section 1 - The American College Online Learning Center

Assignment 5EVALUATE RETIREMENT RISKS AND OFFERALTERNATIVE SOLUTIONS TO ADDRESS THESE RISKS5Assignment 5SECTION 1: THE RISK OF RUNNING OUT OF MONEY AT THEEND OF RETIREMENTLO 5-1-1: Analyze the risks associated with running out of money at theend of retirement1. Overview: There are four risks embedded in every retirement income plan that couldlead to the disastrous result of a client lacking the income needed in the later years ofretirement. These risks apply to both married and single clients and also apply to everyclient for which you need to plan regardless of his/her financial status. These include:a. Longevity riskb. Excess withdrawal risk (also called portfolio failure risk)c. Inflation risk (also called purchasing power risk)d. Timing risk (also called point-in-time risk)2. Longevity risk is the possibility of outliving resources by living longer than planned. Yourclients should be concerned about living too long for a variety of reasons:a. Since no client can predict how long they will live with certainty, the retirementincome stream must last for an unpredictable length of time. This complicatesplanning since the client has to secure an adequate stream of income for anunpredictable length of time.b. Planning Point: The planning horizon for retirement income is indefinite andunknowable. Planners, however, need to create a proxy for longevity when theyput together a retirement income plan.c. According to some mortality tables the average life expectancy for a 65 year old is18 years. However, this is an unacceptable proxy since planning for the averagelife expectancy will be wrong for 50 percent of clients!d. Probabilities of living to a certain age are another possible predictor of a lifeexpectancy proxy.(1) The probability of living from age 65 to a specific age:(2)Age Male Female70 94% 95%75 85% 88%80 73% 79%85 54% 64%90 33% 34%5.1