Crpc 12: Retirement Cash Flow Considerations

Front 1

In addition to the financial factors, what are four key areas that play a significant role in the decision to retire?

Back 1

-social

-cultural

-Interpersonal/relational

-life fufillment

Front 2

Why might simply askin ga client when he or she wants to retire or asking what lifestyle they want in retirement yield frustrating results?

Back 2

Questions like these do not cause clients to fully consider what they really want and what truly is important to them

Front 3

What are some of th eeareas that should be addresseed when considering whether to receive SS at age 62 instead of at full retirment age?

Back 3

-lifestyle choises

-level of health

-actual level of income needed

-EVentual pension benefits that might offset decreased SS bens

-dollar differential between taking benefits early or waiting to full retirment age

Front 4

What is the SS break even point?

Back 4

The point (age) at which waiting to receive benefits makes more financial sense than starting at age 62 (or waiting beyond normal full retirment age).

Front 5

Approximately how much of a retiree's health care expenses will Medicare cover?

Back 5

Medicare can be expected to pay for roughly half of a retiree's health care expenses (not including LTC expenses)

Front 6

What is the most significant difference for the employee between a DB plan and a DC plan?

Back 6

With a DB plan, the EE knows what guaranteed retirement benefits he or she will receive. A DC plan doesn't guarantee a retirment income amount, and therefore creates a significant level of uncertainty into the retirment planning process.

Front 7

What are the three primary health care benefits offered by ers to retirees?

Back 7

-Health Reimbursment Account (HRA)

-Retiree Medical Accounts (RMA)

-Voluntary Employee Benefit Association (VEBA)

Front 8

Briefly describe the problem a retiree may have when using cash equivilaents to limit market risk

Back 8

Safety of principal is no tth econcern. However, decreased purchasing power as a result of inflation is a asignificant problem. Cash/cash equivs simply do not have th ability to keep pace wih inflation, especially when income taxation is included.

Front 9

Annuities can be a useful retirement planning tool. However, there are some potential problems. What are two potential negatives related to annuitites?

Back 9

-withdrawls made prior to 50.5 may be usbject to a 10% early withdrawl penalty

-taxable withdrawls are taxed as ordinary income, not capital gains

Front 10

Older workers may face the possibility of not being able to work for as long as they planned. In addition to social, cultural, and interpersonal issues, what are to of the concerns reltated to not being abel to work as long as planned?

Back 10

- Loss of income, an dits impact on overall retiremnt planning/funding

-Loss of health care benefits, especially if prior to Medicare eligibility

Front 11

What are questions that can be asked to understand and individual's retirment lifestyle goals?

Back 11

-What does retirment look like to to you?

-how do you see yourself spending time in retirrement

-How much do you plan to travel to see the grandchildre?

-Do you plan to make major changes, such as starting a business, getting a degree, or remodeling your home?

-What is that yo have always wanted to doo, and now will have time to accomplish?

Front 12

Mary has determined that she needs income of 5k per month for 25 years of retirement. She has determined that, wiht a 7% return, but not reflecting inflation, she will need a little more than 700k to fund her retirment. If she factors in a 3.5% rate of inflation, what will happen to the amount needed to fund her retirment?

Back 12

She will need slightly more than 1 mil to maintian an inflation adjusted budget with equal purchancing power:

300 N (25*12), .2818 I/YR (3.33816/12), 5000 PMT, PVAD=1,014,385. Note that if you do not immeditely enter the inflation adjusted return after making the calculation you will lose the accuracy giving you an ansswer of 1014390 (if you preset the calc for 12 compounding periods each year, enteree 3.3816 into I/YR)

Front 13

Using a 3.5% inflation rate, what will hapen to the purchasing power of 5k over a 25 year period?

Back 13

The purchasing pwer will have decreased to less than half of what it was at the beginnign of the pereiod (2116 opposed to 5k). To say it another way, in 25 yearas, it iwll requrei almost 12k to have the same purchaing power as 5k (assuiming 3.5% inflation)

Front 14

According to the Fidelity study, what amount of medical expenses can a 65 y.o couple expect over the remainder of a normal life expectancy?

