MODULE 1: MAXIMIZING THE CLIENT EXPERIENCE DURING THE RETIREMENT PLANNING PROCESS

Discounting and ___________ are opposite time value of money concepts. A) inflation-adjusted yield B) compounding C) interest per year D) earnings multiplier

B) compounding Compounding is the opposite of discounting when talking about time value of money.

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? A) $657,022 B) $620,521 C) $512,389 D) $553,380

A) $657,022 Set calculator to BEG mode, one payment per year, and clear the memory. 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/YR. For the TI BA II+, I/Y. 25, N PV, -$657,022. For the TI BA II+, CPT, PV.

When estimating the duration of retirement for planning purposes, the retirement planner should do all of the following except A) add 25 years for good measure. B) base the estimate on the life of the spouse expected to live longer. C) make adjustments based on the client's personal lifestyle. D) use average life expectancy figures as a starting point.

A) add 25 years for good measure. It is generally sufficient to add 5 to 10 years to all estimates. Adding 25 years would necessitate retirement funding until after age 100 in most cases. All of the other items listed should be done when estimating the duration of a client's retirement.

Mary wants to retire the first of next year. She wants to receive annual retirement income payments on the first day of each year, starting when she retires. To solve the amount of capital required to provide her the income she wants, you need to solve for A) annuity due; set calculator to the begin mode. B) annuity due; set calculator to the end mode. C) ordinary annuity; set calculator to the end mode. D) ordinary annuity; set calculator to the begin mode.

A) annuity due; set calculator to the begin mode. To solve this problem, you would need to solve for annuity due, and set the calculator to the begin mode.

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? A) gather information necessary to fulfill the engagement B) implement the recommendations C) analyze and evaluate the client's current financial status D) develop recommendations

A) gather information necessary to fulfill the engagement The identification and resolution of apparent and potential conflicts of interest in the planner/client relationship occurs in the first step of the retirement planning process, Establishing and Defining the Client/Planner Relationship. The next step is to gather information necessary to fulfill the engagement, the second step in the retirement planning process.

All of the following financial goals may conflict with retirement goals EXCEPT A) wealth accumulation. B) college funding. C) emergency funding. D) the cost of caring for elderly parents.

A) wealth accumulation. One of the purposes of lifelong wealth accumulation is to provide for a comfortable retirement. Each of the other goals may conflict with retirement goals.

Frank and Brenda Elliot own $20,000 in cash equivalents, $100,000 in invested assets, and $290,000 in use assets. The Elliots have an outstanding mortgage of $150,000 and owe $3,500 in credit card debt. What is the Elliots' net worth? A) $410,000 B) $256,500 C) $236,500 D) $260,000

B) $256,500 Net worth is defined as assets minus liabilities. The Elliots have $410,000 in assets and $153,500 in liabilities. Their net worth is $256,500.

Joachim 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 A) $344,098. B) $364,743. C) $96,214. D) Solution cannot be determined

B) $364,743. Set calculator to BEG, 1 payment per year, and clear the memory. Keystrokes: 30000, PMT 20, Shift, N. For the TI BA II+, 20, 2ND, xP/Y, N. The result should be "20.0000." This is 20 years times 1 period/year. 6, I/YR. For the TI BA II+, I/Y. PV Solution: -$364,743

You would like to examine the Smiths' net worth as of Dec. 31, 20XX. You will prepare A) a retirement plan. B) a statement of financial position. C) a cash flow statement. D) an income replacement percentage.

B) a statement of financial position. A statement of financial position shows a client's net worth, which is defined as assets minus liabilities, as of a specific date. A cash flow statement shows a client's net cash flow (or deficit) over a period of time (usually one year). Income replacement percentage is another name for "replacement ratio" and is used as a rough guide in determining the amount of income needed in retirement relative to pre-retirement income.

A fiduciary has five major responsibilities. These include all but which one of the following? A) act with utmost good faith B) have annual meetings with clients C) provide full and adequate disclosure of all material facts D) put a client's interest first

B) have annual meetings with clients Having annual client meetings is not a requirement of the fiduciary standard, but it is certainly good practice.

All of the following are considered foundation financial goals EXCEPT A) food, clothing, and shelter. B) helping grandchildren with college. C) emergency funds. D) life, health, and automobile insurance.

B) helping grandchildren with college. College funding is considered a lifestyle goal. Foundation goals are those that contribute to more basic living needs such as food, insurance, and emergency funds. The coverage of risk exposures is also considered a foundation financial goal

Prior to providing retirement planning services, the scope of the services offered should be mutually defined by the planner and client. This initial discussion should not include which one of the following topics? identifying the services to be provided. B) identifying specific funds in which to invest. C) establishing the duration of the services and engagement. D) disclosing the planner's compensation arrangements.

