the retiree would have enough on an inflation adjusted period to retire

Serial payment would be each years payout

Final amount would be 0

This approach is called capital utilization

Calculation instructions:
1. Always have begin marked on calculator

  1. Use an inflation adjusted yield

(1 + ROR -1) X 100
(/1+ I )

After calculating this rate on the calculator just press i/yr to enter as the inflation-adjusted yield

If assuming 7% return and 3% inflation, inflation adjusted yield is 3.8835%. Taking that rate and the first year payout needed of $42,154, you can solve for the lump sum needed for a 30 year retirement.

42,154 pmt
30 N
3.8835 I/YR

Solve for PV= 768,064

Most use this capital utilization strategy that draws off yield and principal

23
Q

Capital preservation

A

Living completely off of retirement assets without diminishing them

If you want the 768,064 after the 30 year period, you would discount it back

768064 FV
30 N
7 I/YR

PV= 100,898

$100,898 is what would be needed in savings to grow to 768,064 in 30 years assuming no inflation

24
Q

Step 4: Determine Savings Amount Needed

Level savings approach

A

Take lump sum amount needed at retirement and calculate the needed amount to be saved per payment

Determine year one amount:
22,000 after inflation adjusted income
22 years till retirement 3% I/yr
22,000(13%)^22= 42,154

Determine total needed
$42,154 Year 1m 
Annual return 7% Inflation 3%
(1+7%)/  -1 X100= 3.8853% 
(1+3%)
Inflation adjusted return is 3.8853%
Use calculator and plug in
3.8853% I/yr
30 n (years till death)
42,154 PM (amount used in year 1)
Solve for PV= $768,064
Total amount needed is $768,064
Determine Payment for annual level savings
Calculator
768,064 FV (lump-sum begin)
22 n (years till retirement)
7 I/YR (return on savings per year)
Solve for PMT in END mode

Payment would be $15,673

Non Calculator
FV= PMT * (1 + R)^22 -1 / R
768,064= PMT * (1+.07)^22 -1 / .07
768,064= 49.0057x
PMT= 15,673
25
Q

Serial saving approach

A

Making payment each year that increase with inflation

Steps
1. Deflate the lump-sum amount that reflects inflation
FV of 768,064 
N is 22
I/YR is 3
Solve for PV= $400,847
  1. Calculate Payment using Deflated lump sum as FV, and inflation adjusted return as I/YR
END Mode
400,847 FV
22 N
3.8835 I/YR
Solve for Payment= $11,863.24
  1. Add inflation for each year beginning with year 1

Year 1= 11,863.24 * 1.03 = 12,219.14
Year 2= 12,219.14 * 1.03= 12,585.71

26
Q

Payments vs Savings

A

Payments are assumed to be at the beginning of the period

Savings are assumed to be at the end of the period

IMPORTANT FOR CALCULATOR COMPUTATIONS

27
Q

Chapter 4 Review Questions

  1. What are income replacement percentages?
  2. Why should caution be used in applying income replacement percentages?
  3. Identify one or two expenses that will decrease in retirement? Increase?
  4. Which of a clients assets should not be included in any list of retirement income producers?
  5. What are the names and characteristics of the two strategies clients can employ in living off their assets?
A
  1. The percentage of pre retirement income that needs to be accounted for in savings. Usually somewhere between 70-90% a year
  2. There are a lot of factors that go into determining the amount needed after retirement. Including the lifestyle that the employee wants to live in retirement, spending habits, and liabilities in retirement
  3. Decrease: Food, Housing
    Increase: Health care, Travel
  4. Emergency funds, funds intended for college, value of personal residence
    1. Capital Preservation- Using income produced by one’s assets to live on during retirement without the capital base decreasing
  6. Capital utilization- using retirement funds and the return on the portfolio to pay for retirement expense. Risk outliving money
28
Q

Chapter 5: Steps 4, 5, 6

Step 4: Develop and Present Financial Planning Recommendations and/or alternatives

Other financial goals that will compete for attention

A
  1. Down payment for a home
  2. Education for children’s college
  3. Emergency funds
  4. Care of elderly parents or a disabled child
29
Q

What if the goal is not attainable?

A

Reduce the retirement income need by:

  1. Retiring later
  2. Reducing lifestyle cost of retirement
  3. Reduce or eliminate bequests to children

Or

Increase the resources available during retirement:

  1. Do part-time work during retirement
  2. Spend less and save more prior to retirement
  3. Invest personal retirement savings more aggressively
30
Q

Make it the clients plan and present the plan

A

Plan must make sense to the client

Make clear assumption and be in clients best interest

Recognize need to meet other goals

Presenting the plan:

  1. Face to face meeting
  2. Present the plan as a document stating assumptions, how plan will be invested, include latest financial statement
  3. Discuss each component to verify acceptance and to clear up misunderstandings
  4. Arrange a follow up
31
Q

Step 5: Implement the Financial Plan Recommendations

A

Create a to do list of things to accomplish

Prioritized and with target dates

32
Q

Monitor the Financial Plan Recommendations

A

Monitor performance of investments, changes in tax law, available products and general economic environment

33
Q

Chapter 5 Review

  1. Identify several financial goals that may conflict with retirement goals
  2. Describe a method for eventually realizing several competing financial goals.
A
  1. Education of children, Emergency Fund, Buying a home

2. Prioritize the goals and sequence them in order of importance

34
Q

Level Payment Method

A

Inflation is not taken into account because you are looking to create a specific amount

35
Q

Questions Missed on Module 1 Exam

A

Uhoh

36
Q

Mary wants to retire the first of next year. She wants to receive monthly retirement income payments on the first day of each month. To solve the amount of capital required to provide her the income she wants, you need to solve for

A

annuity due—set calculator at begin.

To solve this problem, you would need to solve for annuity due, and set the calculator at begin.

37
Q

During retirement, John wants to receive $50,000 at the end of each year for the rest of his life. To calculate the amount that he will need to save, you need to solve for

A

ordinary annuity—set calculator at end.

You do need to set the calculator in END mode and solve for ordinary annuity. If this were asking you to solve for an annuity due (where payments occur at the beginning of the period), you would set calculator for BEG.

38
Q
  1. John has been promised a stream of $30,000 annual payments at the beginning of each year for a period of 20 years. The present value of these payments, discounted at a rate of 6%, is
    (LO 1-4)
A

$364,743.

Set calculator to BEG, 1 payment per year, and C/ALL

Keystrokes:
30000 PMT 
20N 
6 I/YR 
PV Solution: $364,743

CRPC (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions