Retirement

Question 1

What happens to an individual after retirement?

Answer 1

1. decrease in income
2. exepenses remain
3. increase in health related expenses

Question 2

what are the 6 steps in retirement planning?

Answer 2

1. set lifestyle goal
2. collect related information
3. create a retirement budget
4. create a saving and investment plan
5. follow the plan
6. evaluate and revise the plan

Question 3

what is the replacement ratio?

Answer 3

the proportion of desired income after retirement compared to that before retirement (50-70%)

Question 4

how do you create the retirement budget (generally speaking)?

Answer 4

1. estimate total amount needed for retirement
2. estimate available savings and other sources of funds for retirement
3. calculate ADDITIONAL amount needed

4- calculate yearly savings

Question 5

which methods are there to estimate total amount needed during retirement years?

Answer 5

1. replacement ratio method: decide a % of current income that you want to have during retirement
2. expense method: post retirement projected expenses inflation adjusted - post retirement sources of funds

Question 6

list some available sources of funds for retiring individuals

Answer 6

1. current resources
   - cash and equivalents
   - financial assets
   - real estate
2. retirement specific resources
   - government pensions fund
   - social security
   - provident fund (basically a pension but paid lump sum)
   - retirement mutual fund
   - life insurance
3. legal severance pay (compensation provided at layoff)

Question 7

what are the 3 pitfalls/mistakes in retirement planning?

Answer 7

1. starting too late
2. putting away too little
3. investing too conservatively

Question 8

how do you decide on asset allocation mix?

Answer 8

depending on the risk tolerance level of clients. Unless there are major life events, asset allocation should not be changed substantially and frequently

Question 9

asset allocation for low, medium, and high risk tolerance

Answer 9

1. low risk tolerance
   30% cash
   40% bond
   30% stocks
2. medium risk tolerance
   20% cash
   30% bond
   50% stock
3. high risk tolerance
   10% cash
   20% bonds
   70% stock

Question 10

when does a transition of asset allocation usually happen?

Answer 10

during the transition to retirement. In general, three years before retirement, investors should start shifting some money from risky to less risky. They should do this in order to avoid unexpected losses

Question 11

what are some other factors affecting asset allocation for long term investments excluding risk tolerance?

Answer 11

1. stable income investors can hold more financial assets
2. later retirement age can bear more risks
3. higher income and take higher risk