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HS 353 Review David Littell, JD, ChFC®, CFP® Director, NYLCRI, Boettner Chair in Research, Professor of Taxation The American College.

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Presentation on theme: "HS 353 Review David Littell, JD, ChFC®, CFP® Director, NYLCRI, Boettner Chair in Research, Professor of Taxation The American College."— Presentation transcript:

1 HS 353 Review David Littell, JD, ChFC®, CFP® Director, NYLCRI, Boettner Chair in Research, Professor of Taxation The American College

2 Promotional Codes  Single Course: IRI5014 - $50 discount  Two Courses: IRI10014 - $100 discount  Package (3 Courses): IRI15014 - $150 discount  Steps:  Call: 888-263-7265  Tell them you were referred from IRI, give them the appropriate promotion code.  Go to: or email

3 Review sessions for RICP®  May 22, 2014: 5-7 p.m. ET  May 27, 2014: 5-7 p.m. ET  If you are interested in learning more about these webinars please email  This is a 6 hour review session broken-down into 3, 2-hour webinar sessions for the 353: Retirement Income Process course.

4 Competency 1 Create an Effective Retirement Income Plan Section 1: Introduction to Retirement Income Planning Section 2: Understanding the Retirement Preparedness Data Section 3: The Retirement Income Process Section 4: The Business of Retirement Income Planning

5 Retirement Income Planning No industry consensus on retirement income planning –Lack of common definitions, use of terminology –No common definition of retirement income planning –Different approaches used by advisors Our group had no difficulty finding consensus on the following –Solutions have to go across industry silos –A plan is more than a spreadsheet printout showing that the plan has an 83% chance of success LO 1-1-1

6 Retirement Income Planning Ensure that income needs will be met throughout retirement Plan for different time frames and uncertain time frames Help a client identify retirement income needs Requires evaluating assets and sources of income and figuring out ways to generate income from assets LO 1-1-1

7 Retirement Income Planning Consider other financial goals (legacy) Consider contingencies (risks) and risk management techniques Consider tax and legal issues that can undermine the plan Consider tax strategies that can make the plan more successful LO 1-1-1

8 Different than Retirement Savings? More complicated Generating income from assets is a new task Sequence of returns risk Mistakes are hard to recover from The client can undermine the plan Change is a constant and review is required Maybe Yes LO 1-1-1

9 Different than Retirement Savings? Comprehensive planning is better Helping clients define a new life-phase Begin to prepare early for retirement risks Isn’t it really income planning even for the young? Maybe No LO 1-1-1

10 Retirement Decisions (Middle Income) Profile –Significant wealth tied up in their homes –Few other financial assets –Facing a retirement income shortfall or marginally prepared Key decisions for those struggling –When to retire? –Whether to work part-time during retirement? –Accept a reduction in standard of living? –At what age to claim Social Security benefits? –How to address home equity? LO 1-1-2

11 Retirement Decisions (Middle Income) Housing –Afford to remain in home? –How to tap home equity? –Choose to relocate? –Choose more appropriate housing? Financial Assets –Purchase an annuity? –Appropriate withdrawal rates? –Appropriate asset allocation? Other –Purchase LTCI? –Medicare options? –Employer retirement plans? –How do decisions interrelate? LO 1-1-2

12 Additional for More Affluent Client Nonqualified executive employer benefits Selling business interests Legacy bequest Tax planning LO 1-1-2

13 Practice Question 33. Which of the following statements about costs a client might face in retirement is/are correct? I. The present value (at age 65) of out of pocket medical costs will be higher for male clients than it will be for female clients. II. Costs for long term care in a nursing home vary significantly from state to state. A. I only B. II only C. Both I and II D. Neither I nor II LO 1-2-1

14 Costs of Retirement Present value of out of pocket medical costs (not long-term care) at age 65 –Male median cost $65,000 (90% Prescription drug cost = $96,000) –Female median $86,000 (90% = $124,000) –Couple median $151,000 (90% = $220,000) Costs have come down in last two studies Underestimate if Medicare benefits reduced Medicare covers 62% of total costs –Average annual cost in 2013 for a private nursing home is $83,950 –Costs range significantly by state LO 1-2-1

15 Practice Question 34. Which of the following statements about the retirement preparedness of Americans is/are correct? I. Approximately 25 percent of American’s are financially prepared to meet their basic expenses in retirement and 75 percent are not. II. More high income individuals are at risk not to have basic necessities in retirement than low income individuals. A. I only B. II only C. Both I and II D. Neither I or II LO 1-2-2

16 Financial Preparation If baby boomers and those in generation X retire at age 65, there is currently a $4.3 trillion retirement shortfall This only looks at meeting basic expenses and uninsured medical expenses 44% boomer at risk of retirement shortfall Income is an indicator of readiness (86% of the lowest quartile at risk/ 13% of highest) LO 1-2-2

17 Risk and Pension Coverage For generation X –60% at risk (no retirement plan coverage) –18% (20 years of retirement plan coverage) Pension Coverage –Full-time wage and salary workers 21 to 64 60% work for employer with plan 53% participate LO 1-2-2

18 Retirement Confidence Retirement Confidence Survey 2013 –24 th annual survey from EBRI and Matthew Greenwald –Interview 1,000 workers and 250 retirees Overall confidence of workers (2013) –13% really confident (27% in 2007) –27% of workers are not at all confident (10% not at all confident in 2007) –Drop of confidence show more awareness but it hasn’t translated into a higher savings rate or additional planning Less confidence in retirees (41% very confident in 2007 only 18% today) LO 1-2-3

19 Retirement Confidence Less prepared to meet long-term care needs –21% not at all confident of general preparation –39% not at all confident for long-term care needs Factors affecting confidence –Income—lower income higher lack of confidence –Age--Older and low income less confidence than younger low income –Planning—more planning more confidence –Debt—more debt more lack of confidence LO 1-2-3

20 Software Tools Who’s running the numbers –Advisor or back-office Advisor must understand the output Communication of results –Software output not always user friendly –Executive summary LO 1-2-3

21 Retirement Income Process Step 1: Evaluate the client’s current situation –Review quantitative data Cash flow statements show income and spending and provide a look into future spending needs Net worth statements can identify assets available to meet needs and identify debt –Qualitative fact finding can tell you a lot about the client’s personal situation Step 2. Identify and prioritize retirement goals –Many clients may need help envisioning future –Many new tools can help clients envision retirement –Consider retirement risks—especially those later in life –Consider risk tolerance Step 3. Estimate retirement income needs –Meet lifestyle goals in retirement –Identify different types of expenses –Income solutions for basic expenses may be different than discretionary ones –Expenses do not stay constant over retirement LO 1-3-1