Back 14

(85) can expect to have medical expenses in retirmetn of around 220k. This amount IDs costs in excess of what is covered by medicare.

Front 15

Andersons. 50y.o couple w/ annual retirment budget of 95k. They want to plan for 25 year retirment and assume 3.5% inflation and 7% LT return. How much money will they need at 65?

Back 15

Step 1: Find inflated value of 95k in 15 years (they are 50, start retirment at 65). 15 N; 3.5 I; 95k PV; solve for FV= 159,158.

Step 2: Calculate the PVAD of 25 years of payments, using a first payment amount of 159,158 and factoring both inflation and the rate of return. This requries two steps. First determine the inflation adjusted interest rate, then calculatie the serial payment PVAD. To determine the ifnation adnjusted interest rate, do the following:

([ 1.07/1.035]-1)*100=

([1.0338]-1)*100= (.0338)*100=3.3816.

So the inflation-adjusted interest rate is 3.3816. This is what we use to calculate the PVAD for the usm requred at the beginning of retirment.

25 N; 3.3816 I; 159,158 PM; PVAD = 2,747,053. They will need just over 2.7 million in 15 years to fully fund their retirment budget.

Front 16

Approximately what amount has the average American saved toward retirment?

Back 16

Less than 100k. Many less than 10k.

Front 17

Since hte early 1900s, what has been the range of inflation?

Back 17

-10% to +20%. The average is 3-4%.

Front 18

What is one signifciant problem wiht the reliability of Monte CArlo analysis?

Back 18

The old computer programmer's phriase GIGO: garbage in, garbage out. Any mehtod of analysis, incluidng Monte Carlo, is only as good as the assumptions and dtat used. Another concern relates to the long-standing waarning: past performance does not guarnatee future results. Even though Monte Carlo analysis uses sophisticated algorithms, it still cannot guarantee what will happen in the future.

Front 19

According to Robert Curtis in the Retirement Income Redesigned book, what ar eth top five core spteps in the the retirmetn lifestyle planning process?

Back 19

1. Help clients create a picture of theri goals

2. Create a base plan using average returns

3. Stress test their plan for return-sequence risk and unsystematic risks

4. Repeat steps 2 and 3 as requried to create the plan that works for them.

5. Use a monte carlo to compare relative results (if helpful for that clinet)

Front 20

Assume that an indivdiual would like to lea ve a bequest (at death) of 500k to a charity. the individual is 65, expects to live for 25 more years and earn 7%. How much will the indiviudal need to deposit today in order to give the 500k to charity 25 years from now?

Back 20

If the indviidual deposits 92,124.59 and earns 7% it will grow to 500k in 25 years.

25 n, 7 I/YR, 500k FV, PV= 92,124.59.

If individual wanted to give the ifnalted value of 500k (at 3.5%) the starting point would be 1,181,623 discouting this amount back to today at 7%, the deposit would have to be 217,712.97.

Front 21

What was the safe inital withdrawl rate determined in early studies by William Bengen?

Back 21

Early work in this are by WB put a safe initial withdrawl rate at a little more than 4% for an individual in the 60-65 age bracket. Subsequent studies suggest that the withdrawl rate may need to be adjusted based on real returns and inflation during a specific retiremnt period.

Front 22

What are the seven factors or layers Bengen suggests in building an intitla withdrawl rate layer cake?

Back 22

- withdrawl schem (foundation layer)

-asset allocation

-Success rate

-Rebalancing interval

-Super-investor (normally capable of better-than-avg returns)

-desire to leave a legacy

-time horizon

Front 23

What is the range of safe withdrawl rates suggested by Bengen's layer cake study?

Back 23

Depending on the indvidual's response to the seven factors, the safe intital withdrawl rate ranges from a base rate of 4.15% to a maximum rate of 7%. More conservative indvidiuals might waqnt to begin at the 4% level.

Front 24

What are the three parts of Guyton's defintion of a safe intital withdrawl rate?

Back 24

-never requriring a reduction in withdrawls from any previous year

-allowing for systematic increases to offset inflation

-maintaining the portfolio for at least 40 years

Front 25

Jon Guyton's work ID's two confidence standardar percentages: 99 and 95%. What ar eth eintital withdrawl rate (IWR) maximum percentages based on teh three different equity allocations?

