CRPC ALL

Ex. Under value averaging, if an investor desired to increase his or her investment by $1,000 per month and the asset value had declined by $250 from the previous month, the investor would invest ______ the next month, assuming the price of the investment did not change.

$1,250, the loss from the previous month must be made up in addition to the following month's contribution.

Coefficient of Variation

A measure of relative variability computed by dividing the standard deviation by the mean and multiplying by 100. CV = (SD / X) * 100

Planning for Retirement 10 Years Out

-Consider any big-ticket financial commitments you anticipate in the next 10 years and how these items might affect your retirement timeline. -Review your estate documents to ensure the language is up to date. Your estate documents should include items such as a will, a power of attorney, a living will, a health care proxy, and possibly a revocable trust. -Reallocate your investment portfolio based on your earnings timeline, focusing on performance, risk, and expenses.

Planning for Retirement 5 Years Out

-Consider any big-ticket financial commitments you anticipate in the next 10 years and how these items might affect your retirement timeline. -Review your estate documents to ensure the language is up to date. Your estate documents should include items such as a will, a power of attorney, a living will, a health care proxy, and possibly a revocable trust. -Reallocate your investment portfolio based on your earnings timeline, focusing on performance, risk, and expenses.

Planning for Retirement 20 Years Out

-Create an emergency fund of three to six months of living expenses to avoid tapping into your 401(k) or home equity in the event of an emergency. -Boost your earning potential and benefits package by contributing the maximum annual amount to your 401(k), or at least enough to receive any available employer match. -Ensure you have a diversified investment portfolio so that you are invested for inflation-fighting growth and your assets are distributed across taxable, tax-deferred, and tax-free sources. Consider consolidating multiple retirement or brokerage accounts to simplify record keeping and possibly reduce expenses.

Costs for Retirees

-Many retirees find that they spend less on housing, often because their mortgages are paid off by the time they retire or because they sell their large homes and buy smaller, less expensive houses or condominiums. This may not be the case if a second home is in the plan. Don't forget, though, that even a paid-off home is not expense-free; real estate taxes, utilities, insurance, and repairs will remain. -Retirees also tend to spend less on parking, dry cleaning, apparel, and education than do nonretirees. -Second cars for married couples are less necessary. Eliminating one vehicle reduces insurance expenses, vehicle registration taxes, license fees, and maintenance. -Expenditures for Social Security and retirement plans disappear. -Total income taxes may diminish in step with earned income reduction. Taxation, however, will be impacted by the amount of income coming from a qualified retirement plan, which will be fully taxable upon distribution.

Qualifying for Social Security

-You must be age 62 or older and have earned at least 40 Social Security credits over your working lifetime. -If you become disabled before reaching age 62 you can qualify for Social Security benefits with fewer than 40 credits. -You can earn up to four credits per year to qualify for Social Security benefits. For 2021, you must earn at least $1,470 to earn one credit, or $5,880 to earn four credits.

Buy & Hold Strategy

A passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market.

Inflation Adjusted Return

A rate of return that is measured in terms of real goods and services; that is, after the effects of inflation have been factored out. Inflation adjusted yield formula: ([(1 + ROR)/(1+inflation rate)] - 1) x 100

Benjamin Graham's Four Rules of Thumb for Value Investing

1. Buy stocks for two-thirds or less of their net current assets. 2. The earnings-price ratio (earnings yield) should be twice the current AAA bond yield. 3. The dividend yield should be no less than two-thirds of the AAA bond yield. 4. Avoid companies that are currently losing money or that have more than 60% debt-to-total-assets.

The Six-Step Retirement Planning Process

1. Establishing and defining the client-planner relationship 2. Gathering client data including goals 3. Analyzing and evaluating the client's financial status 4. Developing and presenting recommendations 5. Implementing recommendations 6. Monitoring the implemented recommendations for necessary changes HINT: If you're having trouble remembering the six steps of the retirement planning process, try memorizing the following mnemonic: EGADIM (EGAD I Made it) E - Establish client relationship G - Gather data A - Analyze data D - Develop plan I - Implement plan M - Monitor plan

General Guidelines of P/E Investing

1. Select stocks with low P/Es, but only if the companies have solid performances. Many stocks deserve low P/Es because the companies they represent are truly inferior. 2. Diversify. A diversified portfolio of low P/E stocks should have an equal weighting in 15-20 different stocks representing 10-12 industries. 3. Only buy shares of medium to larger companies that are listed on the NYSE or AMEX or that are actively traded over the counter.

Four Steps of Asset Allocation

1. The first step of the process is to determine which asset classes should be represented in the portfolio. This step recognizes the client's policy directives in terms of risk tolerance, investment goals, requirements for cash distributions, etc. It is important to remember that no specific securities are identified at this stage—only the general classes of assets (stocks, bonds, real estate, etc.). 2. After the asset classes have been determined, the percentage representation of each asset class in the portfolio should be determined. This is the point at which the allocation formula is made. For example, 60% stocks, 20% real estate, and 20% fixed-income securities. 3. The third step is security selection. Here, the most suitable individual stocks, bonds, real estate, or mutual funds for the portfolio are identified and acquired. 4. The final step of the asset allocation process is review of portfolio performance and the investment climate. There is an important feedback loop between this review and the first step of the allocation process.

Glide Path

A target retirement fund aims for a specific target date at which the investor will retire, such as 2030, and gradually adjusts its mix of stocks, bonds, and cash equivalents to become more conservative over time. This is done by decreasing the percentage of stocks and increasing the percentage in bonds and cash equivalents as the investor's retirement date approaches, called its glide path.

