CRPC | Maximizing the Client Experience During the Retirement Planning Process

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) $30,100 B) $68,500 C) $6,000 deficit D) $3,800

-- D 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.

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

--A "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.

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

--A 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.

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)analyzing and evaluating the client's information B)gathering information to fulfill the engagement C)implementing the recommendations D)monitoring the recommendations

--A Once you have gathered all of the appropriate data needed, the next step is to analyze it.

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

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

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

--A 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) 100 = 5.8252].

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

--A 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.

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

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

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

--B 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.

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

--B 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.

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

--B 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.

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

--B 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.

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

--B You do need to set the calculator in END mode and solve for ordinary annuity. I f 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.

You would like to examine the Smiths' net worth as of Dec. 31, 20X1. You will prepare A) an income replacement percentage. B) a retirement plan. C) a statement of financial position. D) a cash flow statement.

--C 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) provide full and adequate disclosure of all material facts B) act with utmost good faith C) have annual meetings with clients D) put a client's interest first

--C Having annual client meetings is not a requirement of the fiduciary standard, but it is certainly good practice.

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

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

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 A) I, III, and IV B) I and II C) I, II, III, and IV D) II and III

--C 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.

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

--C 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

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

--D 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).

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

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

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

--D This problem uses the same steps as the previous problem (Problem #14). You solve for an annuity due using the inflation-adjusted rate of 5.8824%.

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

--D To solve this problem, you would need to solve for annuity due, and set the calculator at begin.

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

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

Answer: A 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.

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? A) identifying the services to be provided. B) identifying specific funds in which to invest. C) disclosing the planner's compensation arrangements. D) establishing the duration of the services and engagement.

Answer: B 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.

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) $236,500 C) $260,000 D) $256,500

Answer: D 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.