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Flashcards in Ch 6 Deck (21):

Why do expenses not decrease in retirement?

Due to healthcare, long-term can r, expenses related to hobby, recreation, and travel.


What are expenses that are especially affected by inflation?

Healthcare, assisted living, LTC, prescription drugs


What are the steps in the retirement planing process?

Determine retirement goals

Analyze financial needs

Arranging techniques

Monitoring and revising the plan


What are the factor used to determine retirements savings needs.

Amount of income needed at retirement

Estimated retirement period

Pension and social security estimates

Lump sum necessary to fund any shortfall

Additional amount that must be saved annually


What do you have to estimate to effusively plan for retirement?

Living expenses after employment income stops

Length of retirement


Most efficient type of retirement savings vehicles.

Tax-deductible and tax-deferred.


What are the downsides of tax-deductible and tax-deferred savings vehicles?

maximum contribution limits
early withdrawal penalty
minimum required distributions at 70 1/2
access to funds may be limited


Name four tax-deductible, tax-deferred funding vehicles.

Traditional IRAs
457 Plan


What are the pros of a tax-free funding vehicle (retirement)?

nontaxable earnings
no penalty on withdrawal of contributions
no required RMD (required minimum distribution)


What are two examples of tax-free funding vehicles?

Municipal bonds
Roth IRAs


Type of funding vehicle where taxation of earnings is deferred until earnings are distributed. Contributions are made with after-tax funds.

Tax-deferred (and not tax-free) funding vehicle.


Type of funding vehicle where there is no deduction up-front and you have to pay income tax on the earnings each year.

Currently taxable.


What are examples of a currently taxable funding vehicle?

Savings account
Money Market Account


Method to calculating required retirement income where you apply a percentage to average income to approximate the income required in the first retirement year.

income replacement ratio.


Under the income replacement ratio method of determining retirement income needs, how is it calculated?

Look at the average of the last three years salary and take 60-80 % of this figure to determine needs.


What are some reasons taxes decline after retirement?

Federal taxes are lower and standard deduction is increase
Social Security taxes end
Social Security benefits could be tax free
Some pensions aren't tax free
Some local governments reduce local property taxes


What are two methods of estimating retirement expenses?

Expense Method and Income replacement ratio method


This method of calculating retirement expenses is best for younger individuals. It is based on the total estimated expenses in the first year of retirement.

Expense method


What are the options for distributions during the distribution period.

Annual withdrawal plan - first-year income shortfall taken from fund and subsequent years are adjusted for inflation

Annuity payments - based on life expectancy


How do you determine annual retirement savings needs

Annual income needed
Length of time income is needed
Income provided by SS or pension
Project value of existing retirement assets
Estimate inflation and investment return rates


How do you determine annual savings need with the replacement income method?

Assumptions: current earned income: $100k; replacement pctg: 80%; 20 yrs to retirement; 25 yrs in retirement; 5% inflation rate.

1) figure out 80% of current income and subtract pension and social security. That gives shortfall in today's dollars.

2) multiply by fv factor 2.6533 = 92,866 first year shortfall

3) multiply 92,866 using present value of annuity due to figure out how much needed for entire retirement period (14.7986) = 1,374,279

4) figure out how much current savings (401k etc) will be in the future and subtract that amount.