Ex. Small differences in rate of return create big differences in outcomes over time. For example, a 1% difference in annual return (12% versus 11%) on $20,000 compounded over 30 years is more than

A 1% difference in annual return on $20,000 compounded over 30 years is (measuring 12% against 11%) $141,352 ($599,198 - $457,846 = $141,352).

Ex. Stock A has an expected return of 15% and a standard deviation of 7.5%. Stock B has an expected return of 18% and a standard deviation of 9%. Based on the coefficient of variation, which stock has more relative risk?

Although Stock A has a lower absolute risk, it has the same relative risk as measured by its coefficient of variation (CVA = 7.5%/15% = 0.50) as Stock B (CVB = 9%/18% = 0.50). The coefficient of variation formula can be used to compare two stocks.

Liabilities

Amounts owed to creditors and there are both short and long term liabilities included on the statement of financial position. There are short and long term; short being less than one year from the statement date.

Duration

Bond investors, including mutual fund shareholders who own bond funds, often want to know how sensitive their bond (or bond fund) is to interest rate risk. For instance, if interest rates rise 1%, how much will the bond fund drop in value? Bond investors can estimate this drop with a concept called duration. The lower the coupon rate, the lower level of current interest rates and the longer the YTM. Investors who are risk-averse and concerned about losing principal would want to own bonds with lower durations. Duration is less than YTM; ex. a 10-year bond may have a duration of 6. A ZC Bond's duration is equal to the YTM, however. Ex. If interest rates are going to fall 1%, choose the longer duration; if rates are going to rise 1%, choose the shorter duration.

Defined Benefit Plans

Businesses today are less likely to offer these plans. DB plans are designed to provide participants with a guaranted lifetime income or pension; these plans are becoming increasingly scarce. Mostly, there are costs and risks to employers and people are living longer! Defined contribution (DC) plans are their replacement. The investment accounts are focused on investment returns and account value rather than income goals. Plan risks are borne by the participants, too.

Strategies in Living Off Their Retirement Assets

Capital preservation. Followers of this strategy live off the income produced by their assets without touching the principal. This strategy assures that they will not outlive their incomes. A very large asset pool is required to follow this strategy. Capital utilization. In this strategy, both income and principal are tapped for retirement living expenses. These retirees must make a good estimate of their life spans, otherwise they risk outliving their incomes.

Cash Equivalents

Cash equivalent investments are short-term (maturities of one year or less) money market instruments that are highly liquid and have a high safety of principal. In exchange for this safety they generally offer low rates of return and thereby are subject to purchasing power risk. They do, however, provide a place for an emergency fund and a temporary parking place for retirement funds when other securities markets are in turmoil. They also have a diversification effect on a portfolio.

Statement of Cash Flow (Income Statement)

Cash inflows less cash outflows is the net cash flow or deficit.

Assets

Cash/cash equivalents, invested assets, and personal assets. Assets should be valued at their current fair market value. Leased property and equipment are typically not included as assets but are shown in the footnotes.

Common Stock

Common stocks have earned higher returns over time than other asset classes. Common stocks have outperformed nearly every asset class by a wide margin. In addition, they offer the prospect of rising dividends over time. Their disadvantage to the investor is their volatility, which is also higher than most other asset classes. This volatility makes many clients reluctant to make large allocations to stocks; but the fact is that many of these same clients will be unable to accumulate sufficient retirement savings without the greater returns enjoyed by stocks over time. The two major risks for common stock are business risk and market risk.

Core-Satellite Allocation

Core-satellite asset allocation combines strategic and tactical asset allocation by dividing a portfolio into two parts: (1) the core, which represents 70% to 80% of the portfolio and is invested often in index funds or broad-based exchange-traded funds (strategic asset allocation); and (2) the remaining part of the portfolio, the satellite portion, is used to try to take advantage of particular opportunities that add return and/or diversification to the portfolio (tactical asset allocation).

COLA

Cost of living adjustment. Once you begin receiving your Social Security retirement benefit, widow/widower's benefit, or disability related benefit, you may be given a yearly cost-of-living increase in the month of December (which will actually appear in your January check). Consequently, the check that you receive in the month of January will reflect any applicable cost-of-living increase for the year.

Six Steps of Retirement Planning Process

The six steps of the retirement planning process are as follows: establish and define the client-counselor relationship gather client data and determine goals and expectations determine the client's financial status by analyzing and evaluating develop and present the retirement plan implement the plan monitor the plan

Dollar Cost Averaging

investing roughly equal amounts of money at regular intervals.

Expenses Likely to Decrease During Retirement

During retirement, many items of expense tend to be less or zero. These may include the following: Transportation costs: train, bus, and auto expenses will likely drop when commuting to work ends. One or two cars may be eliminated altogether. Food and housing costs usually are less—not as a result of not working, but because most clients have their mortgages paid and children out of the home by the time they retire. Term life insurance and disability premiums can usually be stopped entirely. Dry cleaning bills, professional fees, clothing expenses, and other costs associated with working diminish. On the other hand, some costs usually go up: medical and dental expenses expenditures on hobbies, recreation, and travel

Ex. When gathering data during the retirement planning process, financial goals should be quantified in dollar amounts and which of the following?

Established time frames.