22 Retirement Income Process Step 4. Identify sources of income and assets available to generate retirement income –Estimating pension and Social Security income –Identifying other sources of income –Inventory assets availability to meet retirement needs Step 5. Make a preliminary calculation of the client’s preparedness for retirement –What type of software –Assumptions that are chosen Step 6. Develop strategies for addressing a retirement income shortfall –Saving more/Living on less –Saving more effectively with tax advantaged plans –Working full or part time –Deferring Social Security –Tapping home equity –Improving investment performance LO 1-3-1

23 Retirement Income Process Step 7. Consider legal and tax issues that can derail the plan –Use appropriate tax-advantaged vehicles for saving for retirement. –Choose the appropriate order of withdrawals –Leaving assets to other heirs –Meeting charitable goals Step 8. Consider retirement contingencies (risks) –The possibility that the client will live longer than expected –The market will have a sustained down period in the first few years of retirement –A spouse dies at an early age LO 1-3-1

24 Retirement Income Process Step 9. Determine an appropriate strategy for converting assets into income –Comprehensive analysis of client’s situation –Solutions should consider a range of options –Converting assets to income begins with choosing the appropriate way of framing this issue Step 10. Integrate all considerations, product solutions and present alternatives, and agree upon –There are trade-offs and clients will have to make some difficult choices –Clients may not fully understand the issues until they see several alternatives LO 1-3-1

25 Financial Planning Process 1.Establish and define the client-planner relationship 2.Gather information necessary to fulfill that engagement 3.Analyze and evaluate the financial status 4.Develop recommendations 5.Communicate the recommendations 6.Implement the recommendations 7.Monitor the plan 8.Practice within professional and regulatory standards LO 1-3-2

26 Practice Question 71. All of the following statements concerning Monte Carlo simulation software are correct EXCEPT A. It allows the planner to make predications of successful and unsuccessful outcomes for a retirement funding scenario. B. It can be used in both the retirement accumulation process and the retirement income planning process (decumulation). C. It cannot provide the probabilities of success for two or more different alternative courses of action. D. It can allow planners to use either historical returns or project future returns. LO 1-4-2

27 Monte Carlo Simulations Probability of successful and unsuccessful outcomes Used for both retirement accumulation and decumulation Example: Test a withdrawal rate from a portfolio for specified time period –Software runs thousands of simulated random trials –Typically based on historical returns –Boils complex process into a simple probability –Useful for comparing two alternative courses of action (4% or 5%) Limitation is the definition of success –Having one dollar left at the end of life may not feel like success –Being one dollar shy may not feel like a failure Monte Carlo can be used in a number of contexts –Random life expectancy –Historical returns or project future returns LO 1-4-2

28 Behavioral Finance People care more about life meaning than money Financial decisions are based on both sides of the brain—don’t be overly analytical Some advisors try to take the emotional considerations out of decision making instead of addressing emotional & analytical needs The advisor can not always control outcomes but they can manage expectations LO 1-4-3

29 Competency 2 Identify Retirement Income Needs and Objectives and Evaluate the Client’s Current Situation Section 1: Identify Retirement Budget Section 2: Sources of Income Section 3: Preliminary Calculations

30 Practice Question 2. A qualitative question that could help you better understand how your client feels about financial matters is A. How many children do you have? B. What keeps you up at night? C. What retirement assets do you have? D. What expenses do you have? LO 2-1-1

31 Practice Question 72. All of the following statements concerning gathering data about your client’s current situation for retirement income planning are correct EXCEPT A. Demographic information about family may be important for estate planning purposes but not retirement income planning. B. Asking questions about experiences with past financial advisors may help you understand what your client wants from the advisor. C. Questions about assets should include information about cost basis and how assets are titled. D. Questions about liabilities should include determining when any installment debts will be repaid. LO 2-1-1

32 Evaluate the Client’s Current Situation Demographic questions –Family and relationships (including financial) –Work –Advisors Qualitative –What is important? (activities/values) –Financial concerns? –Personality style (drivers/philosophers) –What do they want from you Quantitative Balance sheet-Net worth –Assets (value, basis, cost to maintain, title, personal or financial) –Liabilities (mortgage, credit card) –Verify data Cash flow statement –One year identify expenses and income –Keep details for one month –Income (review all sources) –Expenses (determine type) LO 2-1-1

33 Practice Question 73. All of the following are advantages of a tool like Ready-2- Retire EXCEPT A. It can help clients begin to identify goals before sitting down with the advisor. B. It can help clients visualize what they would like to spend time doing in retirement. C. It can help educate clients about the risks faced in retirement. D. It can help inventory assets and income sources available to meet retirement needs. LO 2-1-2

34 Evaluate Risk Tolerance How much uncertainty an investor can manage Accumulation portfolio—risk and return Retirement income—risk is failing to have enough and return is how much can be withdrawn from portfolio May change over time (age and health) Risk capacity –Lower as you age because of loss of human capital –Higher if you are well funded for retirement income needs –Higher if more guaranteed income Pre-post retirement –Pre retirement risk averse can save more –Post retirement risk averse may have too little income LO 2-1-3

35 Inventory Income Sources What sources of income are available? How much will be paid? How long will it last? Is the income source reliable? Does it have cost of living protection? Flexibility in payout options or other relevant features? LO 2-2-1

36 Inventory Income Sources Social Security –Reliability –Cost of living increases Qualified defined-benefit plans –Retirement age Early retirement—actuarial reductions, fewer years of service lower salary Deferred may provide more accruals, higher salary, actuarial increase –Reliability (irrevocable trust—outside reach of creditors) –Basic benefit is an annuity –Private employers no cost of living increases Nonqualified benefits –Often payable for a specified number of years –Reliability (general creditor/vesting performance requirements) LO 2-2-1

37 Practice Question 75. All of the following statements concerning estimating Social Security benefits as part of the retirement income plan are correct EXCEPT A. An individual eligible for multiple benefits will only be eligible to receive one benefit at a time. B. Since benefit statements have been suspended, it is almost impossible to find out an individual’s retirement benefits. C. Benefits will generally increase over time since they are eligible for cost of living increases. D. Benefits could be cut back somewhat in the future if the funding shortfall is not resolved. LO 2-2-1

38 Practice Question 3. Which of the following statements concerning estimating nonqualified defined benefit plan benefits provided by private employers is correct? A. Benefits are generally paid out as a life annuity. B. Benefits may be rolled into an IRA, if a lump sum distribution is chosen. C. Benefits are generally secure as in most cases assets are held in an irrevocable trust. D. Benefits may be subject to a forfeiture provision if a do-not-compete clause is violated. LO 2-2-1

