Chapter 2: Retirement Planning Accumulations and Distributions

Question 1

RWLE

Answer 1

Remaining Work Life Expectancy

Question 2

WRR

Answer 2

Wage Replacement Ratio

Question 3

RLE

Answer 3

Retirement Life Expectancy

Question 4

Work Life Expectancy

Answer 4

the period of time a person is expected to be in the workforce. Usually 30 to 40 years.

Question 5

Remaining Work Life Expectancy

Answer 5

the work period that remains at a given point in time prior to retirement

Question 6

Retirement Life Expectancy

Answer 6

the total amount of time expected during retirement.

Begins at retirement and ends at death.

Question 7

Savings Rate for
Ages 25-35

Answer 7

10% - 13%

Question 8

Savings Rate for
Ages 35-45

Answer 8

13% - 20%

Question 9

Savings Rate for
Ages 45 - 55

Answer 9

20% - 40%

Question 10

Retirement Needs Analysis

Answer 10

The process of determining how much money a person needs to accumulate to be financially independent during retirement

Question 11

Wage Replacement Ratio (WRR) calculation

Answer 11

WRR =
Expenses in Retirement
/
Pre-Retirement Income

Question 12

An appropriate WRR for most people

Answer 12

WRR of 70% - 80%

Question 13

Top Down Approach

Answer 13

WRR Calculation Method:

Begin with 100% of pre-retirement income and adjust the percentage up or down depending on the expenses that may be eliminated or added.

This approach is less precise than the Botton-Up method.

Question 14

Bottom-Up Approach
(aka “budgeting approach”)

Answer 14

WRR Calculation Method:

Examines each category of expense to determine whither it will increase, decrease or remain the same during retirement.

A more precise approach to calculating WRR.

Used for people who are very near to retirement.

Question 15

Retirement Funding (aka capital needs analysis)

Answer 15

is the process of determining how much money a person needs to accumulate to be financially independent during retirement.

Question 16

The Annuity Method

Answer 16

Is the simplest way to determine retirement needs and is based on the pure annuity concept.

Question 17

the two methods for calculating The Annuity Method

Answer 17

1. 4-step approach
2. uneven cash flow approach

Question 18

As WLE Increases

Answer 18

RLE Decreases

Question 19

As RLE Increases

Answer 19

WLE Decreases

Question 20

Retirement Capital is made up of what?

Answer 20

Investments and Savings

Question 21

Taxable Accounts

Answer 21

Banks, Brokerages, Savings Accounts, Income

Question 22

Tax Advantaged Accounts

Answer 22

IRAs
Qualified Plans
Annuities
Tax-Deferred Income

Question 23

Increasing Expenses During Retirement Include:

Answer 23

Vacation / Travel
Hobbies
Second Home
Healthcare
Gifts to family
Higher costs due to inflation

Question 23

Decreasing Expenses During Retirement include:

Answer 23

Savings
FICA
Mortgage, once concluded
Lower Income = Lower Tax
Automobile Costs
Work Related Expenses
Cost of insurance

Question 24

Step 1 of the 4 Step Method

Answer 24

Determine the funding amount in today’s dollars

Question 25

Step 2 of the 4 Step Method

Answer 25

Inflate Step 1 to the Beginning of Retirement

Question 26

Step 3 of the 4 Step Method

Answer 26

Determine the funding need at retirement
(use Beg. key)

Question 27

Step 4 of the 4 Step Method

Answer 27

Determine the annual savings amount

Question 28

Calculation for the real rate of return

Answer 28

Ri = 1+ ROR on Invest / 1+ Inflation -1 *100

example:
ROR 6%
Inflation 3%

1+6% = 1.06
1+3% = 1.03

1.06 / 1.03 = 1.0291-1 = 0.0291 * 100 = 2.9126