Back 25

99% Confidence Standard, Max IWR is:

-4.5-4.6% w/ 50% EQT

-5.2-5.3% w/ 65% EQT

-4.7-5.6% w/ 80% EQT

95%:

3.8% w/ 50% eqt

5.5-5.7% w/ 65% EQT

5.6-6.2% w/ 80% EQT

Front 26

What does Guyton mean when he requires a whitdrawl rate freeze based on poor market returns?

Back 26

A withdrawl rate freeze means that there is no inflation-related wd rate increase following a yea rin which th eportfolio experiences a negative return. The obvious reason for this is an attempt to build sustainabilty into the retirmetn portfolio, while maximizing annual withdrawls.

Front 27

Discuss the difference between a cash flow-based portfolio and an income-based portfolio.

Back 27

A cf poertfolio is a total return portfolio designed to fund a retirmetn budget on a year-by-year basis. Money for th ebudget may come from many sources, includign dividneds, increases in an eqt portfolio, rental receipts, and the liquidation of assets. When a portfolio is structured around cash flow, it is trying to balance income generation, whil emaximizing growth, within reasonable safety parameters, so as to provide th ehgihest levels of inflation-adjusted funding for as long as needed.

Portfolios structured to provide income are primarily nvested in income-producing investments such as bonds. there are two primary problems with an income portfolio. First, because it does not effectively repsond to inflation, purchasing power will start to erode. The second problem is related to the first. If an attempt is made to build an income portfolio that can effectively handle inflation, the retiree will have to accumulate significantly more money than witha cash flow portfolio.

Front 28

Market risk is one type of investment risk. Retirees should also be concerned about what other type of risk?

Back 28

in addition to mkt risk, loss of purchasin power represents an equally, if not somewhat mroe, signficant risk.

Front 29

When building a retirment portfolio, how should the year's income/budget requiremnts be allocated?

Back 29

A retirment portfolio should allocate about a year's worth of income/budget requirements to cash or cash equivialnts. The focus should be on liquidity and stability (ie safetY)

Front 30

Regardles sof the intial retirment portfolio allocation, what should happen over time?

Back 30

The allocation shoudl nto remain constant throughout retirement. Over time, the eqt allocation should be gradually reduced, in favor of more fixed income and cash equivalents. However, this change should be gradual, mantaining an eqt presense for much fo the retirment period.

Front 31

1. An income portfolio is one that focuses on cash equivalents and fixed income. Which of the following would be included in a cash flow portfolio?

1. stocks
2. real estate
3. zero coupon bonds
4. corporate bonds

Back 31

All.

Front 32

3. It is always more beneficial for an individual to delay taking Social Security benefits until age 70. tf

Back 32

False

It is sometimes more beneficial to delay receiving benefits, but in many cases, beginning a full retirement age makes more sense. In fact, depending on the individual, receiving Social Security benefits at age 62 might be best.

Front 33

5. Sequence of returns risks can be mitigated through the purchase of an annuity.

tf

Back 33

True

The order in which investment returns occur does not affect annuity payments. These payments are guaranteed whether there is a bear or bull market.

Front 34

6. Anchoring is a behavioral term used to describe overanalyzing information to a point where you are unable to make any decision at all. tf

Back 34

False

Anchoring is keeping a specific reference point even though it may have no logical relevance. Paralysis by analysis is overanalyzing information to a point where you are unable to make any decision at all.

Front 35

7. One of the first considerations in approaching retirement cash flow is to understand what the word retire means to a particular client.

tf

Back 35

t

The answer to that question can have huge implications on the direction their retirement planning should take.

Front 36

A person with a final pre-retirement income of $200,000 would receive a larger Social Security retirement benefit than a person whose final pre-retirement income was $100,000. tf

Back 36

t In years past, the $200,000 income benefit may have been the same as the $100,000 due to benefit caps. However, that is not currently the case because the cap or taxable wage base is over $100,000 ($117,000 in 2014).

Front 37

9. Waiting until full retirement age is always more beneficial than beginning to receive Social Security retirement benefits at age 62.

tf

Back 37

False

Whether waiting makes more sense or not depends on many factors, including other retirement income, health and life expectancy, investment expertise, and overall financial goals.