Example:

Example. Fred and Wilma's annual retirement income need (in today's dollars) is $70,000. They anticipate annual Social Security benefits of $36,000, and Wilma will receive a small government pension (adjusted each year for inflation) for $4,000 a year (in today's dollars). Their retirement income deficit can be calculated as follows: $70,000 - ($36,000 + $4,000) = $30,000. This means that, expressed in today's dollars, their retirement income deficit is $30,000. Do the rest on paper. See the example on Ch. 4 on Module 1.

Inflation-Adjusted Return

Example. Let's continue with Fred and Wilma. We have already determined that they will need $62,813 at the beginning of their first year of retirement, and we are using an assumed inflation rate of 3%. Let's further assume that the planner, Fred, and Wilma want to plan for a 30-year retirement period, and have also determined that 7% is a reasonable rate of return, given the investment mix of Fred and Wilma. As we saw above, we don't just take the difference between the 7% and 3% to come up with an inflation-adjusted return; we need to use the inflation-adjusted return formula: The keystrokes for this calculation on your financial calculator are as follows: 1.07 ÷ 1.03, -, 1, x, 100 = 3.8835%. You then simply press i/YR to enter this as the applicable inflation-adjusted yield. Now that we have the inflation-adjusted return, we can complete the calculation. Again, make sure this is done in the "BEGIN" mode: 62,813 PMT 30 N 3.8835 I/YR PV = 1,144,480 -- Living off only the cash flow of an asset pool is a strategy of capital preservation. Going back to our example, let us assume that Fred and Wilma do not want to exhaust their funds, but instead want to use the capital preservation approach and have the full $1,144,480 of principal left at the end of their 30-year retirement period. It is very simple to calculate the additional amount of savings needed. You would simply enter $1,144,480 as a future value, and then discount it back 30 years at the estimated rate of return: 1,144,480 FV 30 N 7 I/YR PV = 150,347

Computing FICA

Fred makes $100,000 working for the ABC Corporation. How much FICA does he pay as an employee? $100k x .0765 = $7,650 Sarah makes $150,000 in 2021. What is her share of FICA? $142,800 x 0.0765 = $10,924 $150,000 - $142,800 x 0.0145 = $104 $10,924 + $104 = $11,028

Value Averaging Strategy

In value averaging, the client commits to increasing the portfolio value by a certain dollar amount each period—by $2,000 per month, in the case of Anna. Given the current share price of $22, Anna's initial 100 shares have a total value of $2,200. Therefore, to maintain a monthly value average of $2,000, Anna needs to invest $1,800. At $22 per share that results in the purchase of $1,800 ÷ $22, or 82 shares (81.818 rounded). Total value should be $4,000 after two months. To check: 182 shares x $22/share = $4,000 ($4,004 actually, due to rounding up to whole shares).

Capital Preservation

Living off only the cash flow of an asset pool.

Longevity Risk

Longevity risk is the risk that a retiree will outlive his or her financial resources. As such, it is a significant risk for a retiree.

Social Security Reforms

Many reforms are now being considered to address the projected 23% Social Security shortfall. These include cutting benefit payments, raising Social Security payroll taxes, further increasing full retirement age, changing how excess funds are invested, privatizing Social Security, and providing direct government subsidies to the program.

Ex. Mary wants to retire the first of next year. She wants to receive monthly retirement income payments on the first day of each month. To solve the amount of capital required to provide her the income she wants, you need to solve for

annuity due-set calculator at begin.

Identifying Current Trends in Retirement Planning

businesses today are less likely to offer defined benefit (DB) plans increased focus on planning for longevity expansion of employer sponsored financial wellness initiatives expansion of plan distribution options

Characteristics of Growth Stocks

high profit margins earnings-per-share growth of 15% or more sales and earnings highly independent of the general economy small dividends, if any (as all earnings are used to finance expansion) distinctive products or services above average price-to-earnings ratios (as much as two to four times that of S&P 500 stocks) high price-to-book-value ratios high betas high expectations for continued growth by the investment community

Financial Goals that May Conflict with Retirement Goals

housing education emergency funds care of elderly parents or a disabled child

Ex. During retirement, John wants to receive $50,000 at the end of each year for the rest of his life. To calculate the amount that he will need to save, you need to solve for

ordinary annuity-set calculator at end. You do need to set the calculator in END mode and solve for ordinary annuity. If this were asking you to solve for an annuity due (where payments occur at the beginning of the period), you would set calculator for BEG.

Ex. You have just finished identifying and disclosing all of the apparent and potential conflicts of interest in the relationship with your client. What is the next step that you would undertake as you continue through the planning process?

Gathering information necessary to fulfill the engagement.

Determining Goals

Goals need to be specific, sometimes multiple.There must be clear time horizons and amounts. These goals must be prioritized since there may be insufficient resources to accomplish them. The typical hierarchy of financial goals are: 1. basic needs 2. safety 3. managing finances (debt, mortgages) 4. esteem (vacations, travel, etc) 5. self-actualization (financial freedom)

Ex. John has been promised a stream of $30,000 annual payments at the beginning of each year for a period of 20 years. The present value of these payments, discounted at a rate of 6%, is

Set calculator to BEG, 1 payment per year, and C/ALL Keystrokes: 30000 PMT 20N 6 I/YR PV Solution: $364,743

Ex. Which of the following types of information are important to gather from a client prior to developing retirement planning recommendations? his or her desired age of retirement the client's assumption for the long-term rate of inflation investments the client prefers not to use number of children client and spouse intend to have

I, II, III, and IV

Windfall Elimination Provision

If any part of your government pension is based on work not covered by Social Security, you may be affected by the Windfall Elimination Provision. For 2021, the reduction is $498/month or one-half of the monthly pension benefit. This is phased out for individuals who have 30+ years of substantial earnings in a covered position.

