section 1 - The American College Online Learning Center

of it. However, because stocks are consistently the highest yielding assets, overlonger time periods they are the best positioned to offset the losses in purchasingpower represented by inflation.h. Timing risk can be quite serious with all types of investments, but probably mostproblematic with stocks. The stock market has shown the ability to drop over 20percent in one day, and to rise more than 10 percent in one day. Probably the bestway to deal with timing risk is to set a schedule as to when one will invest moneyor liquidate holdings, and then stick to that schedule.i. Planning Point: Ultimately, the retiree will have to make some sort of bet aboutfuture investment returns when he or she retires. If the market will have a majorcollapse during his or her retirement, then he or she clearly would be best off witha heavy investment in bonds, particularly well-rated ones. If the rate of inflationincreases significantly, then the retiree will be substantially better off with moreequities and fewer bonds. The ultimate safety—cash investments—would almostcertainly provide inadequate returns and result in clients becoming destitute whenthey are in their latter years of retirement.8. Ask the client to prepay expenses.a. By prepaying for a funeral, or paying off mortgages and other loans, the client willlower or eliminate expenses in retirement.b. Planning Point: When paying off any loan early, one is essentially investing one’smoney at the loan’s interest rate. Thus, one should not use money that is earning5 percent to pay off a loan that is costing 4 percent. However, taking money that isearning 2 percent and using it to pay off a loan costing 8 percent is a great dealand will substantially benefit the client over time.c. The lower the client’s expenses in retirement, the less inflation impacts the clientduring retirement. In addition, the client cannot prespend this money throughexcess withdrawals because it is being used to reduce future expenses (notcurrent excess consumption). Finally, this strategy may help with timing risk if theclient chose to lock in the cost at the right time.9. Good ideas for all types of retirement risks—other strategies that help to impede the riskof running out of money because of longevity risk, excess withdrawal risk, inflation risk,and timing risk (note these “universal solutions” work well for almost all types of risk, butoften for different reasons for each type of risk):a. Recommend that the client delay starting retirement. Planners should considerrecommending postponing retirement if the client is expecting to live longer, or ifinflation rates are projected to be high in the period following planned retirement.For example, a two-year delay in starting retirement means two fewer years oflongevity and inflation risk. However, this strategy will not work for the 40 percentof clients who were forced to retire earlier than planned.b. Recommend that the client go back to work full or part time. Reemployment maygive the client the extra income needed to offset longevity risk, make up for excesswithdrawals, act as a hedge against inflation, and offset timing risk. However, thereare reasons a postretirement employment solution may not work. These include:(1) The client may not have the appropriate skills and training.(2) The client may have health restrictions that impede his/her ability to work.(3) Postretirement working is typically lower paying and does not providebenefits.(4) Postretirement work may not happen in a tight job market.5.11