Front 38

10. Medicare eligibility is often a significant factor in deciding when to retire.

tf

Back 38

True

Medicare can be expected to pay for roughly half of a retiree’s health care expenses. As a result, Medicare-eligibility is often a significant factor in deciding when to retire. An individual may have everything lined-up to allow early retirement, but will often delay, waiting to become eligible for Medicare.

Front 39

13. Advisors will typically have retirees withdraw funds from taxable accounts prior to withdrawing funds from tax-deferred accounts.

tf

Back 39

True

Allowing funds to grow tax-deferred results in greater wealth for retirees. Advisors might not always have the option of taking funds from taxable accounts, but when the option is available, it is almost always advisable to take from the taxable account and allow the tax-deferred funds to continue to grow.

Front 40

Health insurers can have fairly restrictive underwriting requirements that make it more difficult for older, pre-Medicare eligible people to purchase personally owned coverage at a reasonable premium. tf

Back 40

True

By the time an individual reaches his or her 50s, there’s a good chance that he or she has experienced at least one medical problem. It is not unusual for these medical conditions to cause an insurer to either rate or reject an application—thereby significantly raising the rates, and/or eliminating the medical condition from coverage as a preexisting condition.

Front 41

2. Reverse mortgages are only available to seniors over age 60.

tf

Back 41

False

Reverse mortgages are only available to seniors over age 62.

Front 42

4. One process used to determine the amount of money needed to fund retirement is to first find the inflated value of the desired income (in today’s dollars) and then use a serial payment to calculate the present value (annuity due) of the future income stream.

tf

Back 42

True

This calculation will provide the lump sum needed at retirement to fund future income payments.

Front 43

7. A 50-year-old couple who have accumulated $250,000, and want an inflation-adjusted annual income of $75,000 beginning at age 65 (adjusted amount = $125,651 at 3.5% inflation) lasting for 25 years, would need an additional $1.5 million (rounded) to fund their retirement (with a 7% investment rate).

tf

Back 43

True

The future value of $250,000 in 15 years at 7% investment rate = $689,758 (rounded). Subtracting this amount from the total amount needed of $2.2 million, leaves approximately $1.5 million (rounded).

Front 44

9. Consider the following scenarios:

* begin retirement in an 8% inflation environment and then, after five years, move into a 3.5% environment for 20 years
* begin with 20 years of 3.5% inflation and finish with five years of 8% inflation If the investment rate remains the same, at 7%, the outcome of the two scenarios is essentially identical.

Back 44

False

The first scenario would go through more of the retirement assets to fund the first five years. The reason for this is a negative real return –.9259 % (i.e., 8% inflation and 7% return). As a result, more money would be needed to fund overall retirement income needs than with the second scenario.

Front 45

11. Stress testing may be used to help design a portfolio around the possibility of negative results due to bad timing.

tf

Back 45

True

Stress testing can insert a bit of realism into the funding equation, and can help to immunize a retirement portfolio against (at least some) negative results.

Front 46

1. According to William Bengen’s Layer Cake research, retirees willing to accept more risk and more uncertainty than average may be able to increase their initial withdrawal rate to slightly more than

Back 46

7%.

Although Bengen established a conservative initial safe withdrawal rate at around 4%, by adjusting certain parameters and being willing to accept a higher degree of risk, a 7% rate is possible.

Front 47

In Jonathan Guyton’s research, what is the maximum initial withdrawal rate range from a portfolio with 80% equities, at a 95% confidence standard?

4.5-4.6

5.2-5.3

5.5-5.7

5.6-6.2

Back 47

5.6%–6.2%

Guyton’s research indicates a maximum initial withdrawal rate in the range of 5.6% to 6.2%. The other rates come from using a lower percentage of equities.

Front 48

3. According to Guyton’s study, a portfolio with an 80% equity allocation makes the most sense for a majority of retirees.

tf

Back 48

False

Guyton suggested that a 65% equity allocation provided the best balance and made the most sense for a majority of retirees.