Determining the Retirement Savings Need

1. calculate net annual retirement income need. This is done by seeing the sources of inflation-adjusted income from a total need; these may include SS income or pension income. 2. adjust income deficit for inflation over preretirement period. Determine income needed in the first year as adjusted for inflation 3. determine total retirement fund needed. The calculated lump=sum retirement fund is the total fund needed on day one of retirement. This amount, invested at the IRR, will generate annual income payments equal to the deficit which will grow with inflation each year. 4. determine savings amount needed - level payment and serial payments. Once the lump amount is determined, then annual savings or serial payments can be calculated.

Ex. If you invest $10,000 in an account that compounds at an annual rate of 5%, what will the account be worth after 10 years?

Set calculator to 1 payment per year, and C/ALL Keystrokes: 10000 PV 10 N 5 I/YR FV Solution: $16,288.95.

The Role of the Retirement Counselor

The role of the retirement counselor is to facilitate comprehensive retirement planning through a prudent and coordinated set of recommendations consistent with the client's needs, goals, attitudes, and resources. This invariably requires a relationship between the client and counselor based upon trust and a mutually defined understanding of the scope of services to be offered.

Factors for Filing Social Security

Current resources, life-expectancy, and breakeven age, whether you are still employed (earnings test reduction). Breakeven Age: The age at which the total value of the higher benefits you receive from delaying starts to exceed the total value of the lower benefits you will receive if you start early.

Fully Insured vs. Currently Insured

Fully: Having at least one credit for every year since turning 21 with a maximum of 40 credits; that's 10 years of work. One must be fully ensured to receive these retirement benefits barring special exceptions due to disability or widows age 60+ Currently: Have at least 6 credits in a 13 credit period preceding the event where eligibility is sought. Child benefits, mother or father benefits, and the lump sum death benefit become available.

Essential Elements of an IPS

GRASP: Goals, Risk, Asset Allocation, Strategies, Periodic Review Goals must be clear Understand a risk level acceptable to the client Understand how client's assets should be allocated amongst suitable classes of investments A statement identifying the investment vehicles and investment strategies deemed suitable for the portfolio A provision for periodic review.

Collecting Social Security

Full Retirement Age (FRA) By starting your Social Security benefits at full retirement age, you will receive 100% of your primary insurance amount (PIA). Before FRA While benefits can begin as early as age 62, if you collect Social Security before your FRA, you will receive a permanently reduced benefit. The reduction is calculated as follows: Payment is reduced 5/9 of 1% for each month filed before FRA, up to 36 months, Payment is reduced 5/12 of 1% for each month filed early in excess of 36 months. After FRA If you delay receipt of benefits until after your FRA, you will receive a payment in excess of that which you would have otherwise received. For those just reaching full retirement age, this increase equates to an 8% of PIA raise per year for each year you delay filing after your FRA, up until a maximum of age 70. Social Security refers to this raise as a delayed retirement credit. Paying Back Social Security: Let's say an individual realizes that they took social security too early, what happens? Claimants have 12 months from the date they filed their original claim to pay back all payments, and they can then refile for increased benefits at a later date. This strategy can be employed to increase benefits by waiting past FRA and then receiving delayed retirement credits.

Government Pension Offset

If you receive a government pension based on work not covered by Social Security, your Social Security spouse's or widow(er)'s benefits may be reduced. The GPO provision will reduce the spousal or survivor benefit by two-thirds amount of the pension. Ex. Carla is collecting $600 per month from a government pension and is also eligible to receive a Social Security spousal benefit of $1,000 per month. Due to the GPO, her Social Security spousal benefit will be reduced to ____________. Due to the GPO, her Social Security spousal benefit will be reduced by 2/3 of her state government pension amount, or $400. $1,000 - $400 = $600.

Earned Income Restrictions

In 2021, if you are under your FRA and working, you will lose $1 in Social Security benefits for every $2 earned above the earnings cap of $18,960 (indexed to inflation). In the year in which you reach your FRA this reduction is reduced to $1 for every $3 earned above the earnings cap of $50,520 for 2021 . Once you obtain your FRA you may continue to work and earn money without it impacting your Social Security benefit.

Real Estate

In general, real estate has offered a respectable average rate of return. However, poor liquidity, high transaction costs, and tax-reporting responsibilities are major disadvantages. And real estate can become overvalued like any asset, leading to negative returns. For those who directly own property, few can afford to diversify across several properties and locations. Many of these disadvantages are addressed through REITs, which own various properties (for equity REITs), mortgages (for income REITs), or both (for hybrid REITs) and trade on organized exchanges and over the counter. One aspect of real estate that is applicable to retirees is the reverse mortgage, which provides cash flow to a homeowner with significant equity in his or her home.

Adjusting Income Deficit for Inflation Over Preretirement Period

In order to complete this future value calculation, the necessary inputs on your financial calculator are: PV = present value of retirement income deficit N = number of periods (years) until retirement I/YR = Inflation rate Example. Continuing with Fred and Wilma, they are both age 40 and plan to retire at age 65, so they have 25 years until retirement. They anticipate that inflation will be 3%. So the future value of the income amount they would need in the first year of retirement is: 30,000 PV 25 N 3 I/YR FV = 62,813

Ex. Barb wants a retirement income of $5,000 at the beginning of each month for 25 years. If she is able to earn a return of 7% on invested assets, she needs $700,000 to fund her income. However, this does not include any inflation adjustment. By incorporating a 3.5% inflation factor, what is Barb's approximate funding requirement increase, stated at the time of retirement, if she wants to maintain the same purchasing power of her $5,000 monthly payment?

