CFP Retirement Planning Flashcards
(27 cards)
income replacement ratio
The client estimates a percentage of pre-retirement income that they believe to be adequate to provide a standard of living at retirement comparable to what they enjoyed while working.
When is best time to use income replacement ratio?
The income replacement ratio is frequently used when retirement is still quite a few years away (i.e., early to mid-career clients); it sets a realistic estimate that can be adjusted as retirement nears.
retirement income analysis
provides a more accurate projection of retirement needs for a late-career client. The actual income and expenses of the late-career client can be used to inform the estimated retirement need.
What is used to calculate retirement income analysis?
Using a formal budget of retirement expenses, the client and planner will determine the appropriate level of retirement income needed, taking into account that certain expenses the client had pre-retirement will increase, others will decrease or be eliminated, and still others will be added.
Retirment income analysis inflation
This initial projection serves as the starting point but must be inflated to future dollars to determine the future first-year income need.
Retirement income analysis calculation
After sitting down with Bob and looking at his future income needs, you have determined that he will need $75,000 per year at retirement in 15 years. Further, you anticipate that Bob will receive $25,000 per year in today’s dollars from Social Security beginning in 15 years and thereafter increasing by the CPI each year. This leaves a retirement income need of $50,000 per year for Bob and his family, in terms of today’s dollars. But what will Bob really need if he retires in 15 years, if we assume 3% annual inflation? Enter the following variables into your HP-12C or HP-10bII calculator to find out (set your calculator to four decimal places)
Inflation = 3%
Present Value = $50,000
Time to Retirement = 15 years
Now solve for Future Value. After entering these values into an HP-10bII or a HP-12C, we find Bob will need $77,898 from his own savings in the first year of retirement.
Having determined the amount of income needed, the planned retirement date, an assumed growth rate, projected inflation rate, and the number of years the payments must continue, we can calculate the amount of retirement capital required and then develop an accumulation plan to reach the client’s retirement income objective.
After sitting down with Bob and looking at his future income needs, you have determined that he will need $77,898 annually from his own savings beginning with the first year of his retirement in 15 years. This $77,898 represents the purchasing power of $50,000 today. He will also receive annual Social Security retirement benefits1 in 15 years approximating the purchasing power of $25,000 today.
You assume that Bob’s assets will earn 6% after-tax during his retirement years, which will last 30 years. What will Bob need to accumulate for retirement under these circumstances? Follow the steps below.
Calculate the first-year inflation-adjusted income need We already determined this would be $77,898.
Calculate the inflation-adjusted rate of return
To calculate the inflation-adjusted return, use the formula below:
[{
1 + Assumed rate of return
1 + Assumed inflation rate
} - 1 ] X 100
So in our example, it would be:
[{
1 + .06
1 + .03
} - 1 ] X 100 = 2.91
Inflation-adjusted return = 2.91%
Solve for PV
We now have all the information we need to enter the following into our financial calculator and solve for the present value, which is the accumulation need at the time of retirement (set your calculator to four decimal places, and then round your answer to the identified number of places in each example).
In order to make an IRA contribution
an individual (or one of the spouses, if making a spousal contribution) must have “taxable compensation”, which generally means that the individual must have earnings from working.
Annual contributions cannot exceed the lessor of earned income of the following statutory limits:
$7,000
$1,000- 50+ Catch Up
Contributions to IRA Deadline
must be made by the due date for the eligible individual’s tax return. For most individuals or married couples, the cutoff date is April 15. Extensions of time to file the tax return do not extend the IRA contribution deadline.
Age limit for Traditional IRAs
No age limit
IRA Annual Limit per individual?
married individuals can each contribute up to this limit, even if one spouse is providing taxable compensation funding for the other.
A single individual, aged 57, has taxable compensation of $1,500 plus dividends and interest of $30,000 for the current year. The maximum this individual can contribute to an IRA is:
$1,500
A married couple filing a joint income tax return has modified adjusted gross income (MAGI) of $75,000 for the current year. His taxable compensation is $84,000. Her taxable compensation is $1,000, which she placed in a Traditional IRA. She also has a Roth IRA. If the wife is 45 years of age, what is the maximum additional contribution that can be made to her Roth IRA for the current year
$6,000
A married couple, John and Jane, both aged 55, file separate income tax returns. John has no taxable compensation for the current year and no modified AGI; Jane has $28,000 in compensation and $29,000 of modified AGI. What is the maximum that can be contributed to John’s Traditional IRA?
$0
Qualifying Charitable Distribution (QCD)
A QCD is a distribution meeting all of the following requirements:
The distribution would have been taxable were it not a QCD,
The Traditional IRA owner must be age 70½ or over, and
The QCD is limited to an indexed amount.
Direct Qualified Charitable Distribution
A direct contribution is a transfer from a taxpayer’s IRA directly to a charity and is limited to an annual maximum of $108,000 in the current year (2024) as indexed. The taxpayer (donor) receives no payout stream from the charity. The charity uses 100% of the contribution for charitable purposes.
Indirect Qualified Charitable Distribution
An indirect contribution is a transfer from a taxpayer’s IRA to a charitable remainder trust (CRT) or charitable gift annuity (CGA).1 The maximum lifetime contribution is $53,000 (as indexed) and must be made within one tax year. The donor (or donor and spouse) receives an annual payout for over their lifetime. At the donor’s death, the remaining value of the annuity transfers to the charity. As a result, the charity ultimately receives less than 100% of the QCD.
Saver’s Credit
Congress provides the Saver’s Credit for low-income to moderate-income taxpayers making contributions to Traditional IRAs, Roth IRAs, and certain other plans.
Qualifying for Savers Credit
Qualifying taxpayers receive an income tax credit of up to $1,000 (single) or $2,000 (married filing jointly). The credit rate ranges from 0% to 50% of the contribution depending upon the taxpayer’s filing status and adjusted gross income. The credit amount is simply the credit rate multiplied by the contribution amount.
Allison, a single taxpayer, made a $6,000 contribution to a Traditional Deductible IRA in the current year. Her AGI qualifies her for the maximum Saver’s Credit. Allison wishes to reduce her income tax as much as possible; which of the following is she allowed on her income tax return?
A) A deduction for AGI of $6,000 AND a Saver’s Credit of $1,000
B) A deduction for AGI of $6,000 OR a Saver’s Credit of $1,000
C) A deduction for AGI of $6,000 AND a Saver’s Credit of $2,000
D) A deduction for AGI of $6,000 OR a Saver’s Credit of $2,000
A) A deduction for AGI of $6,000 AND a Saver’s Credit of $1,000
While it is always possible to make contributions of taxable compensation to a Traditional IRA within the annual limit, the tax-deductibility of those contributions is phased out if the individual meets two conditions:
- The taxpayer or the taxpayer’s spouse is an active participant in an employer-sponsored retirement plan AND
- Modified Adjusted Gross Income (MAGI) exceeds specified limits.
IRA Deduction when not participating in Employer-sponsored plan
Remember, if a single taxpayer or both spouses (married filing jointly) are NOT participants in an Employer-Sponsored retirement plan, they can deduct their Traditional IRA contributions regardless of how high their income might be.
A married couple, filing jointly, has modified AGI from earned income of $90,000 for the current year. Both are active participants in an employer-sponsored plan. They each make a $5,000 contribution to their respective IRAs. Their contributions are:
A) Fully Deductible
B) Partially Deductible
C) Nondeductible
Fully Deductible
