Flashcards in Chapter 11 - Retirement Planning Deck (25):

1

## Annunity Method

### Determines how much a client needs to fund their retirement based on the assumption that the person will die exactly when the account balance reaches zero.

2

## Capital Needs Analysis

### The process of calculating the amount of investment capital needed at retirement to maintain the pre-retirement lifestyle and mitigate the impact of inflation during the retirement years

3

## Capital Preservation Model (CP)

### A capital needs analysis method that assumes that the client has the same account balance at the end of LE as they did at the beginning of retirement

4

## Lepto-Kurtic

###
A distribution that appears to be normal but has more area under the two tails than a normal distribution (i.e. Fat Tails)

[Stats reference]

5

## Monte Carlo Analysis

###
A mathematical tool used to calculate the success of an individual’s retirement portfolio using changing variables.

6

## Purchasing Power Preservation model (PPP)

### A capital needs analysis method that assumes that at a client’s life expectancy, the client will have a capital balance with purchasing power equal to the purchasing power at the beginning of retirement.

7

## Pure Annuity Concept

### The basic capital needs analysis approach, generally prepared on a pre-tax basis

8

## Remaining Work Life Expectancy (RWLE)

### The amount of time remaining before retirement. Calculated at any given point of time.

9

## Retirement Life Expectancy (RLE)

### The time period beginning at retirement and extending until death. The RLE is the period of retirement that must be funded.

10

## Savings Rate

### The average savings amount in the US based on consumption.

11

## Sensitivity Analysis

### A tool used to understand the range of outcomes for each variable in a retirement plan by rotating each variable toward the undesirable side of risk to determine the impact of a small change in that variable on an overall plan.

12

## Suitability

### Having a reasonable basis to believe that a recommended transaction or investment strategy is appropriate for a client, after proper considerations. See FINRA Rule 2111.

13

## Wage Replacement Ratio (WRR)

###
An estimate of the percent of income needed at retirement compared to earnings prior to retirement.

Usually expressed as a percent.

14

## Work Life Expectancy (WLE)

### The period of time a person is expected to be in the work force, generally 30 to 40 years.

15

## What are two common ways to calculate a WRR?

###
Top Down calculation - ballpark for younger clients

Bottom Up calculation - more precise budget based on current and anticipated expenses. Used for older clients.

16

## What are the 6 steps of the Annuity Method?

###
1. Calculate WRR

2. Determine gross (overall) $ needs

3. Determine Net $ needs (-SS for example)

4. Calculate inflated pre-retirement needs for the first payout year. (TVM)

5. Calculate Capital needed at start of retirement. (TVM)

6. Calculate Monthly savings need during RWLE (TVM)

17

## What are the basics of a Monte Carlo Analysis?

### Computer software uses RNG for certain variables and determines the probability of those variables occurring. Usually outputs a “best”, “expected”, and “worst” case- showing a percentage chance of success of retirement.

18

## What are some weaknesses of a Monte Carlo Analysis?

###
Some linear assumptions are false.

Stock Returns have a Lepto-Kurtic distribution, instead of normal.

Mean and SD of stock returns vary more over time than allowed in simulation.

The analysis ignores Income Tax consequences.

19

## Superannuation

### Retirement funds running out before the end of your life.

20

## What is the biggest factor in the WLE and RLE relationship?

### A life is only lived for so long- the length of one either increases or decreases the other.

21

## What are three main recommendations for saving for retirement?

###
Start early (between 25 and 35)

Save a lot! (10-13% gross income- includes matching)

Be mindful of returns (create growth in a broad portfolio)

22

## What are some key factors to consider for retirement during the working years?

###
Savings amount and rate

RWLE

TVM

Inflation Rate

Sources of retirement income

23

## What are some key factors to consider for retirement during the retirement years?

###
WRR

Annual Income needs

RLE (or longevity)

Inflation rate

Properly managing and changing investments

Sources of retirement income

24

## What total balance should be accumulated while using the 4% of Capital Balance approach for a retirement annuity?

### 25 times the income needed

25