B) identifying specific funds in which to invest. Specific investments are not discussed until step four of the planning process, when the planner develops and presents the retirement plan. The initial meeting should include a discussion of the planner's compensation arrangements so that the client can determine precisely how the planner will be paid. Duration of the engagement and scope of services provided should also be discussed.

Which one of the following client goals is sufficiently specific for retirement planning purposes? A) "We want to travel." B) "We'd like to send our children to college." C) "I want to accumulate $500,000 by December 2040." D) "I'd like to retire with enough money to do what I want."

C) "I want to accumulate $500,000 by December 2040." "I want to accumulate $500,000 by December 2040." is an adequately specific goal. The planner will be able to analyze resources and determine if this goal is achievable. The other goals listed are all vague and nonspecific.

Andy and Lori Cookston had a combined gross salary of $85,000 this year. Other cash inflows amounted to $9,800. Their fixed cash outflows were $26,300, and their variable cash outflows were $64,700. What was the Cookstons' net cash flow for the year? A) $6,000 deficit B) $30,100 C) $3,800 D) $68,500

C) $3,800 Net cash flow is calculated by subtracting total cash outflows from total cash inflows. Total cash inflows of $94,800 minus total cash outflows of $91,000 equals net cash flow of $3,800.

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? A) $7,874 B) $14,151 C) $8,740 D) $13,131

C) $8,740 See the Financial Calculator videos on the LMS. As stated in the syllabus, the CRPC® course uses financial calculator videos 1-1 through 1-12 except for 1-7 on loans. Then calculator videos 1-17 and 1-18 concern bonds. Bond calculations are covered in Module 2. Start by setting up the calculator. Turn the calculator on and clear the memory. Set the number of compounding periods per year; the number of decimals shown to be four, and be in the proper payment mode (begin or end mode). Keystrokes: 1000000, FV Shift, N. For TI BA II+, 25, 2nd, xP/Y, N. The result should be "25.0000." 11, I/YR. For the TI BA II+, 11, I/Y. PMT Solution: -$8,740. For the TI BA II+, CPT, PMT 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.

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.) A) $671,897 B) $616,419 C) $890,593 D) $841,589

C) $890,593 Start by setting up the calculator. See the Financial Calculator videos on the LMS. Turn it on and clear the memory. Set the number of compounding periods; the number of decimals shown to four, and be in the proper payment mode (begin or end mode). 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, Shift, N. For the TI BA II+, 30, 2ND, xP/Y, N The result should be "30.0000." PV Solution: -$890,589.37 or $890,593 For the TI BA II+, CPT, PV. The difference between these two numbers comes from the number of decimals the calculator actually used for the interest rate. $890,589.37 used the interest rate out to nine decimal places (5.825242718%). This is the complete number computed by the calculator even though it shows four decimal places. The full number is used if you did the calculation and then pressed I/YR for the HP-10bII or I/Y for the TI BA II+. $890,593.13 comes from manually entering the interest rate as "5.8252." That would mean the calculator would actually use "5.825200000." In this case, the difference is $3.76 out of over $890,590-ish dollars. This is a 0.00042% difference and that is close enough. It is easier to do the math and then immediately press the interest rate button than to write the number down then manually enter it. This will also help prevent inadvertently typing in the wrong interest rate and it will also speed up the process. This issue becomes larger in a multiple-step problem, but the difference is still not significant. Thus, if you get a number that is very close, you and your calculator are okay. However, if you calculated $641,566 you were in the end mode. On the test, you will be happy for a little while b

Which of the following types of information are important to gather from a client prior to developing retirement planning recommendations? I. his or her desired age of retirement II. he client's assumption for the long-term rate of inflation III. investments the client prefers not to use IV. number of children client and spouse intend to have A) I, III, and IV B) II and III C) I, II, III, and IV D) I and II

C) I, II, III, and IV The age of retirement is required for determining investment and life insurance needs. Economic assumptions need to be gathered from the client. While the planner may help refine the assumption, it is nonetheless the client's assumption that is needed. Planners also need to gather information on investments the client absolutely does not want to include in an investment mix. The number of children a couple may have provides an indication as to what may be needed for education expenses, shows how children will affect family income, and creates the need for other forms of planning such as trusts and guardianship issues.

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 A) wages and salaries earned during retirement can increase retirement income. B) people's life spans are expected to increase, so the need for retirement income must increase. C) almost all categories of living expenses increase during retirement years. D) Social Security benefits are increased for people who delay receipt of benefits beyond their Social Security full retirement age.