39 Practice Question 76. All of the following statements concerning assets that can be used to generate retirement income are correct EXCEPT A. The future value of a qualified profit-sharing benefit at retirement age is easy to determine. B. Some financial assets may not be available to meet retirement needs as they are earmarked for other purposes. C. Nonqualified deferred compensation may be at some risk if the company has financial difficulties. D. Qualified defined-contribution plans may offer an annuity distribution option at a favorable annuity rate. LO 2-2-2

40 Retirement Assumptions Retirement age –Average age is 62 –Many retire earlier than planned (health/caregiving/loss of job) –Pitfalls of choosing early Medicare not available to 65 Increased exposure to inflation Different situations require different tools Social Security benefits reduced Longevity –28% of those who live to 65 make it to age 90 –Use life expectancy for those who live to 65 –Consider individual health status and family history Inflation –Use long-term estimates –Software can model different rates for different expenses Retirement need –Ratio approach as a rough estimate –Expense method as you approach retirement LO 2-3-2

41 Calculations Different situations require different tools –Some only have Social Security and 401(k) –Some have a wide range of resources Consumer tools may be too simple Professional tools should –Be appropriate for the situation –Allow manipulation of expense/income sources –Output is important and can educate client –Spreadsheets not a good communication tool –Complex not always more accurate LO 2-3-2

42 Practice Question 4. Which of the following statements concerning assumptions used in determining retirement need is correct? A. Actuarial tables reveal that 68% of those who live to 65 will still be alive at age 90. B. It is appropriate to disregard the client’s health status in determining a life expectancy assumption. C. The expense method approach to estimating retirement need becomes more plausible as clients approach retirement age. D. It is best to use the most recent inflation rate when choosing an inflation assumption. LO 2-3-2

43 Competency 3 Choose Appropriate Strategies to Address Gaps in Income Section 1: Saving More and/or Spending Less Section 2: Additional Work Section 3: Saving More Efficiently with Tax- Advantaged Plans Section 4: Deferring Social Security Section 5: Tapping Home Equity Section 6: Improving Portfolio Performance

44 Saving More Saving more has a limited impact on the income plan for those close to retirement Still important strategy –Some can afford to save a lot more –More years to retirement In combination with other strategies –Using tax-advantaged plans –Working longer The relationship with spending less –Try out living on a reduced income –Test drive whether that strategy will work LO 3-1-1

45 Spend Less In Retirement Spending less can mean reduced standard of living A well prioritized spending plan may make it easier to identify reductions Ideas for significant reductions –Downsize –Relocate –Sell assets with significant expenses Temporary spending cuts can matter Can the same lifestyle be obtained with less? LO 3-1-1

46 Work Longer Working longer either full-or part-time can Significantly affect the plan Example: –58-year-old single individual with $100,000 of income, assets of $500,000, saving 20% of pay, and needing 85% of income –Retire at age 65 income shortfall at 81 –Retire at 66 income shortfall at 86 –Retire at 67 and assets sufficient until 90 LO 3-2-1

47 Protecting Employment Opportunities Many retire earlier than planned Primary concern is work available and feasible? How can an older worker better ensure employment opportunities? –Job skills and professional network –Healthy lifestyle –Avoid burnout LO 3-2-1

48 Practice Question 41. Which of the following statements concerning tax-advantaged retirement savings plan opportunities for consulting income for an individual who also has another job and contributes the maximum salary deferrals to the company’s 401(k) plan is (are) correct? I. The individual could set up a SEP to shelter a portion of the consulting income as long as the two business entities are unrelated. II. The individual could set up a 401(k) plan for the consulting income and make maximum salary deferrals as long as the two business entities are unrelated. A. I only B. II only C. Both I and II D. Neither I nor II LO 3-3-1

49 Supplemental Income (second job or consulting income) General rule –Individual working for two unrelated employers can have benefits in both plans –Controlled group, affiliated service group rules require related employers to be treated as one employer Exception for salary deferrals –Salary deferrals to 401(k), 403(b), and SIMPLEs are aggregated across unrelated employers Exception for 403(b) plan participation –415 limit applies to contributions to 403(b) plans and other plans of a business owner LO 3-3-1

50 Self-Employed Plan Options (unincorporated, no other job and no employees) SEP –20% of Schedule C income reduced by Social Security deduction –(415(c) limit) up to lesser of 100% income or $50,000 in 2012) 401(k) plan –20% plus $17,000 salary deferrals plus $5,500 catch-up (2012) –Totals can not exceed 415(c)—however $5,500 in addition (total $55,500) –Include Roth election for salary deferrals Defined-benefit –Only plan that contributions can exceed 415(c) LO 3-3-1

51 Practice Question 79. All of the following are good candidates to choose a Roth Election in a 401(k) plan EXCEPT A. Ralph, who is working part-time this year because he has gone back to school at night B. Jean, who is earning much more this year than usual due to royalties from a book C. Sandy, who has all of her savings in tax-deferred accounts and expects to be in the same tax bracket in retirement D. Larry, who is trying to maximize his tax advantaged savings this year LO 3-3-2

52 Comparing Roth/Tax Deferral Tax Considerations Tax Rates –Choose tax deferral if tax rates are lower in retirement –Choose Roth if tax rates increase in retirement –Same accumulation if tax rates remain the same Future tax rates –Young people currently in low tax bracket –Some may be temporarily in a low tax bracket –Some expect tax increase (top bracket) –Middle-income likely to be in lower bracket –Beneficiaries (widow) may be in a higher tax bracket LO 3-3-2

53 Other Reasons to Roth Save More –A $22,500 Roth contribution results in $22,500 of after-tax retirement income –Same pre-tax deferral reduces current income by $14,625 and only results in $14,625 of after-tax retirement income No required distributions Tax-efficient asset for heirs Tax diversification LO 3-3-2

54 Roth Conversion Issues Roth IRA Conversion Rules –Anyone can do it (no income limits) –By 12/31/12 to convert for 2012 –Taxed on value at time of conversion –Can recharacterize by the following October 15 Convert when tax rates are currently low –Look for opportunities to convert –Consider projections of future tax rates Pre-paying a future tax obligation—a different way to save for retirement Reduces inheritance taxes Look for depressed asset values—ability to recharacterize LO 3-3-2

55 Practice Question 6. Jennie and Johnny are both age 58, are married, and have AGI of $300,000. Both are employees of large companies and maximize contributions to their companies’ 401(k) plans. Jennie can make additional contributions to a tax-advantaged retirement plan for the year by A. Making additional contributions to the 401(k) plan under a Roth election. B. Making deductible contributions to an IRA. C. Setting up a SEP to shelter a portion of their investment earnings. D. Making nondeductible contributions to an IRA and then converting to a Roth IRA. LO 3-3-3

