Retirement Planning - 3 Impact of Return Sequencing on Sustainability of Retirement Distributions

Question 1

What should you take into consideration when distribution planning is uncontrollable?

Answer 1

Sequence of Returns – the order in which returns are
earned

Question 2

What is a sequence of returns?

Answer 2

“Sequence” refers to the fact that the order and timing of poor investment returns can have a big impact on how long your retirement savings last. After all, a retirement portfolio generally isn’t just a lump of cash in a savings account that you draw inexorably down to zero.

Question 3

What should you take into consideration when distribution planning is uncontrollable?

Answer 3

Method of Withdrawal - how much to distribute
* Asset Allocation – consistency and the volatility of returns
* Method of Distributions – the order in which accounts are
used

Question 4

What are main points on ideal distribution planning?

Answer 4

Don’t Defer Too Much, Or Too Little
* Delaying RMDs indefinitely can drive up tax brackets in
later years
* Withdrawing too much can drive up tax
brackets now
* Optimal methods “fill” lower tax bracket buckets, and
defer the remainder
– Ideal balancing point depends on client income/wealth
– Roth conversions provide flexibility to fill tax buckets

Distribution methods are often very sensitive to client
goals
* Distribution methods should match client goals to
outcomes
* In practice, client tax situations may change from year
to year
– Sometimes adjustments may be made to distribution
methods to account for specific opportunities in the
tax year

Question 5

What other factors have recently been taken into consideration for distribution planning?

Answer 5

Legacy goals
– Market valuation
– Active risk management
– Options
– Annuities & other guarantees

Question 6

What are legacy goals?

Answer 6

Unlike other goals, legacy goals are one-time distributions rather than an annual distribution amount over a range of years. While these could be used as a single-distribution goal anywhere in a plan, we recommend setting these at the end of a plan

Question 7

What is return sequencing?

Answer 7

Return sequencing, is a phrase used to describe the year-over-year investment returns experienced by a portfolio for a select period, such as an annuity accumulation period, the five-year period prior to retirement or the 10-year period following retirement.

Question 8

Higher rates of inflation will result in the fund being spent in a _________ period of time.

Answer 8

shorter

Question 9

True or False: If inflation were to change from 3% to 3.5%, the funds would be extinguished in 26 years as opposed to the original 30 years

Answer 9

True

Question 10

What would happen if inflation dropped from 3% to 2%?

Answer 10

The funds would last a longer time (Ex. 35 years as opposed to 30 years)

Question 11

True or False: Disparities in the early years have a magnified effect, but the extent of volatility does not affect return sequencing.

Answer 11

False: Disparities in the early years and the extent of volatility have a magnified effect on return sequencing.