C) 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.

Industry standards typically consider expenses lasting beyond ____ to be long-term liabilities. A) six months. B) five years. C) one year. D) one month.

C) one year. Long-term liabilities are those that are payable over a period greater than one year. Mortgage notes and auto loans are examples that fall into this category.

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 A) investment risk tolerance. B) income sources and amounts. C) the client's ability to purchase health insurance. D) the balances in retirement accounts.

C) the client's ability to purchase health insurance. The client's ability to purchase 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.

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) $26,956. B) $599,198. C) $457,846. D) $141,352.

D) $141,352. 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).

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? A) $16,470.10 B) Solution cannot be determined. C) $17,908.48 D) $16,288.95

D) $16,288.95 Set calculator to END mode, 1 payment per year, and clear the memory. Keystrokes: 10000, +/-, PV 10, Shift, N. For the TI BA II+, 10, 2ND, xP/Y, N. The result should be "10.0000." This is 10 years times 1 period/year. 5 I/YR FV Solution: $16,288.95. For the TI BA II+, CPT, FV. LO 1-4

Your client's current retirement income deficit is $80,000. In 31 years, that figure will be _________, assuming a 4% rate of inflation. A) $275,879 B) $363,043 C) $285,564 D) $269,851

D) $269,851 Set calculator to END mode, 1 payment per year, and clear the memory. Keystrokes: 80000 +/-, PV 31, shift N. For the TI BA II+, 31, 2ND, xP/Y, N. The result should be "31.0000." This is 31 years times 1 period/year. 4, I/YR. For the TI BA II+, I/Y FV Solution: $269,851. LO 1-4

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? A) $400,000 B) $100,000 C) $200,000 D) $300,000

D) $300,000 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% [ ( (1.07/1.035) - 1) x 100 = 3.3816] compounded monthly); so the increase is approximately $300,000. Set calculator to BEG mode, 12 payments per year, and clear the memory. Keystrokes: 25, shift, N. For the TI BA II+, 25, 2ND, xP/Y, N. The result should be "300.0000." This is 25 year times 12 months/year. 3.3816, I/YR. For the TI BA II+, I/Y. 5000, PMT PV Solution: -$1,014,385.32 or -$1,014,389.93 If you are way off, ensure you are compounding 12 times per year.

You have completed all of the activities involved in the data gathering step of the financial planning process, including obtaining sufficient quantitative information and documents. What is the next step of the process? A) implementing the recommendations B) gathering information to fulfill the engagement C) monitoring the recommendations D) analyzing and evaluating the client's information

D) analyzing and evaluating the client's information Once you have gathered all of the appropriate data needed, the next step is to analyze it.

Which one of the following is an incorrect statement regarding retirement spending habits? A) health costs increase B) travel and recreation costs increase C) expenditures for retirement plan contributions cease D) automobile-related costs increase

D) automobile-related costs increase Automobile costs often decrease. Second cars for married couples are less necessary, and commuting miles are reduced or eliminated for the primary vehicle. Eliminating the second car reduces insurance expenses, license fees, maintenance costs, and taxes.

When gathering data during the retirement planning process, financial goals should be quantified in dollar amounts and which of the following? A) by ownership. B) by type of goal. C) order of priority. D) established time frames.

D) established time frames. When assisting the client in establishing realistic goals, the planner should help define financial goals so that they are quantified in dollar amounts and have established time frames instead of remaining general in nature. Goals may be organized based on type, ownership, and priority but those are not ways of quantifying them and making them more specific.

When a client's funds are insufficient to attain retirement goals, it is appropriate for the planner to suggest all of the following EXCEPT A) spending less and saving more during retirement. B) performing part-time work during retirement. C) retiring later than initially planned. D) increasing gifts to children.

D) increasing gifts to children. Increasing gifts to children would exacerbate the problem. If client retirement funds are insufficient to meet goals, gifts to children should decrease. All other options will increase available resources. Delaying retirement will also decrease the need for retirement income.

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 A) annuity due-set calculator at end. B) annuity due-set calculator at begin. C) ordinary annuity-set calculator at begin. D) ordinary annuity-set calculator at end.

D) 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.

To calculate retirement needs, planners must make assumptions regarding future trends. These assumptions include all of the following EXCEPT A) inflation rates. B) rates of investment return. C) tax rates. D) political events.

D) political events. Although political events have effects on investment returns and inflation, it is nearly impossible to consistently predict events of such a random nature. Investment returns, inflation rates, and tax rates must be assumed when projecting retirement income needs.