56 Practice Question 7. Gretta is married, self-employed with no employees, age 72 and earns $50,000 of Schedule C earnings. In order to shelter as much income as possible she should adopt a A. SEP B. Profit-sharing plan C. Money purchase pension plan D. 401(k) plan LO 3-3-3

57 Social Security Basics Benefits are based on 35 years of wage history Benefit options on Social Security calculators—the detailed calculator provides the best estimate LO 3-4-1

58 Practice Question 80. Deferring Social Security retirement benefits has the following benefits EXCEPT A. Deferring results in a higher percentage of retirement income that is inflation protected. B. Deferring increases the percentage of earnings replaced by Social Security. C. The benefit increases continue as long as the worker defers Social Security. D. Deferring Social Security benefits increase the worker’s benefit as well as the widow(er) benefit. LO 3-4-1

59 Everyone Wants a Good Deal Take early to get money’s worth (Break even analysis) –Betting on dying young—a bad gamble—losing means a long life with too little income –Wealthier individuals who can afford to look at it this way are more likely to live longer lives –Maybe ok if short life-expectancy Spousal survivor benefits –Surviving spouse receives the higher of the two retirement benefits –Even if short life expectancy—spouse may not (the larger benefit is paid for the joint lifetime) LO 3-4-1

60 Deferral Changing the frame –Deferral increases monthly benefit –Cost is the lost payments –Determine price of annuity with CPI Supporting deferral –Work –Other accounts –Receiving smaller benefits from Social Security LO 3-4-1

61 Social Security to Support Deferral Divorced spouse takes spousal benefit at full retirement age and switches to worker’s benefit at age 70 Married couples –Claim Social Security worker’s benefit to start spousal benefit then suspend worker’s benefit –Both work—worker with higher benefit receives the spousal benefit and defers the worker’s benefit LO 3-4-1

62 Practice Question 42. When using the break-even approach to choosing Social Security benefits, which of the following statements is (are) correct? (LO 3-4-1) I. A single individual with a short life expectancy is the best candidate for beginning benefits early. II. Those with higher socio-economic status may have more incentive to defer benefits. A. I only B. II only C. Both I and II D. Neither I nor II LO 3-4-1

63 Accessing Home Equity Conventional loan –Mortgage or line of credit –Good for short-term need (lower expenses) –Payback—or foreclosure Single purpose loan –State and local government programs –Purpose such as property tax deferral –Low cost or forgiven –May limit other borrowing Downsizing –Don’t wait to sell in a crisis –Replacement housing may not be available Reverse mortgage –Longer term solution –Nonrecourse loan –Range of distribution options LO 3-5-1

64 Reverse Mortgage Basics HECM provides FHA insurance All owners age 62 or older Applies to principal residence Amount based on age, home value, interest rate Repayment only at time of sale Debt grows over the time of the loan Nonrecourse loan No income tax consequences of payment Payment options (lump sum / line of credit / tenure) LO 3-5-1

65 Planning Considerations Creating a regular income stream –Downsize –Reverse mortgage tenure option –Short-term to defer Social Security Reducing debt expenses –Downsizing to payoff debt –Reverse mortgage lump sum –Refinance conventional mortgage Long-term care planning –Pay for home care –Use with LTCI or other funding approaches Emergency fund –Hold for years of bad investment performance –Use to meet basic needs and stay in home LO 3-5-1

66 Practice Question 8. Which of the following statements about reverse mortgages is correct? A. Repayment is required immediately if the loan exceeds 50 percent of the value of the home. B. Loans payments are treated as taxable income to the homeowner. C. If the home’s value exceeds the loan amount, the bank would receive the windfall when the home is sold. D. Payment choices include a lump sum, line of credit and tenure option. LO 3-5-1

67 Improving Portfolio Performance Mutual fund research –Higher expenses generally reduce return –Avoid closet index funds –Choose newly launched funds –Choose funds with ownership by managers and directors –Choose institutional class shares –Choose funds with short-term redemption fees –Avoid worst performers –Bank-affiliated funds have underperformed –Broker sold funds tend to underperform LO 3-6-1

68 Practice Question 9. An actively managed stock mutual fund that has a high level of overlap with the appropriate benchmark is referred to as a A. Value fund B. Closeted index fund C. Growth fund D. Large cap fund LO 3-6-1

69 Asset Location Issues Tax-exempt and tax-deferred enjoy tax-free growth –Individual in 25% tax bracket has a $750 Roth IRA and $1,000 IRA. Both grow by 100%. –Individual has $1,500 after-tax in both accounts –So investor receives 100% of the return and takes 100% of risk Taxable government shares in returns and risk –Average return 10% and 20% standard deviation –Year 1, +10%, year 2 -10%, year 3 +30% with a 15% tax rate –Year 1 +8.5%, Year 2 -8.5%, year 3 +25.5% (8.5% average and 17% standard deviation) LO 3-6-2

70 Asset Location Principals Hold stocks in taxable account Hold bonds and other investments taxed as ordinary income in the tax deferred plan Stocks traded frequently consider tax-deferred plan Consider asset allocation decisions on an after- tax basis LO 3-6-2

71 Practice Question 45. Which of the following statements concerning asset location and asset allocation decisions based on tax considerations is (are) correct? (LO 3-6-2) I. Asset allocation decisions should disregard the differences in the tax aspects of different accounts. II. Hold stocks in the taxable account and bonds in the tax-advantaged retirement accounts to the fullest extent possible. A. I only B. II only C. Both I and II D. Neither I nor II LO 3-6-2

72 Competency 4 Evaluate the income tax, estate issues, and other threats to the retirement income plan Section 1: Income Tax Considerations Section 2: Estate Planning Considerations Section 3: Incompetency

73 Qualified Plan Paperwork Benefit election form Qualified joint and survivor annuity notice and waiver forms Right to a direct rollover Notice of tax treatment 1099R—lump sum distributions LO 4-1-1

74 Qualified Plan Tax Checklist Is there any special tax treatment? Is a portion attributable to a 401(k) Roth account? Is the participant under age 59½ and if so do any of the exceptions apply? Is there any cost basis in the plan? Is there a distribution of employer stock? Is the recipient a death beneficiary and not the participant? LO 4-1-2

75 Practice Question 11. Ralph has a $50,000 IRA with $30,000 of nondeductible contributions and a $250,000 rollover IRA that has no cost basis. If he withdraws $20,000 from the nondeductible IRA how much of the distribution is subject to income tax. A. $0 B. $12,000 C. $18,000 D. $20,000 LO 4-1-2