Instead of around $700,000, Barb will need slightly more than $1 million to maintain an inflation-adjusted budget with equal purchasing power (using an inflation-adjusted rate of 3.3816 compounded monthly); so the increase is approximately $300,000. Set calculator to BEG mode, 12 payments per year, and C/ALL Keystrokes: 25, shift, N 3.3816 I/YR 5000, +/-, PMT PV Solution: $1,014,389.93

Low P/E (Price to Earnings) Strategy

Low P/Es represent a consensus view that "the earnings of these stocks are not worth much." To the contrarian, that dim consensus might represent a buying opportunity. -- Dreman's advice to the investor is threefold: Select stocks with low P/Es, but only if the companies have solid performances; that is, select those in strong financial positions with favorable operating and financial ratios. Many stocks deserve low P/Es because the companies they represent are truly inferior. Others, however, trade at low P/Es because the companies or industries they represent are currently out of favor. Fad-following investors eventually become disenchanted with their current favorites and turn to others. When the low P/E stocks or industries come back into vogue, their prices are bid up, creating profits. Diversify. A diversified portfolio of low P/E stocks should have an equal weighting in 15-20 different stocks representing 10-12 industries. Only buy shares of medium to larger companies that are listed on the NYSE or AMEX or that are actively traded over the counter. -- Over the years, research on the efficacy of the low P/E approach is generally supportive of the strategy. Studies by Sanjay Basu show that low P/E portfolios outperform the market on a risk-adjusted basis even after transaction costs are considered. Another study by Haim Levy and Zvi Lehrman indicates the same, but it also indicates that transaction costs tend to eliminate the incremental profits of this approach. Dreman himself reported a study of 1,800 listed companies rank ordered into five groups by initial P/E ratios. During the period 1975 to 1985, the highest total returns were associated with the lowest P/E group, and the lowest total performance was earned by the highest P/E group of firms. These performance differences were substantial. A subsequent study

Ex. What is the value of a bond with a 6% coupon payment, a $1,000 par value (principal paid on maturity also called maturity value), and a maturity of 10 years, if the market interest rate (i.e., YTM) is 4%? 6%? 8%?

Make sure that the calculator is set to 2 periods per year: At 4%: 10 SHIFT [n] 4[i] 30[PMT] 1000[FV], then solve for [PV] DISPLAY: -1,163.51 (ignore sign) At 6%: 10 SHIFT [n] 6[i] 30[PMT] 1000[FV], then solve for [PV] DISPLAY: -1,000.00 (ignore sign) At 8%: 10 SHIFT [n] 8[i] 30[PMT] 1000[FV], then solve for [PV] DISPLAY: -864.10 (ignore sign)

Net Worth

Net Worth indicates the monetary value the client would have if all assets were converted to cash at the fair market value listed; then used to pay of outstanding debts.

Ex. Mary wants to have a retirement income of $60,000 protected against 3% inflation. She assumes that she will earn 9%, and wants to have the income for 30 years. How much capital will be required to provide Mary this much income at the first of each year? (Set your calculator for four decimal places.)

Set calculator to BEG mode, one payment per year, and C/ALL Because the problem indicates that Mary wants her income to be protected against inflation, you will use the inflation-adjusted rate of 5.8252% [((1.09/1.03) - 1) x 100 = 5.8252]. Keystrokes: 60000, PMT 5.8252, I/YR 30, N PV Solution: -$890,593

Ex. Margaret needs an annual retirement income of $48,000 protected against 2% inflation. You are to assume that she will earn 8%, and wants to have the income for 25 years. How much capital will be required to provide Margaret this much income at the first of each year?

Set calculator to BEG mode, one payment per year, and C/ALL. Because the problem indicates that Margaret wants her income to be protected against inflation, you will use the inflation-adjusted rate of 5.8824% [((1.08/1.02) - 1) x 100 = 5.8824%] Keystrokes: 48,000, PMT 5.8824, I/Y 25, N PV, -$657,022

Provisional Income & Taxes

Provisional income is calculated as your adjusted gross income, plus any tax-exempt income (e.g., from municipal bonds) and excluded foreign income, plus one-half of your Social Security benefits. 85% of your SSB may be taxed if your provisional income is above $34k, $44k for couples filing together.

Qualified Default Investment Alternative (QDIA)

Qualified default investment alternative (QDIA) rules are designed to make it easier for fiduciaries of defined contribution plans with participant-directed investment accounts, such as 401(k) plans, to automatically enroll participants. These rules describe qualified default investments which include, but are not necessarily limited to, targeted-retirement funds, balanced funds, or a professionally managed fund. These investment options, discussed below, delegate the very important investment considerations of asset allocation and portfolio management to professional money managers.

