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42 Cards in this Set

  • Front
  • Back

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

All.

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


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.

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


tf

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.

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

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.

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


tf

t


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


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

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).

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


tf

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.

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


tf

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.

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


tf

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.

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

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.

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


tf

False


Reverse mortgages are only available to seniors over age 62.


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

True


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

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

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).

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.

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.

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


tf

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.

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


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.

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

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.

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


tf

False


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

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


t/f

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.

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

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.

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


t/f

True


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

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


tf

True


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

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


twelve months of income requirements


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

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


tf

False


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

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

False


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

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


tf

True


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

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


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.

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?

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?”

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


when they reach age 65


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

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


has not changed much over that period.


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

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?


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.

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?


$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}.

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?


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

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)?


$250,000


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

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?

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.

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


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.

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

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.

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


True


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

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?


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).

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

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.

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)?


65%


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

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

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.