76 Roth Tax Checklist Is the distribution from a Roth IRA or Roth Account? Is the distribution a qualifying withdrawal? Is it best to roll Roth Accounts to a Roth IRA? If a non qualifying Roth IRA withdrawal What is being withdrawn? Have contributions been fully recovered? If earnings does the 10% penalty apply? LO 4-1-2

77 Non-qualifying Withdrawals Roth IRAs –Contributions withdrawn first without tax –Earnings taxed as ordinary income and penalty Roth accounts –Prorated recovery rule –Tax problem resolved by rolling to Roth IRA LO 4-1-2

78 Practice Question 48. Jill receives a distribution from her 401(k) plan. In determining the tax treatment of the distribution, which of following questions is (are) relevant? I. Is Jill single? II. Has Jill received employer stock as part of the distribution? A. I only B. II only C. Both I and II D. Neither I nor II LO 4-1-2

79 RMD Planning Checklist Identify who is responsible for RMD compliance Inventory all plans subject to RMD rules Determine whether distributions can be deferred for qualified plans Identify what plans can be aggregated Carefully review beneficiary forms consider adding contingent beneficiaries Look to maximize “stretch” except for years in which withdrawals or Roth IRA conversions can occur at low tax rates Consider charitable beneficiaries to eliminate taxes LO 4-1-3

80 Practice Question 49. Bob, age 75 owns two IRAs, one pays out a life annuity and the other is an account plan. His beneficiary for both IRAs is his 35-year-old niece. Which of the following statements concerning the required minimum distribution (RMD) rules that apply to these plans is (are) correct? I. The distribution from the IRA paying a life annuity may reduce the RMD from the account plan IRA. II. The calculation of the required distribution for the account plan is based on his niece’s life expectancy. A. I only B. II only C. Both I and II D. Neither I nor II LO 4-1-3

81 Practice Question 81. All of the following statements concerning IRA beneficiary designations are correct EXCEPT A. Under the required minimum distribution rules, the beneficiary chosen will impact how long distributions can be stretched out after the death of the participant. B. If a beneficiary form is not completed the plan will provide for a default beneficiary. C. Plans generally do not allow contingent beneficiaries. D. A charitable beneficiary can be a way to eliminate income taxes on distributions paid to the charity after the death of the participant. LO 4-1-3

82 Practice Question 50. George and Georgia are 62, retired and are not yet receiving Social Security benefits. They have taxable investments and a large tax-deferred rollover IRA. Which of the following is (are) tax-efficient withdrawal strategy(ies) for this couple? I. They should take all distributions from the tax deferred account first to avoid required minimum distributions. II. They should consider taking some distributions from the tax deferred account and converting them to a Roth IRA. A. I only B. II only C. Both I and II D. Neither I nor II LO 4-1-4

83 Tax Treatment of Annuities Qualified Nonqualified –Earnings tax-deferred as long as owner is “natural person” –Preannuitization period Earnings taxed first 10% early withdrawal penalty applies –Annuitization Exclusion ratio LO 4-1-5

84 Tax Treatment of Social Security Provisional income –AGI –Tax exempt interest –½ Social Security benefits Provisional income exceeding thresholds Single $25,000 (up to 50%) $34,000 (up to 85%) Married $32,000 (50%) $44,000 (85%) LO 4-1-6

85 Lifetime Gifts Outright In trust Eliminates from estate Annual exclusion Medical and educational expenses Gift tax credit Considerations –Can you afford it? –Can the donee manage the transfer? –What property should be given away? –What are the income tax issues? LO 4-2-1

86 Practice Question 52. Which of the following statements concerning lifetime gifts in an estate plan is (are) correct? I. A donee may not always be ready to receive a substantial gift. II. Property with built-in loss potential should be gifted as the loss can be deducted by the donee. A. I only B. II only C. Both I and II D. Neither I nor II LO 4-2-1

87 Practice Question 53. Which of the following statements concerning a charitable gift annuity is (are) correct? I. Payments from a charitable gift annuity funded with cash will be partially tax-exempt until the annuitant reaches his or her life expectancy. II. The annuitant bears a risk of nonpayment from the issuing charity as well as from inflation. A. I only B. II only C. Both I and II D. Neither I nor II LO 4-2-2

88 Charitable Gift Annuities Taxation –A portion taxable and a portion return of investment until basis recovered Investment risk –On charity as it must fulfill promise even if contributed asset has become worthless –Donor recourse is lawsuit against charity, donor is general creditor Inflation risk –Fixed payments expose non-charitable beneficiary to inflation Administrative costs – Simple multi-page contract – Lawyers, accountants, financial advisor expense rarely incurred LO 4-2-2

89 Practice Question 82. All of the following statements about the merits of charitable unitrusts (CRUT) compared to those of the charitable annuity trusts (CRAT) are correct EXCEPT A. The CRAT provides less risk of investment loss than does the CRUT. B. The CRUT is simpler to administer than the CRAT. C. The CRUT offers less risk of its payments being diminished by inflation. D. The CRUT provides more flexibility than the CRAT in structuring the timing of the payment to the noncharitable beneficiaries. LO 4-2-2

90 Qualities of a CRAT Investment –CRAT shifts investment risk to remainder beneficiary which may receive nothing. –Income beneficiary sues trustee for breach of fiduciary duty if insufficient trust assets Inflation –Fixed payments expose non-charitable beneficiary to inflation Administrative expenses –Trust agreement, legal, accounting, professional trustee LO 4-2-2

91 Qualities of a CRUT Investment risk –Unitrusts distribute market risk more evenly between income and remainder beneficiaries though both have risk –By limiting income payout to DNI in the NICRUT or NIMCRUT, net income unitrusts, especially NICRUTs, shift market growth to charitable remainder beneficiary Inflation –Non-charitable beneficiary not exposed since potential in sharing in any future appreciation Administrative expenses –Trust agreement, legal, accounting, professional trustee –More complex than CRAT because annual valuation LO 4-2-2

92 Practice Question 15. Which of following statements concerning strategies for delegating health care decisions is correct? A. A do not resuscitate order can substitute for a health care power of attorney. B. An individual with a declaration of heath care (living will) must also appoint a health care power of attorney. C. Guardianship is the most effective way to delegate health care decisions upon incapacity. D. When adopting a health care power of attorney it is appropriate to choose both an agent and a contingent agent. LO 4-3-1

