Module 1 Chapter Reviews Flashcards
Identify three current trends in retirement planning.
(1) Businesses are less likely to offer defined benefit (DB) plans.
(2) Increased focus on planning for longevity.
- People are living longer
(3) Expansion of plan distribution options.
- There are more retirement savings vehicles available today.
Discus the challenges associated with the shift from defined benefit plans to defined contribution plans.
Defined benefit plans give participants life time income or pensions, but the costs and risks are borne by the company. As longevity increases, this risk/cost has become too much for the company to bear.
Defined contribution plans put the risk/cost on the employee instead. Most of these employees have little or no financial expertise.
What is a defined benefit plan?
&
What is a defined contribution plan?
Defined benefit plans: provide participants with guaranteed lifetime income or a pension.
Defined contribution plans: are investment accounts that focus on investment returns instead of an income goal.
Identify the six steps of the retirement planning process.
E.G.A.D.I.M.
(E GAD I Made it)
E - Establish client relationship
G - Gather data
A - Analyze data
D - Develop plan
I - Implement plan
M - Monitor plan
Explain: E - Establish client relationship
Identify the services to be provided.
Disclose the compensation.
Determine the client/counselor responsibilities.
Establish the duration of the relationship.
Provide any material information necessary to define the limit/scope.
Explain: G - Gather data
Data is the raw unprocessed information used to:
- Understand the client
- Help the client form valid goals and expectations
- Develop an appropriate plan and recommendations
Explain: A - Analyze data
You must analyze the client’s data to form all material information like:
- Income needs
& - Retirement savings needs
Explain: D - Develop/Present plan
The plan should be clear to the client and presented to them in a way that makes sense to the client.
Explain: I - Implement plan
This is the step in which you put the plan to work and begin the plan
Explain: M - Monitor plan
The plan should be reviewed often and monitored to make sure that it is still on track or needs adjustments.
Identify and describe the three key components of a statement of financial position.
The statement of financial position is also known as the Balance Sheet or Net Worth Statement.
The three components are:
Assets, Liabilities, and Net Worth
Assets - Liabilities = Net Worth
Describe the cash flow statement.
The cash flow statement helps identify the clients current spending habits of inflows and outflows.
What is the equation that defines the cash flow statement?
Cash Inflows - Cash Outflows = Net Cash Flow (or Deficit)
What two qualities should retirement goals have to make them useful in planning?
Goals should be specific:
- Goals should have an amount of money and time horizon specified.
- Goals should be S.M.A.R.T (Specific, Measurable, Action-oriented, Realistic, and Time-oriented).
Goals should be prioritized:
- Each goal should be ranked in order of importance in case there are not enough resources to achieve all goals.
What are S.M.A.R.T goals?
Specific, Measurable, Action-oriented, realistic, and Time-oriented.
What are the “income replacement percentages”?
Income replacement percentages (a.k.a. replacement ratios) are the percentage of your preretirement income that is earned or needs to be earned in retirement.
Why should caution be used in applying income replacement percentages?
The income replacement percentage can vary widely:
- Income needs vary in retirement depending on how the client plans to inflate or deflate their lifestyle in retirement.
- Unexpected costs for healthcare and maintenance.
In estimating a client’s retirement income needs, identify the current expenses that are likely to decrease during retirement.
- Less savings required
- Less income taxes
- Less expenses on education, dry cleaning, and apparel
- Less car expenses, maintenance, registration
In estimating a client’s retirement income needs, identify the current expenses that are likely to increase during retirement.
- Travel
- Activities (every day is Saturday)
- Medical expenses
Which of a client’s assets should not be included in any list of retirement income producers?
Emergency funds should not be included in the retirement income producers calculations.
What are the names and characteristics of the two strategies clients can employ in living off their retirement assets?
Capital Utilization and Capital Preservation:
Capital Utilization: is living off of the interest and principal to deplete the funds over the course of the clients lifetime
Capital Preservation: is living off of only the interest/gains from investments so that you do not deplete your retirement funds.
Identify several financial goals that may conflict with retirement goals.
The most common goals that conflict with retirement saving goals are:
- Housing
- Education
- Emergency funds
- Care for elderly or disabled family
Describe a method for eventually realizing several competing financial goals.
The best method used is to prioritize and sequence the clients goals.