Front 49

4. An income portfolio is safer and therefore a better long-term choice for most retirees than a cash flow portfolio.

t/f

Back 49

False

An income portfolio will create problems with maintaining purchasing power. A cash flow portfolio helps to protect purchasing power, and can be designed to minimize market risk.

Front 50

5. Bengen’s Layer Cake suggests a base withdrawal rate that is significantly higher than the suggested initial withdrawal rate in his earlier work.

t/f

Back 50

False

Bengen’s Layer Cake study suggests a base withdrawal rate of 4.15% compared to an initial withdrawal rate of 4% in his earlier work, not significantly greater.

Front 51

6. Asset allocation is a significant factor in Bengen’s Layer Cake.

t/f

Back 51

True

Bengen focused on four key factors: portfolio tax status, time horizon, asset allocation, and portfolio rebalancing.

Front 52

1. Life expectancy at birth in 1900 was around 47 years. Current life expectancy has increased to around 78 years.

tf

Back 52

True

This represents a 30-year, or 67% increase over approximately 100 years.

Front 53

2. A retirement portfolio should allocate approximately what amount to cash/cash equivalents to take care of withdrawal needs?

Back 53

twelve months of income requirements

A retirement portfolio should allocate approximately one year’s worth of income/budget requirements to cash/cash equivalents.

Front 54

3. To offset the future loss of purchasing power, a retirement portfolio should be heavily allocated to fixed income investments.

tf

Back 54

False

Fixed income investments do not inherently offset the loss of purchasing power. Equities are needed to do that.

Front 55

6. At a 3.5% inflation rate, over 20 years, the value of a $75,000 annual budget today will need to be $300,000 in 20 years, just to maintain purchasing power.

tf

Back 55

False

The value will need to be approximately $150,000. Keystrokes: 20 N, 3.5 I/YR, 75,000 PV, FV = 149,234

Front 56

7. By the time retirees are midway through retirement, they probably would be more comfortable with a 50/50 equity/fixed income allocation.

tf

Back 56

True

The allocation should shift over time toward more fixed income. At mid-point, a 50/50 allocation probably makes sense.

Front 57

1. At its inception, the Social Security retirement age was

Back 57

65.

At its inception, the Social Security retirement age was 65. At that time (1935) average life expectancy at birth was around 62 years old.

Front 58

4. Which of the following correctly identifies a core question, as identified by George Kinder in The Kinder Method of Life Planning, to ask a client when trying to identify their real interests and objectives?

What woudl you change about your life?

When do you want to retire?

Where do you want to retire?

How have you been investing your money so far?

Back 58

What would you change about your life?

Kinder’s three questions each focus on the core issue of, “would you change anything about your life?”

Front 59

6. Under what circumstances do most people become eligible for Medicare?

Back 59

when they reach age 65

With a few exceptions (such as full disability), eligibility for Medicare begins at age 65.

Front 60

8. Statistics concerning formal complaints about age discrimination over the last 10 years indicate that age discrimination

Back 60

has not changed much over that period.

Age discrimination has not changed much over the last 10 years and continues to be a factor.

Front 61

9. When considering a person’s retirement budget, which of the following is a correct statement regarding the impact of increased leisure time and dream/goal fulfillment?

Back 61

budget may increase over the preretirement budget

Considering the high potential for increased expenses related to travel, dream and goal achievement, plus spending more time (and money) on hobbies, it is entirely possible that a person’s retirement budget will be greater than their preretirement budget.

Front 62

10. Barb wants a retirement income of $5,000 each month for 25 years. If she is able to earn a return of 7% on invested assets, she needs $700,000 to fund her income. However, this does not include any inflation adjustment. By incorporating a 3.5% inflation factor, by approximately how much will Barb’s funding requirement increase, if she wants to maintain purchasing power?

Back 62

$300,000

Instead of around $700,000, Barb will need slightly more than $1 million to maintain an inflation-adjusted budget with equal purchasing power (using an inflation-adjusted rate of 3.3816 compounded monthly). Keystrokes: 300 N (25 × 12), .2818 I/YR (3.3816 ÷ 12), 5,000 PMT, PVAD = $1,014,390 {if you preset the calculator for 12 compounding periods per year, enter 3.3816 into I/YR}.