93 Practice Question 16. Which of the following statements concerning a power of attorney is correct? A. With a power of attorney the agent delegates certain responsibilities to the principal. B. The problem with a springing power of attorney is that the power terminates after the task has been completed. C. The durable power of attorney terminates at the death of the principal. D. Courts generally interpret the powers of a durable power of attorney broadly. LO 4-3-2

94 Practice Question 83. All of the following statements concerning incapacity planning for financial decisions are correct EXCEPT A. Incapacity may be an appropriate time to convert a term life insurance policy to a permanent product. B. A special needs trust is an appropriate vehicle for managing incapacity for an older client. C. Some qualified plan trustees will not be willing to make benefit payments to a participant’s power of attorney D. A powerful combination of tools for incapacity planning is a power of attorney combined with a revocable living trust. LO 4-3-2

95 Competency 5 Evaluate retirement risks and offer alternative solutions to address these risks Section 1: Outliving resources Section 2: Risks associated with aging Section 3: Investment risks Section 4: Risks associated with work Section 5: Risks associated with family Section 6: Other risks

96 Longevity Facts Alive at 65—average life expectancy –Male = 84 –Female = 86 1 in 4 will live past age 90 1 in 10 will live past 95 Social Security calculator –Male born in 1953: Age 60 = 83.4 Age 66 = 84.6 Age 70 = 86 LO 5-1-1 Longevity Risk

97 Longevity Solutions Transfer risk Defer Social Security Life annuity from employer retirement plan Purchase immediate life annuity Purchase deferred income annuity Deferred annuity (annuitize or income rider Life insurance contract (settlement options/ 1035 for annuity) Income for indefinite period Reverse mortgage—tenure Rental income Dividend paying stock Business interests LO 5-1-1 Longevity Risk Systematic withdrawals Withdrawal rate tied to length of retirement Make adjustments More equities

98 Contingency Fund Create a portfolio that you don't touch until the later years of retirement Create a contingency fund with: –Diversified portfolio –Consider a Roth IRA –Withdrawals from permanent life insurance contracts –Loans from a reverse mortgage line of credit LO 5-1-1 Longevity Risk

99 Inflation Facts –Some economists worry that the federal deficit may lead to high inflation. –Even modest inflation can significantly erode purchasing power over time. –Higher inflation rates for retirees Strategies –Increasing inflation adjusted income (defer Social Security/TIPs/inflation adjusted annuity) –Building increasing streams of income (bonds/annuities) –Choosing investments with inflation hedge (equities) –Other (withdrawal strategies/prepay expenses) LO 5-1-2 Inflation Risk

100 Excess Withdrawal Risk Factors –Sustainable withdrawal rate research –Appropriate adjustments –Could have too much or too little spending Careful planning – Choose withdrawal rate carefully – Stick with distribution plan (client can undermine) – Plan for contingencies and other risks Lock-in to avoid risk – Income annuities – Income riders – Bond ladders LO 5-1-3 Excess Withdrawal Risk

101 Health Expense Risk Choosing appropriate insurance Saving enough (amount/level of preparation) Medicare advantage may provide more benefits Pre-Medicare gap—exchanges are new option Shop for insurance plans Choose generic drugs (25% of total costs) Go outside the country for care LO 5-2-1 Health Expense Risk

102 Long-term Care Facts 70% of retirees need long-term care at some point 70% of services are provided by family members Negative impact on family caregiver’s career and health Less than 10% of those age 65 have long-term care insurance Average length of long-term care: –2.2 years for male –3.7 years for female $85,000 – U.S. average for one year in a semi-private U.S. nursing home room Alzheimer’s is the number one cause of long-term care LO 5-2-2 Long-Term Care Risk

103 Long-Term Care--Solutions Insurance Medicare/Medicaid Other programs (Veteran’s benefits) CCRC Hybrid annuity/life-insurance Controlling costs (maintain health) LO 5-2-2 Long-Term Care Risk

104 Frailty Solutions Financial Management –Choosing others to make decisions Family members Daily money managers Corporate trustees –Control mechanisms Power of attorney Living trust Avoid guardianship –Simplify finances (automate and solutions like annuities) Household management –Families may help with chores –Hire others for home maintenance—be careful! –Choose alternative housing LO 5-2-3 Frailty Risk

105 Elder Abuse--Facts The annual loss $2.6 billion Many victims are never the same emotionally The typical victim is a woman age 70 to 89-- however, victims represent a diverse profile Families, friends, neighbors, and caregivers were the most frequent perpetrators (55%) of elder financial abuse. Sixty percent of family perpetrators are adult children. LO 5-2-4 Financial Elder Abuse Risk

106 Market Risk Hard to determine value at retirement –Saving for 30 years—with different time periods –Average accumulation was 10 times salary, but outcomes ranged from 3 to 27 times salary Hard to avoid market risk entirely –Increasing equity exposure generally improves portfolio sustainability and ending wealth –Equity exposure is key to address the deep risk of inflation Solutions –Bifurcated investment strategy –Have the lowest exposure to equities at retirement age –Purchase downside protection with derivatives and income riders in deferred annuities LO 5-3-1 Investment Risks

107 Liquidity Inability to have assets available to support unanticipated cash flow needs Planning for sufficient liquidity is an important part of a retirement income plan Is liquidity real or perceived? Flexibility is a related concern LO 5-3-1 Investment Risks

108 Sequence of Return--Solutions Reduce volatility –Purchase life annuities –Build a bond ladder –Lower allocation to equities at retirement –More asset classes to reduce standard deviation Withdrawal strategy that allows for adjustments Provide for portfolio downside protection –Purchase derivatives to protect against downside risk –Purchase living benefit riders LO 5-3-2 Sequence of Returns Risk

109 Forced Retirement Facts MMI study—54% of oldest boomers retired earlier than planned –Fewer than 10% had adequate resources –32% cited health reasons/25% cited job loss EBRI—47% retire earlier than planned –55% due to health or disabilities Solutions –Plan for a range of retirement ages –Negotiate for a severance package LO 5-4-1 Forced Retirement Risk

110 Reemployment Risk Facts EBRI work in retirement –2013 expecting to work 69% –2013 retirees actually working 25% Reasons for work in retirement (2010 RCS) –Almost all gave a positive reason for working stay active and involved (92 percent) enjoyed working (86 percent) –Those working solely for nonfinancial reasons is small –Ninety percent identified at least one financial reason LO 5-4-2 Reemployment Risk

111 Employer Insolvency Private employers –Defined-benefit plans: Irrevocable trust: PBGC –Defined-contribution plans: Irrevocable trust –Executive benefits Employees are general creditors Assets remain available to claims of creditors Public employers –Defined-benefit plans of municipalities Municipalities can file for bankruptcy Determine priority of pension claims –Defined-benefit plans of states States can not file for bankruptcy Earned benefits generally have high standing LO 5-4-3 Employer Insolvency Risk

