Unit 3

Question 2

What is the life-cycle approach to financial planning?

Answer 2

A broad view of the client’s financial profile that matches goals with their current stage in the life cycle.

Question 3

What percentage of a client’s goals and lifestyle can be explained by their stage in the life cycle?

Answer 3

70%

Question 4

What phase occurs from the early 20s to mid-50s in the life-cycle approach?

Answer 4

Asset accumulation phase

Question 5

What phase occurs from the late 20s to early 70s in the life-cycle approach?

Answer 5

Conservation (risk management) phase

Question 6

What is a key characteristic of the distribution (gifting) phase?

Answer 6

High cash flow, low debt, and high net worth.

Question 7

Can clients be in multiple phases of the life cycle at once?

Answer 7

Yes

Question 8

What information is collected in the data collection process of the life-cycle approach?

Answer 8

• Ages of the client and spouse
• Marital status
• Number and ages of children and grandchildren
• Family income by each contributor
• Family net worth
• Employment status

Question 9

At what age is Curtis in the life-cycle approach, and what is his net worth?

Answer 9

60 years old, net worth of $1,500,000

Question 10

In which phase is Curtis likely to be?

Answer 10

Conservation phase

Question 11

What is the purpose of the two-step approach in financial planning?

Answer 11

To cover risks and then save and invest.

Question 12

What does the three-panel approach refine?

Answer 12

The two-step approach by dividing short-term savings and long-term investments.

Question 13

What is evaluated in Panel 1 of the three-panel approach?

Answer 13

Risk management of personal, property, and liability risks.

Question 14

What types of insurance are evaluated in Panel 1?

Answer 14

• Life insurance
• Health insurance
• Disability insurance
• Long-term care insurance
• Property insurance
• Liability insurance

Question 15

What is evaluated in Panel 2 of the three-panel approach?

Answer 15

Short-term savings and investments and debt management.

Question 16

What is evaluated in Panel 3 of the three-panel approach?

Answer 16

Long-term savings and investments.

Question 17

What does the strategic approach in financial planning codify?

Answer 17

Clients’ big-picture goals while considering their external environment.

Question 18

What analysis is incorporated in the strategic approach?

Answer 18

SWOT analysis

Question 19

What are the two types of needs identified in the strategic approach?

Answer 19

• Necessary by law (e.g., auto liability insurance)
• Required to make the plan work (e.g., savings)

Question 20

What are some examples of goals in the strategic approach?

Answer 20

• Adequate risk management portfolio
• Adequate savings rate for retirement and education
• Adequate emergency fund
• Adequate debt management
• Adequate investment portfolio
• Adequate estate plan

Question 21

What is the purpose of setting objectives in the strategic approach?

Answer 21

To divide broad goals into discrete, actionable steps.

Question 22

What might be an example of a tax management objective?

Answer 22

Change the risk of an investment portfolio.

Question 23

What is the primary focus of the cash-flow approach in financial planning?

Answer 23

To manage the inflow and outflow of cash to meet financial goals.

Question 24

What is the purpose of estate planning?

Answer 24

Have estate documents prepared (will, durable power of attorney for healthcare, advance medical directive, etc.)

Estate planning is essential for ensuring that an individual’s wishes are honored regarding the distribution of their assets and healthcare decisions.

Question 25

What does adjusting income tax over withholding help achieve?

Answer 25

Meet other cash-required objectives ## Footnote Adjusting tax withholding can provide the necessary cash flow for various financial needs.

Question 26

Which approach to financial planning is led by the client’s mission statement?

Answer 26

Strategic approach ## Footnote The strategic approach focuses on aligning financial planning with the client's personal mission and goals.

Question 27

What is the primary focus of the life-cycle approach in financial planning?

Answer 27

Quick and simple data collection in a non-threatening way ## Footnote This approach allows planners to quickly understand the client's expectations and needs.

Question 28

What do qualitative benchmarks in the metrics approach help determine?

Answer 28

The level of progress that a client should be making in terms of accomplishing financial goals ## Footnote Qualitative benchmarks provide a framework for assessing financial progress.

Question 29

What is prioritized in the cash-flow approach?

Answer 29

Recommendations with no cash-flow impact or a positive cash-flow impact ## Footnote This ensures that the client's financial situation improves without negatively affecting cash flow.

Question 30

Which of the following is a negative annual cash-flow impact?

Answer 30

Purchase life, health, disability, long-term care, property, or liability insurance ## Footnote Such purchases often require ongoing payments that can strain cash flow.

Question 31

What does the statement of income and expenses help calculate?

Answer 31

Net discretionary cash flow ## Footnote This calculation is crucial for understanding available cash for savings and spending.

Question 32

What does the pie-chart approach visually display?

Answer 32

The balance sheet and cash-flow statement ## Footnote This visualization can help clients see how their money is allocated.

Question 33

What percentage of a client's gross pay is typically allocated to housing costs?

Answer 33

25% ## Footnote This is a common benchmark for budgeting housing expenses.

Question 34

What is the first step in the present-value-of-all-goals approach?