Spousal Benefits

Receiving an ex-spouse benefit: So long as you were married for 10+ years, are currently unmarried, and are age 62 or older you will qualify for benefits based on your ex-spouse's record. The divorced spouse's benefit at FRA equals one-half of the worker's PIA, and will be reduced if taken prior to FRA. Such a benefit will end if you remarry, die, or become entitled to a retirement or disability benefit that equals or exceeds one-half of the worker's PIA. If an individual remarries before the age of 60, the widower's benefit will be terminated. If an individual is over the age of 60 when they remarry, their marriage will not affect their Social Security widower's benefit. Ex. Betsy, the spouse with the lower Social Security benefit, will take her own $1,200 benefit. Jeff, the spouse with the higher Social Security benefit, will receive a $600 spousal benefit, deferring receipt of his own benefit until age 70. The plan is for Jeff to receive the delayed retirement credit. This will increase his monthly benefit and it will also increase the survivor benefit for Betsy. The "restricted application for spousal benefits only" was available to people born on or before Jan 2, 1954 and who has achieved their FRA. Thus, it is no longer possible for anyone to initiate this strategy as of Jan 3, 2020. However, retirement planners need to understand this strategy because many people have implemented it. Survivor's Benefit: Survivors can collect benefits based on their deceased spouse's work history and earnings once they turn age 60, even if they have no children. If they're caring for a qualifying child, they can collect benefits before age 60. No matter what, the first step is that the surviving spouse starts by receiving whatever check the worker was receiving or was entitled to receive. The second step is to check if the s

Income Replacement Percentages

Replacement Ratios are rough guides in determining the amount of income needed in retirement. It's common to say that retirees need 70% to 80% of preretirement income to support a similar lifestyle in retirement. This is entirely dependent on the lifestyle that the person wants to live later on.

Serial Savings Approach

Serial savings are payments that increase with inflation. This is often the preferable way to fund a long term goal because the savings dollar amount will increase annually at rate of inflation. 1. deflate the lump sum needed at retirement into today's dollars using hte inflation rate as a discount rate 2. calculate the payment using the discounted lump sum from step 1 as a future value and an inflation-adjusted return as the interest rate 3. once the payment has been solved, it will need to be increased by that inflation rate in order to arrive at the end of first year payment Example. We have already determined that Fred and Wilma need a lump sum of $1,144,480 at the beginning of retirement 25 years from now, the inflation rate is 3%, and the rate of return 7%. There are three steps in the serial payment calculation: Deflate the lump sum needed at retirement into today's dollars, using the inflation rate as the discount rate. The lump sum needed at the beginning of retirement is $1,144,480. We are going to deflate it back over 25 years to today's dollars using the 3% inflation rate. The result is then used as a future value in the calculation. The reason for this is that we have taken inflation into account in coming up with the lump sum amount needed at the beginning of retirement, but since we are going to be taking inflation into account with our payments (increasing them by the inflation rate each year), we need to back out this inflation from the lump sum. 1,144,480 FV 25 N 3 I/YR PV = $546,610 Calculate the payment using the discounted lump sum from step (1) as a future value and an inflation-adjusted return as the interest rate. Now we are going to solve for payment, using the present value we just solved as a future value, and using an inflation-adjusted return for the interest rate (the 3.8835 we solved pr

Ex. Your client's current retirement income deficit is $80,000. In 31 years, that figure will be _________, assuming a 4% rate of inflation.

Set calculator to 1 payment per year, and C ALL Keystrokes: 80000 PV 31 N 4 I/YR FV Solution: $269,851.

Ex. John wants to have $1 million in his retirement fund when he retires in 25 years. Assuming that he earns 11% and inflation is at 3%, how much does John need to save on a level basis at the end of each year?

Set calculator to END mode, one payment per year, and C/ALL Keystrokes: 1000000, FV 25, N 11 I/YR PMT Solution: $8,740 Notice that the inflation rate does not come into play here because the question notes that John will be saving on a level basis. Also, the goal is not expressed in today's dollars. The goal is simply to have $1 million in the account at retirement.

Small Stock Strategy Investing

Small stocks are not for everyone, and certainly not for many retirees. They may be suitable, however, for clients with high risk tolerances, entrepreneurial instincts, and long investment horizons.

Social Security for Retirement

Social Security represents half or more of total retirement income for 53% of married couples and 74% of unmarried individuals. In fact, for most retirees, Social Security is their only income source that protects against inflation risk, market risk, and longevity risk. However, Social Security was never designed to replace your full preretirement income. Instead, it is meant to provide a foundation, or income floor, and to prevent poverty during one's retirement years. The intent is for individuals to build other retirement savings in order to create a financially secure retirement. On average, Social Security represents 33% of the income of seniors according to ssa.gov's Fast Facts for the most recent year reported (2015). See page 6 of the Module for the graph. 2015 is the latest edition of this report because Social Security is reconsidering the methodology it uses.

The purpose of Social Security

Social Security was created in 1935 with the intent of protecting families from poverty after a worker's retirement. It was established as a social insurance program, where benefits are earned by contributing to the system during the course of employment by means of a payroll tax, or FICA (Federal Insurance Contributions Act). The total FICA tax is 15.3 %. The employer and employee each pay 6.2 % for old-age, survivors and disability insurance (OASDI) and 1.45% each for hospital insurance. That's 7.65% each. The Social Security wage base is $142,800 in 2021.

Ex. Which one of the following can be used to measure a mutual fund's risk-adjusted return as measured by total risk?