112 Loss of Spouse Solutions Involve both spouses in planning Proper estate planning Maximize the Social Security survivor benefit Choose joint and survivor annuities Life insurance (first-to-die) Long-term care planning LO 5-5-1 Loss of Spouse Risk

113 Unexpected Financial Responsibilities Six in ten (62%) age 50+ today provide financial support to family members Worry about controlling how much they give Concerned about running out of money and being a burden on their families 5.8 million children live in grandparents' homes LO 5-5-2 Unexpected Financial Responsibility Risk

114 Other Risks Timing risk –Considers the variations in sequences of actual events that can have a significant impact on retirement security. –Inflation/market/sequence of return/black swan Public policy –An unanticipated change in government policy –Tax/Social Security/Health care Solutions –Regular review of the plan –Advisor who is an RICP –Diversification (Roth/tax-deferred) LO 5-6-1 Timing Risk

115 Competency 6 Choose Appropriate Strategies for Turning Assets into Income Section 1: Approaches Used to Convert Retirement Assets into Retirement Income Section 2: The Systematic Withdrawal Approach Section 3: The Bucket Approach Section 4: The Essential versus Discretionary (Flooring) Approach Section 5: How the Approaches Mitigate Risks

116 Describe the Three Major Approaches The structured systematic withdrawal approach The time-based segmentation approach (also known as the “bucket approach” or the “age- banded” approach) The essential-versus-discretionary approach (also known as flooring) LO 6-1-1

117 Practice Question 61. Which of the following statements comparing the different approaches to retirement income planning is/are correct? I. According to one study, the approach that forced clients to alter their standard of living the most after the Great Recession of 2008 was the systematic withdrawal approach. II. Even though the bucket approach segments investments, the bucket approach may lead to the same portfolio allocation that was envisioned in the original systematic withdrawal portfolio approach. A. I only B. II only C. Both I and II D. Neither I nor II LO 6-1-1

118 Practice Question 88. All of the following statements about the “Financial Adviser Retirement Income Planning Experiences, Strategies, and Recommendations” research study are correct EXCEPT A. The overwhelming majority of clients getting decumulation advice are considered validators (do-it-yourselfers who want an advisor to give second opinions and occasional advice). B. There is an increased demand for retirement income services. C. The most popular approach to providing retirement income to clients is the systematic withdrawal approach. D. Many surveyed advisors adjust the amount of the systematic withdrawal on an on-going basis using various dynamic withdrawal strategies LO 6-1-2

119 Structured Systematic Withdrawals Diversify investments based on risk profile Manage for total return Withdraw a predetermined or policy-based amount Withdraws funded by a combination of interest, dividends, portfolio holdings LO 6-2-1

120 Systematic Withdrawal Approaches Most research is based on –Initial withdrawal rate (4% of $1,000,000 = $40,000) –Inflation adjusted for following years Other approaches for subsequent years –No inflation adjustments –Withdrawals based on current values –Use first approach with guard rails LO 6-2-1

121 Safe Withdrawal Rate Based on historical analysis the 4 (or 4.5) rate is sustainable in the worst case scenario Also assumes steady inflation adjusted spending pattern Choosing the safe withdrawal rate –Comfort of sustaining the worst case scenario –Future may not look like the past –May be forcing clients to live on less--f or many time periods 6-7% would be successful –In most cases this approach results in leaving a substantial legacy or the ability to spend more later LO 6-2-1

122 Safe Withdrawal Rate Research Rate increases with more globally diversified portfolio Rate increases if withdrawals start at a time when markets are not highly valued Rate increases if the client can take small decreases in withdrawals in down markets Rate increases with a shorter time horizon LO 6-2-1

123 Factors Choosing Withdrawal Rate Withdrawal rate for future years (inflation adjusted) Time horizon Other sources of income Asset allocation Amount annuitized Importance of legacy goal Willingness to accept risk in exchange for opportunity to spend more LO 6-2-1

124 Sustainable Withdrawal Rates and the Middle Class The tighter it is for the client, the more important it is to focus on the expense side—not the income side. Social Security plays a more important role for the middle class. Do not try and extend portfolio withdrawal rates beyond what is reasonable—but should take advantage of research findings—consider higher withdrawal rate with adjustments for market conditions LO 6-2-3

125 Glide Path Glide path deals with the change in equity allocation over time (as you get older, reduce equity allocation) Constant portfolio over all ages was the best to avoid portfolio failure. Reduction in standard deviation is important LO 6-2-4

126 Practice Question 89. All of the following statements about the safe withdrawal rate are correct EXCEPT A. Using a safe withdrawal rate of 4 percent means that 96 percent of the time the client will have their principal left over. B. Using a safe withdrawal rate of 4 percent means that at the median level wealth is increased by a factor of 1.6. C. The safe withdrawal rate research should be interpreted to indicate that clients need to save enough money to only draw down 4 percent per year, adjusted annually for inflation. D. The safe withdrawal rate approach to retirement income planning focuses on making the client’s assets last for the specified period (e.g., 30 years) under a worst case scenario for investments. LO 6-2-1

127 Bucket Approach Create time segmented portfolios to meet income needs for specified time periods Some divide buckets not based on time segments but based on asset classes or other classification Choose investments based on portfolio objectives –Most conservative for short-term bucket and most aggressive for longest-term Distribute assets from first bucket before second and so forth LO 6-3-1

128 Why Consider Time Segmentation? The three phases of retirement –Phase one—The client is the same as he was before retirement. This typically means the client has no limitations (fully active). –Phase two—The client experiences moderate limitations. Occurs at different times for different people in the relationship Relationships and interactions with others become more meaningful –Phase three—The client experiences significant limitations. Appropriate and regular support are needed Family caregivers may need to leave their own jobs Planning is not just financial –planning for the supports needed at the next stage –Activity portfolio—document what am I going to do to stay engaged LO 6-3-2

129 Strengths Integrates asset allocation with income allocation Can accommodate different risks that occur in different phases of retirement Bucket approach may resonate well with clients: –Stocks are for later time periods, so the client can buy and hold rather than worry about short-term market fluctuations. –Without looking at a bucket approach, it is difficult to rationalize to a client why stocks should be in a retirement fund. –Clients can sleep better at night. Total asset allocation may be similar to systematic withdrawals LO 6-3-1

