Chapter 11 - Retirement Planning Flashcards

(25 cards)

1
Q

Annunity Method

A

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.

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2
Q

Capital Needs Analysis

A

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

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3
Q

Capital Preservation Model (CP)

A

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

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4
Q

Lepto-Kurtic

A

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]

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5
Q

Monte Carlo Analysis

A

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

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6
Q

Purchasing Power Preservation model (PPP)

A

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.

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7
Q

Pure Annuity Concept

A

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

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8
Q

Remaining Work Life Expectancy (RWLE)

A

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

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9
Q

Retirement Life Expectancy (RLE)

A

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

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10
Q

Savings Rate

A

The average savings amount in the US based on consumption.

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11
Q

Sensitivity Analysis

A

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.

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12
Q

Suitability

A

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.

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13
Q

Wage Replacement Ratio (WRR)

A

An estimate of the percent of income needed at retirement compared to earnings prior to retirement.
Usually expressed as a percent.

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14
Q

Work Life Expectancy (WLE)

A

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

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15
Q

What are two common ways to calculate a WRR?

A

Top Down calculation - ballpark for younger clients

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

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16
Q

What are the 6 steps of the Annuity Method?

A
  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
Q

What are the basics of a Monte Carlo Analysis?

A

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
Q

What are some weaknesses of a Monte Carlo Analysis?

A

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
Q

Superannuation

A

Retirement funds running out before the end of your life.

20
Q

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

A

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

21
Q

What are three main recommendations for saving for retirement?

A
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
Q

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

A
Savings amount and rate
RWLE
TVM
Inflation Rate
Sources of retirement income
23
Q

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

A
WRR
Annual Income needs
RLE (or longevity)
Inflation rate
Properly managing and changing investments
Sources of retirement income
24
Q

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

A

25 times the income needed

25
How much of an earnings rate should an annuity need while using the 4% of Capital Balance approach? (Without inflation adjustment?)
1.310% | Add 3% or so for inflation.