Standard Deviation

Strategic Asset Allocation

Strategic asset allocation attempts to identify the asset mix that will provide the optimal balance between expected risk and return for a long investment horizon. Once the asset mix is determined and the weights assigned, the portfolio manager tries to maintain that balance. With fluctuating asset prices, some asset classes will naturally do better than others, unbalancing the portfolio relative to the weights originally assigned to each asset category. For example, during a period of growing stock prices and rising interest rates, a portfolio that begins with 50% of the dollar value in stocks and 50% in bonds will quickly become unbalanced, with stock values dominating the portfolio. Thus, intervention (with the client's approval) becomes necessary to rebalance the mix to the original strategic balance.

Tactical Asset Allocation

Tactical asset allocation is an active approach that tries to position a portfolio into those assets, sectors, and individual securities showing the most promise of above-average gains. Changes are then made as the prospects for these assets, sectors, and securities change. Many approaches can be used in tactical asset allocation. It can use sector rotation and market timing approaches, or it can incorporate momentum investing, whereby money is moved from areas with below-average performance to areas that are performing above average. -Tactical asset allocation may also be seen as the opposite of momentum investing, moving money away from the asset category that has been most successful to one that has been the least successful. The theory here is that the most successful asset class has either become fully valued or overvalued, and the least successful asset class has become undervalued. Naturally, caution is advised with any such simple strategy. Sector rotation (moving, for example, from financial services stocks to capital goods stocks or from large-cap stocks to small-cap stocks) and market timing are typical methods of implementing this approach to asset allocation.

Types of Risk, Measures of Risk

Take a look at Module 2 of AAMS; Systematic and Non-Systematic Risk portions are repeated here. As is SD, Beta, Treynor, Sharpe, Alpha, and Duration.

Level Savings Approach

Take the lump sum amount needed at retirement and calculate the payment needed to reach that amount using the assumed ROR. Example. Returning to Fred and Wilma, we had determined that they needed to save an additional $1,144,480 by the beginning of retirement to make up for their shortfall from Social Security and any inflation-adjusted pensions to achieve the level of retirement income that they desired using the capital utilization method ($30,000 in today's dollars, $62,813 in retirement year one dollars). Remember that Fred and Wilma have 25 years until retirement, so the annual level savings amount would be: 1,144,480 FV 25 N 7 I/YR PMT = $18,095

Investment Types

Target Date Funds -Target funds, which are often found in retirement accounts, enable the investor to invest for retirement in just one fund, automatically allocating between stocks and bonds for the investor. The longer until retirement the more that will be invested in stocks, and then as retirement approaches and into retirement the amount allocated to stocks will decrease, and the amount allocated to bonds will increase. This is called the "glide path." Advantages include ease of investing in just one fund, and the allocation being changed automatically over time. Disadvantages are that the "one size fits all" approach may not be the optimum choice for the investor, and the fund may not be in sync with the risk tolerance of the investor. Balanced Funds -Balanced funds have a portfolio mix of bonds, preferred stocks, and common stocks with the dual investment objectives of current income and capital appreciation. As a general rule of thumb, these funds have an asset mix of about 60% stocks and 40% bonds. Balanced funds are considered "total return" funds, since they provide both current income and appreciation. Managed Accounts -A managed account, commonly called a separate account or a privately managed account, is one that is managed by a professional money manager who creates a portfolio tailored and customized to the needs of an individual. This customization provides much greater portfolio flexibility should the individual's circumstances, needs, or preferences change, because the individual securities are actually held in the client's name.

Fixed Income Securities

The advantages of fixed-income securities are their fixed cash flow stream and return of principal if held to maturity, high certainty of return with high quality securities, and generally low price volatility. The big disadvantages are their low-to-moderate rate of return and their two major risks: -exposure to inflation (purchasing power risk) due to the fixed dollar amount of their interest income and principal, and -interest rate risk (as interest rates increase, bond prices decrease). One type of bond, the Treasury inflation-protected security (TIPS), pays a fixed rate of interest and has its principal increase with the Consumer Price Index, thereby providing a hedge against inflation. Bond investors look to two sources for these returns: periodic interest payments and capital gains. Those interest payments may be taxable or, if from municipal securities, tax-exempt.

Barbell Strategy

The barbell strategy splits the bond portion of the portfolio between a short-term bond series and a long-term bond series; both ends then stagger maturities similar to the ladder approach. The essence of this strategy is to blend short-term and long-term bonds to provide an overall income stream that is acceptable to the client.

Cash Flow Statement & Equation

The cash flow statement is a financial statement that describes cash inflows (from salaries, investment returns, rents, etc.) and cash outflows (for living expenses, loan payments, savings, taxes, etc.). It is defined by the following equation: Cash inflows - Cash outflows = Net cash surplus (deficit)

Ex. The process of data gathering is the second step in the retirement planning process. All of the following are examples of data to be gathered except

The client's ability to purchase health insurance or investments is reviewed in step three of the planning process, in which an analysis and evaluation of financial status takes place. During the data gathering process the planner should identify the client's retirement account balances and income sources and amounts, and determine his or her risk tolerance.

Expected Value or Mean

The expected value is the man of a probability distribution of potential observations. The symbol for the mean is X. Ex. Returning to the previous example of investments QRS and TUV, suppose the possible returns for investment QRS are 10% and 14%, each with a probability of occurrence of 25%, and the probability of occurrence of a 12% return is 50%. The expected value (return) for investment QRS is: 0.25(10%) + 0.50(12%) + 0.25(14%) = 12%

Ex. The lower the coupon rate,

The greater the price volatility of the bond.

Ladder Strategy

The ladder strategy, also known as the staggered maturity strategy, spreads equal amounts of the bond holdings along different maturities; this strategy avoids large commitments at one maturity, and is intended to help offset interest rate risk.