Front 63

11. In a 3.5% inflation-rate environment, approximately how many years will it take for the purchasing power of $5,000 to be cut in half?

Back 63

20

At 3.5%, the inflation-adjusted value of $5,000 will be reduced to approximately $2,513. Keystrokes: PV = 2,500, [+/-] , I/YR = 3.5, FV = 5,000. Solve for N = 20.14 years

Front 64

12. According to the most recent study by Fidelity, approximately what amount of medical expenses (unreimbursed by Medicare) will a 65-year-old couple have, who live to a normal life expectancy (i.e., age 85)?

Back 64

$250,000

According to the Fidelity study, the couple can expect to have $250,000 in medical expenses not covered by Medicare.

Front 65

It may be a practical impossibility for near-retirees who have not been saving to accumulate enough money to cover anticipated health care expenses. In the absence of other options, what would be considered the ultimate safety net for these people?

Back 65

Medicaid

The ultimate safety net for these people is Medicaid, but it will not allow them to have anything near a (financially) comfortable retirement. Plus, Medicaid dollars may be limited in the future.

Front 66

17. Which one of the following correctly describes the wealth effect?

Back 66

New retirees often start retirement by spending lavishly without fully comprehending that the money must last through retirement.

The wealth effect occurs early in retirement when the retiree or retiring couple looks at their statements and realizes they have a substantial nest egg and start spending it at an unsustainable pace.

Front 67

18. The Simpsons have just been informed that they are about $300,000 short of their retirement funding goal. They are 60 years old, have an annual income of $75,000 (of which they spend $65,000), and plan to retire at age 66. Badly shaken, they are considering what they can do. Which of the following are reasonable options for the Simpsons to consider? (Note: options must be realistic and achievable.)

1. increase monthly funding deposits by $3,500
2. adjust their retirement budget goals
3. consider selling their house and moving into a smaller, less expensive home
4. delay their retirement start date

Back 67

II, III, and IV only

Each of these is a viable option except increasing their monthly funding deposit by $3,500. They have only $10,000 discretionary annual income, which makes depositing $3,500 a month a practical impossibility.

Front 68

23. Investing money at age 65 in order to make a bequest at the end of retirement is normally more cost effective than actually making the gift at age 65, because of the positive impact of investment returns.

tf

Back 68

True

Even factoring inflation, investment returns reduce the actual dollar amount needed to leave the bequest at the end of retirement.

Front 69

24. William Bengen published one of the seminal studies on safe initial withdrawal rates. In his original work, what initial withdrawal rate percentage was deemed safe over a retirement period of at least 30 years?

Back 69

4%

In his studies, Bengen found that at around a 4% initial withdrawal rate, with annual adjustments for inflation, just about all well-constructed portfolios would be able to last throughout retirement (at least for 30 years).

Front 70

Bengen’s Layer Cake focuses on several assumptions that are relevant to determining maximum initial withdrawal rates. In addition to the tax status of a portfolio, which of the following are assumptions that must be determined for each individual?

1. the desire to leave a bequest
2. asset allocation
3. historical returns
4. time horizon

Back 70

II and IV only

In addition to time horizon and asset allocation, the portfolio rebalancing process is also a significant factor. An additional consideration is the required success rate.

Front 71

26. Jonathan Guyton researched maximum initial withdrawal rates and the variables that impact those rates. According to Guyton’s studies, what percentage of equities in a retirement portfolio provides the best balance between risk, return and maximum initial withdrawal rate (IWR)?

Back 71

65%

According to Guyton, a portfolio with 65% equities (in various categories) seemed to provide the best balance between risk, return, and maximum IWR.

Front 72

28. Nick is entering into retirement with an equity allocation of 70% in his portfolio. He has heard that he should make some adjustments with the assets used to fund his current-year budget, and has asked you what he should do. Which of the following will increase the general safety level of Nick’s current-year cash flow allocation?

a. reallocate to 40/60

b. move the current year's income allocation to cash/cash equivs

c. Move 25% of eqt allocation to growth fund

d. reallocate portfolio to 05/50

Back 72

move the current year’s income allocation to cash/cash equivalents

Moving the year’s worth of income/budget requirements to cash will stabilize Nick’s current cash flow/income withdrawal needs.