F.44 Retirement needs analysis Flashcards
(7 cards)
Jonathan is a financial planner helping Sarah, a 25-year-old client, plan for her retirement. He utilizes a popular retirement planning model to estimate Sarah’s financial needs for her retirement. Based on most retirement planning models, at what age does Jonathan typically assume Sarah will retire?
A) 55
B) 60
C) 65
D) 70
65
Explanation: Most traditional retirement planning models typically assume a retirement age of 65. This assumption has historical roots, as age 65 has been a common age for full retirement benefits in many pension plans and public retirement systems. However, individual circumstances and preferences can vary, so it’s essential to adjust the retirement age assumption as needed for each person’s unique situation.
F.44 Retirement needs analysis
John, a financial planner, is preparing a retirement plan for one of his clients. He decides to use one of the most common retirement planning models. Which of the following assumptions best describes the relationship between retirement income sources and expenses in most traditional retirement planning models?
A) Retirement income sources will always exceed retirement expenses
B) Retirement income sources and expenses will fluctuate independently of each other
C) Retirement income sources will remain stable, while expenses will increase annually
D) Retirement income sources and expenses are generally assumed to be equal
Retirement income sources and expenses are generally assumed to be equal
Explanation: In most traditional retirement planning models, the primary assumption is that retirement income sources (such as pensions, Social Security, and savings) will match retirement expenses. The goal of such planning is to ensure that the retiree doesn’t run out of money. While in real life there may be variations due to unexpected expenses or income changes, the foundational assumption for modeling purposes is that they will be equal. Adjustments and additional planning strategies are then employed if there’s a projected shortfall or surplus.
F.44 Retirement needs analysis
Jonathan and Maria are meeting with a financial planner to discuss their retirement goals. Jonathan prioritizes traveling the world during retirement, while Maria wants to spend most of her time close to home, volunteering and investing in her hobby of painting. They have a combined retirement savings target of $1.5 million.
Given their individual priorities, which of the following planning assumptions is MOST crucial for their financial planner to consider when designing their retirement plan?
A) Allocating a larger portion of their budget exclusively towards travel expenses
B) Assuming a consistent yearly expense regardless of their activities
C) Combining and evenly splitting the budget for both travel and art supplies
D) Prioritizing the liquidation of all assets early in retirement to fund Jonathan’s travels
Combining and evenly splitting the budget for both travel and art supplies.
Explanation: Given that Jonathan’s priority is traveling and Maria’s priority is her art and volunteering, the most comprehensive approach would be to combine and evenly split the budget for both of their interests. This approach ensures that both of their priorities are taken into account. The other options either overlook one of their priorities or don’t provide a sustainable financial strategy for their retirement.
F.44 Retirement needs analysis
Sophie is a financial planner working with a client, Mr. Thompson, on his retirement planning. She is using a standard retirement planning model to estimate the amount of savings Mr. Thompson will need. When discussing the model with Mr. Thompson, he asks her about the assumptions related to life expectancy. Which of the following best describes the assumption made regarding life expectancy in most retirement planning models?
A) Life expectancy is assumed to be the same for all individuals regardless of their health or family history.
B) Life expectancy is based solely on an individual’s current age and does not account for any other factors.
C) Life expectancy is assumed to be the age until which the average person of a certain age is expected to live.
D) Life expectancy is determined by an individual’s choice of retirement age.
Life expectancy is assumed to be the age until which the average person of a certain age is expected to live.
Explanation: Most retirement planning models use average life expectancy figures for their calculations. This means they take into account the age at which, on average, a person of a certain age can be expected to live. It’s not personalized to individual health or family history, but rather based on population averages. It’s important for individuals to consider their own circumstances when planning for retirement and not solely rely on average life expectancy figures.
F.44 Retirement needs analysis
You are a Certified Financial Planner working with a client who is 5 years away from retirement. The client expresses concerns about recent market volatility and wonders how it might affect their retirement planning assumptions. Based on your knowledge, which of the following statements best describes the impact of market volatility on retirement planning assumptions?
A) Market volatility has no impact on retirement planning as long-term averages remain consistent.
B) Increased market volatility generally leads to higher returns in retirement portfolios, improving retirement outcomes.
C) Market volatility can affect the sequence of returns risk, which can have significant implications for retirement income sustainability.
D) Market volatility ensures that retirement portfolios will grow at a consistent rate year after year.
Market volatility can affect the sequence of returns risk, which can have significant implications for retirement income sustainability.
Explanation: The sequence of returns risk refers to the danger that the timing of withdrawals from a retirement account will negatively impact the overall rate of return available to the investor. If there’s significant market downturn early in retirement and the retiree is withdrawing funds, this can deplete the portfolio more quickly than if the market were stable or growing. Even if the market recovers later, the portfolio might not benefit as much due to the reduced asset base. Hence, market volatility, especially in the early years of retirement, can have a substantial impact on the sustainability of retirement income.
F.44 Retirement needs analysis
Amanda, a prospective retiree, is meeting with her financial planner, Joseph, to discuss her retirement plan. Amanda is curious about how expenses are projected in the future, given the uncertain nature of inflation. Joseph explains that most retirement planning models make a certain assumption about inflation. Which of the following best describes that assumption?
A) Expenses remain constant throughout retirement regardless of inflation.
B) Expenses decrease in retirement due to deflation.
C) Expenses increase each year at a rate consistent with projected inflation.
D) Expenses are unpredictable and not adjusted for inflation in models.
Expenses increase each year at a rate consistent with projected inflation.
Explanation: Most retirement planning models assume that expenses will rise each year at a rate consistent with inflation. This helps provide a more accurate estimate of the future purchasing power of retirement savings and the amount of income one might need to maintain their desired standard of living during retirement.
F.44 Retirement needs analysis
Compared to Millennials, how do Gen Z view retirement savings?
A) Less important, with fewer Gen Z saving for retirement.
B) Equally important, with similar percentages saving for retirement.
C) More important, with a higher percentage of Gen Z saving for retirement.
D) Retirement savings is not a priority for both generations.
More important, with a higher percentage of Gen Z saving for retirement.
Explanation: Only 58% of Millennials are saving for retirement, compared to 70% of their younger Gen Z counterparts.
F.44 Retirement needs analysis
