Chapter 2 :: Retirement Planning Accumulations & Distributions

As the RLE increases because of early retirement, there is generally both an increased need of funds to finance the RLE and a shortened WLE in which to save and accumulate assets. a.) True b.) False

a.) True

Capital needs analysis is the process of calculating the amount of investment capital needed at retirement to maintain the pre-retirement lifestyle. a.) True b.) False

a.) True

Individuals must consider the impact of inflation when projecting retirement needs. a.) True b.) False

a.) True

Personal savings is the source of retirement income most influenced by the individual. a.) True b.) False

a.) True

Retirees generally rely on Social Security, private pension plans, and personal savings to fund their retirement incomes. a.) True b.) False

a.) True

Simulations allow for an unlimited number of simultaneous ranging variables. a.) True b.) False

a.) True

The RLE is the time period beginning at retirement and ending at death. a.) True b.) False

a.) True

The WRR is an estimate of the percentage of annual income needed during retirement compared to income earned prior to retirement. a.) True b.) False

a.) True

The annuity method assumes that the individual will die at the expected life expectancy with a retirement account balance of zero. a.) True b.) False

a.) True

The capital preservation model, the purchasing power preservation model, and the capitalization of earnings model are used to mitigate the risk of outliving retirement funds. a.) True b.) False

a.) True

The two methods for calculating WRR are the top-down approach and the budgeting approach. a.) True b.) False

a.) True

Jordan is 55 and wants to retire in 12 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 97. He currently has a salary of $100,000 and expects that he will need about 82% of that amount annually if he were retired. He can earn 9 percent in his portfolio and expects inflation to continue at 3 percent. Jordan currently has $325,000 invested for his retirement. His Social Security benefit in today's dollars is $30,000 per year at normal age retirement of age 67. How much does he need to save each year at year end to meet his retirement goals? a.) $6,245 b.) $9,252 c.) $8,432 d.) $7,659

b.) $9,252

Which of the following are risks to financial independence? 1. A shortened work life expectancy. 2. An extended retirement life expectancy. 3. Inadequate investment rate of return. a.) 1 and 3 only b.) 1, 2, and 3 c.) 1 only d.) 1 and 2 only

b.) 1, 2, and 3

Jasmine is 53-years old and earns $115,000 a year. She saves 12% of her annual gross income for retirement. Jasmine will pay off her mortgage by the time she retires. Her monthly payment is $1,950.21. Calculate Jasmine's wage replacement ratio using the top-down approach (round to the nearest %) andusing pre-tax dollars. Assume that she wants to maintain her lifestyle. a.) 68% b.) 60% c.) 88% d.) 80%

b.) 60%

Fixed-income securities generally provide the best hedge against inflation and loss of purchasing power. a.) True b.) False

b.) False Common stocks provide the best hedge against inflation. The real economic returns for fixed-income securities are low and are not a good hedge against inflation.

Our society tends to save at a rate that is adequate for retirement planning. a.) True b.) False

b.) False Given that a savings rate of 10% to 13% of gross pay over a long period of time is necessary to meet the retirement goal, the savings rate in the U.S. is insufficient for retirement planning.

Monte Carlo Analysis predicts particular events. a.) True b.) False

b.) False Monte Carlo Analysis does not predict particular events. Rather, it provides insight into the most likely outcome while also providing other possible outcomes, both good and bad.

Social Security is an adequate wage replacement for most individuals. a.) True b.) False

b.) False S.S. is not a sufficient source of income replacement during retirement for most income levels. S.S. provides 100% of income to only 20% of individuals aged 65 or older receiving S.S. benefits.

Approximately 80% of men work past age 65. a.) True b.) False

b.) False The average age men retire is age 64. Labor force participation for men over age 65 is under 30%.

Sensitivity analysis eliminates the risk of retirement planning. a.) True b.) False

b.) False While sensitivity analysis does not eliminate all risk associated with retirement planning, it does allow the advisor to build a slightly worse case scenario and to determine the impact of more conservative assumptions on the overall plan.

Larry is 58 and wants to retire by age 65. He expects that he will live to age 95. He currently has a salary of $140,000 and expects that he will need about 72% of that amount annually if he were retired. He can earn 9 percent in his portfolio while he is working. However, he expects that he will only earn 7 percent in his portfolio during retirement because he will adjust his asset allocation so that his portfolio is more conservative. He expects inflation to continue at 3 percent. Larry currently has $800,000 invested for his retirement. His Social Security benefit in today's dollars is $24,000 per year, assuming a retirement of age 65. He just calculated what he needs to save each year and it is more than he can afford. Which of the following is his best alternative to achieve his retirement goals? a.) Modify his portfolio during retirement to achieve an 8% rate of return instead of a 7% rate of return. b.) Reduce his expected needs by $10,000 in today's dollars. c.) None of the listed answers will help him achieve his goals. d.) Delay his retirement by 2 years.

b.) Reduce his expected needs by $10,000 in today's dollars.

Which of the following expenditures will most likely decrease during retirement? a.) Health care costs b.) Retirement savings c.) Home maintenance d.) Vacation and travel costs

b.) Retirement savings

Colin is 40 years old and wants to retire in 27 years. His family has a history of living well into their 90s. Therefore, he estimates that he will live to age 95. He currently has a salary of $150,000 and expects that he will need about 75% of that amount annually if he were retired. He can earn 8 percent from his portfolio and expects to receive an annuity that will pay him $20,000 in today's dollars per year beginning at age 67. The annuity includes a cost of living adjustment, which is equal to inflation. Colin currently has$200,000 invested for his retirement. His Social Security benefit in today's dollars is $30,000 per year at normal age retirement of age 67. How much does he need to accumulate at age 67 exclusive of his pension and Social Security benefits? Use 3% inflation. a.) $2.8 million b.) $2.1 million c.) $2.2 million d.) $2.9 million

c.) $2.2 million $150,000 x 75% = $112,500 $112,500 - $20,000 from annuity - $30,000 SS = $62,500 PV = 62,500 I/Y = 3% N = 27 CPT FV = 138,830.56 (first year's need in retirement) PMT = 138,830.56 N = 28 I/Y = (1.08 / 1.03) - 1 x 100 CPT PV = $2,203,467.60

Ralph, a 40-year-old nurse who earns $80,000 a year, saves 14% of his annual gross income. Assume that Ralph wants to maintain his exact pre-retirement lifestyle. Calculate Ralph's wage replacement ratio using the top-down approach (round to the nearest %) and using pre-tax dollars. a.) 86% b.) 70% c.) 78% d.) 92%

c.) 78%

Which of the following is true? 1. Utilizing the top-down approach, an individual who earns $75,000 per year as an employee for Golf Enterprises, LLC and saves $13,000 of his earnings per year towards retirement will have a wage replacement ratio equal to 82.67%. 2. An individual's work life savings rate will not impact his retirement plan funding requirements. a.) Both 1 and 2 b.) 1 only c.) Neither 1 nor 2 d.) 2 only

c.) Neither 1 nor 2

Sean will be retiring soon. All of the following expenditures could be eliminated in his retirement needs calculation except: a.) The $2,200 per year he spends on his work suits and dress clothes. b.) The $22,000 per year he contributes to his 401(k) plan. c.) The $18,000 annual mortgage payment he makes that is scheduled to end seven years into retirement. d.) The FICA taxes he pays each year.

c.) The $18,000 annual mortgage payment he makes that is scheduled to end seven years into retirement.