Answer 34

Determine individual present values of each short, intermediate, and long-term goal ## Footnote This step is essential for understanding the total financial commitment required.

Question 35

What does the financial-statement and ratio-analysis approach assess?

Answer 35

The client’s strengths and weaknesses today ## Footnote This assessment helps in identifying areas for improvement in financial planning.

Question 36

What is the purpose of the metrics approach in financial planning?

Answer 36

Provide quantitative benchmarks for clients to use as guidance ## Footnote These benchmarks help clients understand their financial health relative to common standards.

Question 37

Fill in the blank: The cash-flow approach prioritizes recommendations with _______ cash-flow impact.

Answer 37

no or positive ## Footnote Prioritizing these recommendations ensures financial stability.

Question 38

True or False: The metrics approach utilizes qualitative benchmarks to assess financial progress.

Answer 38

True ## Footnote Qualitative benchmarks are essential for evaluating the effectiveness of financial strategies.

Question 39

What type of ratios does the financial-statement and ratio-analysis approach utilize?

Answer 39

Liquidity ratios, debt ratios, performance ratios ## Footnote These ratios provide insight into the client's financial health and management.

Question 40

What is a limitation of the statement of income and expenses?

Answer 40

Only recurring income and expenses are included ## Footnote This means that non-recurring items like asset sales or inheritance are not accounted for.

Question 41

What is the two-step/three-panel approach used for?

Answer 41

Helps establish objectives that are measurable with ratio analysis.

Question 42

What percentage of gross pay is typically covered by Disability Insurance?

Answer 42

60 – 70% of gross pay.

Question 43

What does Homeowners Insurance typically cover?

Answer 43

Full replacement value and open peril coverage on dwelling and content.

Question 44

What is the recommended amount for an Emergency Fund?

Answer 44

3 – 6 times monthly non-discretionary cash outflows.

Question 45

What should Housing Ratio 1 be less than?

Answer 45

<28% of gross pay.

Question 46

What should Housing Ratio 2 be less than?

Answer 46

<36% of gross pay.

Question 47

What percentage of gross pay should be saved for Financial Security?

Answer 47

10 – 13% of gross pay.

Question 48

What basic documents are needed for clients under age 50?

Answer 48

Basic documents.

Question 49

What additional documents do clients over age 50 need?

Answer 49

Trusts and estate planning.

Question 50

True or False: Debt ratios measure the client's ability to meet short-term obligations.

Answer 50

True.

Question 51

True or False: Liquidity ratios indicate how well a client manages debt.

Answer 51

False.

Question 52

What do ratios for financial security determine?

Answer 52

The amount of progress that the client is making toward achieving short-term financial security goals.

Question 53

What do performance ratios determine?

Answer 53

The adequacy of returns on investments relative to the risk level of the investment.

Question 54

What is the foundation of personal finance?

Answer 54

Cashflow.

Question 55

What is the first step in the budgeting process?

Answer 55

Determine the client’s income for a time period (month or year).

Question 56

What should be included in the second step of the budgeting process?

Answer 56

Determine fixed and variable expenses for the time period.

Question 57

What type of expenses are predictable and recurring?

Answer 57

Fixed expenses.

Question 58

What type of expenses occur irregularly or fluctuate in amount?

Answer 58

Variable expenses.

Question 59

What should be done if the net discretionary cash flow is negative?

Answer 59

Increase income and/or decrease expenses.

Question 60

Clients should reduce their expenses if which of the following is true?

Answer 60

If their cash flow is negative, if their net cash flow is insufficient to meet their goals, and if their expenses as a percent of income are increasing over time.

Question 61

What is the recommended savings rate benchmark for a 25-year-old client whose only goal is retirement?

Answer 61

~12%.

Question 62

What is the recommended savings rate benchmark for a 50-year-old client whose only goal is retirement?

Answer 62

~20%.

Question 63

What percentage of Fei's compensation does her employer match for her 401(k) plan?

Answer 63

50% of Fei's contribution up to a maximum of 4%.

Question 64

What is Fei's savings rate if her ending 401(k) balance is $100,000 after contributing $15,000?

Answer 64

12.7%.

Question 65

What was the initial balance of Fei's 401(k) plan at the beginning of the year?

Answer 65

$60,000

Question 66

How much did Fei contribute to her 401(k) plan this year?

Answer 66

$15,000

Question 67

What was the ending balance of Fei's 401(k) account?

Answer 67

$100,000

Question 68

What is the formula for calculating the savings rate?

Answer 68

Savings Rate = (employee contributions + employer contributions) / Gross Pay

Question 69

What is the maximum amount the employer can match in Fei's 401(k) plan?

Answer 69

$6,000

Question 70

What percentage of Fei's salary is the employer match limited to?

Answer 70

4%

Question 71

What was Fei's total compensation for the year?

Answer 71

$150,000

Question 72

What is Fei's savings rate this year?

Answer 72

14%

Question 73

Fill in the blank: The savings rate equals the sum of her contribution to her 401(k) plan and the _______.

Answer 73

employer match

Question 74

True or False: The employer match is included in the calculation of the savings rate.

Answer 74

True