Chapter 11 - Retirement Planning Flashcards Preview

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

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.


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


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



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]


Monte Carlo Analysis

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


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.


Pure Annuity Concept

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


Remaining Work Life Expectancy (RWLE)

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


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.


Savings Rate

The average savings amount in the US based on consumption.


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.



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.


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.


Work Life Expectancy (WLE)

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


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.


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)


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.


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.



Retirement funds running out before the end of your life.


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.


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)


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

Savings amount and rate
Inflation Rate
Sources of retirement income


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

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


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

25 times the income needed


How much of an earnings rate should an annuity need while using the 4% of Capital Balance approach? (Without inflation adjustment?)

Add 3% or so for inflation.