130 How Time Segmentation Works Common to choose three 10-year time segments representing the 30 years of retirement (this can vary) Estimates of retirement needs for each period can vary—allowing a more accurate calculation of need Assets in short-term bucket meet current income needs- -laddered bonds, term certain annuities or other The assets needed for later time periods (the second and third buckets) are invested for growth Accommodates both investment and product allocation Over time adjustments can be made –As one bucket is emptied –As goals and objectives change –As the economic conditions change LO 6-3-1

131 Practice Question 65. Which of the following are rationales for using the bucket approach to retirement income planning rather than the systematic withdrawal approach? I. If the portfolio has one required rate of return under the systematic withdrawal method, there is a mismatch between term risk and portfolio return which does not occur in the bucket method, which accounts for matching up term risk and portfolio return. II. Bucket approach investing works better from the behavioral economics standpoint than systematic withdrawal investing. A. I only B. II only C. Both I and II D. Neither I nor II LO 6-3-1

132 Flooring Flooring (also known as essential vs. discretionary) A portion of the portfolio is put into guaranteed or low-risk products or ladder strategies to create an income “floor” to meet essential expenses Social Security (when available) creates at least a partial floor—delaying increases floor Sometimes the essential vs. discretionary approach is thought of as annuitization for the core piece and invest for the rest Guarantee the basic expenses—allow for upside potential on the discretionary expenses A challenge can be that clients think of standard of living, not essential vs. discretionary expenses LO 6-4-1

133 Flooring Example: George and Gracie would like to lock in money to pay for rent, groceries, and car insurance (among other fixed expenses). They purchase an immediate annuity with an inflation rider to provide monthly income on a joint and survivor basis until they both have died. George and Gracie can combine their annuity income with their Social Security income to pay for the basic expenses. They will then use the remainder of their portfolio to provide for their budgetary “wants and wishes.” LO 6-4-1

134 The Annuity Puzzle There is a high degree of aversion to voluntary annuitization among retirees even though annuities offer security and sustained income. Advantages of annuitizing the floor with a fixed immediate annuity –Annuities defeat mortality risk. The client is given a stream of income for as long as they live. –Annuitants might enjoy a “mortality premium”—those who have long lives will benefit from the pooling of assets with those who have short lives. –Annuities suit clients with a low level of risk tolerance because they eliminate the volatility of investing the client’s assets. –Annuities prevent a client from consuming assets too quickly. They are an excellent antidote to excess withdrawal risk. LO 6-4-2

135 Analyze How Strategies Affect Risks Longevity risk –Flooring with annuities provides direct protection –Other approaches do not protect directly If investments are successful assets will be available Both approaches are flexible and can allow for change when circumstances change Excess withdrawal risk –Locking in with the flooring approach eliminates the option of spending too much –Other approaches focus on choosing appropriate risk and reevaluating the plan LO 6-5-1

136 Analyze How Strategies Affect Risks Inflation risk –Use approach that allows more assets invested in equities –Purchase inflation adjusted life annuity –Variable annuity with guaranteed income rider Reinvestment risk –Bucket strategy requires changing investments frequently –Also applies to other strategies that require reinvestment over time LO 6-5-1

137 Liquidity and Legacy Risk The flooring strategy creates the greatest liquidity and legacy risk problem because of the use of an annuity to create the floor Systematic withdrawals and bucket strategy better address these risks LO 6-5-1

138 Competency 7 Integrating approaches, risks, products, and strategies to create an effective retirement income plan Section 1: Retirement Income Products Section 2: Applying Products Section 3: Practical Application Section 4: Monitoring and Adjusting the Plan Section 5: Case Studies

139 T/F Section 7-1 1.Large cap stocks are more likely to provide a risk premium than small-cap stocks 2.The FDIC insurance limit at a single institution applies to all of an individual’s accounts regardless of how they are titled. 3.Thirty year treasuries would effectively protect against price risk but not reinvestment risk. 4.A variable immediate annuity provides a floor income with a possibility of increasing benefits. 5.Open ended indexed mutual funds can be traded intra-day.

140 Systematic Withdrawal Investment Strategies Start with asset allocation appropriate for client’s risk tolerance Equity position to sustain withdrawals (50- 70%) –Too little increases exposure to longevity and inflation risk –Too much adds to portfolio failure risk Consider separate holdings to allow redemption of appreciating assets LO 7-2-1

141 Practice Question 95. All of the following statements concerning the asset allocation model used when the systematic withdrawal approach is followed are correct EXCEPT A. A large percentage in equities will help the client with inflation and longevity risk, but may hurt the client with market risk. B. At any given point in time, the planner should be able to determine which assets will be targeted to provide current income. C. ETFs should not be used with systematic withdrawals because the surrender charges involved with this product make them undesirable to provide current income. D. If a client owns enough asset classes, it is more likely they will be able to sell a “winner” to fund current income. LO 7-2-1

142 Products for the flooring approach Flooring –Immediate annuities –Deferred annuities with benefit riders –I bonds –Tips Discretionary expenses –Systematic withdrawals –Bucket approach LO 7-2-4

143 Practice Question 96. All of the following statements about investment products used with clients who are following the systematic withdrawal approach are correct EXCEPT A. Deferred variable annuities may be appropriate for the equity side of the portfolio that is held to provide income in the later years. B. Growth equity funds may be appropriate for the equity side of the portfolio that is held to provide income in the later years. C. Bond unit investment trusts (Bond UITs) can give the clients target maturity dates. D. Clients should link their bond holdings to positively correlate with equity markets (when equities go up, bonds go up). LO 7-2-1

144 Practical Considerations Client may not be clear what they want Only arrive when there is pressing need Haven’t lived through this before Lot’s of starts and stops along the way Understand goals before getting to facts Spouses can have very different visions Work through alternatives with clients LO 7-3-1

145 Practical Considerations Planning focuses on when to retire, at what income level, and how much risk is acceptable Help client obtain two of three goals (with a shortfall) Communicate alternatives—let client help choose plan There is often information you don’t know Resistance may mean client did not “buy” plan Be quick to address issues--without overreacting Some annual planning (tax) is required Reach out to clients in a number of ways (meetings, emails, statements) LO 7-3-1

146 Monitoring the Plan RisQuotient –Monitoring the retirement portfolio –Use a mathematical formula (not Monte Carlo analysis) –Factors in longevity, expected return, standard deviation and spending rate –High risquotient means risk of failure—time to act Sordex—stress testing the portfolio –Compares the client’s current situation to what would happen in extreme circumstances –High ratio means more monitoring required What is the capital preservation rule? –Withdrawal rate increases 20% reduce payments by 10% and if withdrawal rate decreases 20% increase 10% –Portfolio loss means no inflation adjusted withdrawals Sec 7-4

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