Purpose of Asset Allocation

The purpose of asset allocation is to apportion funds in a way that meets the client's investment goals and dampens the effects of periodic market fluctuations. Two common factors that can alleviate retirement investors' concerns with security price volatility are time and asset allocation. Longer investment horizons can manage greater volatility than short investment horizons. Asset allocation can select asset classes that are aligned with both the investor's investment horizon and his or her risk tolerance.

Statement of Financial Position

The three key components of a statement of financial position are: Assets. Assets are what the client owns: cash, securities, property, and other resources. Liabilities. Liabilities are what the client owes: credit card debts, mortgages, auto note balances, etc. Net worth. Net worth is defined as assets minus liabilities. It represents what the client would have left over if he liquidated all assets at fair market value and used the proceeds to pay off all liabilities.

Two Qualities of Retirement Goals Useful in Planning

To be useful in planning, retirement goals should be specific and prioritized. A specific goal indicates an event, an amount, and/or a time.

Calculating the Social Security Benefit

To calculate a Social Security benefit, start with your earnings record and then apply an inflation adjustment to each year of earnings shown, which puts all of your past earnings in today's dollars. Next, determine your "lifetime average earnings," which Social Security defines as your highest 35 years of earnings, as adjusted for inflation. Your highest 35 years of inflation-adjusted wages are then totaled and divided by 420 (the number of months in 35 years) to come up with your average monthly earnings, or your AIME (average indexed monthly earnings). Social Security then applies a formula to your AIME to determine your monthly benefit, or primary insurance amount (PIA). Henry would receive 50% of Etta's PIA only if his PIA was less than 50% of Etta's PIA. The family maximum benefit for a couple with no ancillary beneficiaries does not apply when both are receiving benefits based on their own earnings histories.

Assets Not Included in a List of Retirement Income Producers

When you look through the statement of financial position to identify assets that might produce income during retirement, do not include: Emergency funds—the client will need these funds for emergencies during retirement. Funds intended for college education. The value of the personal residence. In most cases, even if the client sells the house, he or she will have to purchase a replacement or begin paying rent. However, be alert to situations in which the retiree sells his or her current residence and replaces it with a lower-cost dwelling; the cost difference may be available for income-producing investments.

Challenges of Shifting from Defined Benefit to Defined Contribution Plans

With defined contribution plans, risks are borne by plan participants/employees rather than by plan sponsors/employers (as with defined benefit plans). Many of these employees have little or no financial expertise.

Treasury Inflation-Protected Securities (TIPS)

With inflation being a real concern for retirement savers and retirees, one fixed-income security that can be used to counter inflation is the Treasury inflation-protected security, or TIPS. These securities are issued by the U.S. government, so there is no risk of default. They have a fixed interest rate, but, unlike traditional bonds, their principal increases every six months with the Consumer Price Index, thereby keeping up with inflation (in the event of deflation, the principal would decrease). Because of this structure, interest payments would also increase as the fixed rate is applied to the new, higher principal. These bonds are issued in multiples of $100 and with 5-, 10-, and 30-year maturities. At maturity, the investor receives the greater of the inflation-adjusted principal or, in the event of deflation, the face value of the bonds. TIPS are taxed yearly (at the federal level, they are exempt from state and local tax) on not only the interest paid but also on the inflation adjustment, even though that inflation adjustment isn't received until maturity. For this reason, TIPS are best used in a tax-deferred account such as an IRA. TIPS can be a good choice for at least part of the fixed-income component of a portfolio for individuals investing for retirement. For retirees, one strategy with TIPS would be to stagger maturities so bonds would mature yearly, and resulting cash flows could be used to pay the retiree's expenses. This would provide regular cash flow that would also keep up with the Consumer Price Index. It is important to remember that retirees' expenses do not necessarily coincide with the CPI. For example, in recent years health and energy expenses have increased much faster than inflation. While TIPS can be part of the solution to keep up with inflation, stocks over time can provide returns th

Gathering Data

You need both quantitative and qualitative date in understanding the client. The data needed is:-family and dependent data-names, addresses, telephone numbers of other advisers they work with -assets, liabilities, net worth -income data -insurance and tax situation -employee financial benefits including stock options -investment experience, holdings, and outlook -retirement planning data -client owned business information-time horizons-anticipated educational, gifting, or other financial requirements -client and family health status -interests -occupation and employment expectations -risk tolerance -changes in lifestyle -financial goals

Ex. Strategic asset allocation is

a "target allocation" approach to investing.

Ex. It is anticipated that the percentage of people who continue to work after they reach age 65 or 66 will increase in the future. All of the following are reasons for this increase except

almost all categories of living expenses increase during retirement years. With some exceptions, most categories of living expenses (such as transportation, clothing, and housing) decrease during retirement years. Some expenses, such as travel and medical, may increase during retirement years. It is true that Social Security benefits may increase for people who work past their Social Security full retirement age. Additionally, wages and salaries earned during retirement will obviously increase retirement income and longer life spans will result in a need for more retirement income.

Small-Firm Effect

stocks of small firms have earned abnormal returns, primarily in the month of January. Enables investors to reap returns greater than associated risks explain.

Efficient Market Hypothesis

the theory that asset prices reflect all publicly available information about the value of an asset. The efficient market hypothesis contends that current market prices reflect all the available information about issuers and the future expectations of their investors; therefore, attempting to find mispriced securities in an efficient market is a waste of time.