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8. Other strategies that help to cope with the risks associated with the aging process(long-term care risk, frailty risk, health care expense risk). Note these “universal solutions”work well for almost all types of risk, but often for different reasons for each type of risk:a. Recommend that the client delay starting retirement. It is often a good idea topostpone retirement until Medicare begins. A client who retires is only entitled to18 months of COBRA coverage. And the coverage is typically expensive sincethe employer is no longer sharing the cost. Health care lapses prior to Medicarestarting at 65 cannot only be costly, but they also can be deadly if the client leavesa medical condition unattended while he waits for Medicare to kick in.b. Recommend that the client go back to work full or part time. Reemployment maygive the client the extra income needed to offset long-term care risk, frailty riskand health care risk. Some medical professionals will even go as far as to say thatcontinued work activity stimulates the brain and can lead to a postponement of theneed for long-term care or the onset of frailty. However, others point to the stressof work as causing frailty risk to visit the client at an earlier age.c. Ensure that the client is receiving professional advice by working with a financialplanner or planners. Choosing the proper Medicare and Medigap coverage canbe a complicated task.d. Monitor the retirement income plan and lower spending if necessary. (Plannersshould monitor at least annually and adapt expenditures to make sure funds areavailable to offset long-term care needs, frailty expenses, and uninsured medicalexpenses.)e. Relocate to an area with a lower cost of living. This will work best to hedgelong-term care and frailty risk since some areas carry a much lower price tagfor caregiving services, home maintenance services, and other service needsbrought about by frailty.9. Recommend an appropriate strategy to convert assets into income.a. In a later competency we will discuss in detail the systematic withdrawal strategy,the so-called “bucket approach” strategy, and the income floor strategy as a wayto turn the client’s assets into a stream of retirement income.b. These strategies can go a long way toward addressing client risks. We will revisitthe impact of each strategy on retirement risks in a later competency.c. It is important that the planner coordinate the risks and solutions discussed in thissection with the strategies discussed later (and vice versa) in order to allow for acomprehensive solution for the client.Retirement Income Checklist: Does Your Client’s Retirement Plan Consider these Post-Retirement Risks andSolutions?Concern/RiskConcern:Inability to pay for healthcare costs related to oldage.Long-Term Care Risk–the possibility of needingsignificant resourcesfor custodial or medicalcare if dementia and/orphysical impedimentsrestrict the ability toPossible Solutions1. Purchase long-term care insurance.2. Capitalize on the house. Institute a reverse mortgage program, downsize to aretirement community, choose to reside in a continuing care retirement community(CCRC), or take a home equity loan.3. Create a separate portfolio that is reserved until the later years of retirement.4. Implement a Medicaid spend-down.5. Have the client create advanced directives.6. Select effective health care coverage including the most appropriate Medicare,Medigap and retiree health care policies.5.20
Retirement Income Checklist: Does Your Client’s Retirement Plan Consider these Post-Retirement Risks andSolutions?Concern/Riskperform activities of dailyliving.Frailty Risk – thepossibility that mentaland/or physical frailtywould prohibit a clientfrom properly managinghis/her financial affairsand/or his/her home.Health Care ExpenseRisk – having inadequatemedical insurance.Possible Solutions7. Recommend health savings accounts (HSAs).8. Delay starting retirement.9. Go back to work full-time or part- time.10. Use professional advice.11. Monitor the retirement income plan and lower spending if necessary.12. Relocate to an area with a lower cost of living.13. Involve both spouses in the financial planning process.14. Recommend an appropriate approach to convert assets into income.SECTION 3: THE RISKS AND SOLUTIONS ASSOCIATED WITHRUNNING OUT OF MONEY BECAUSE THE CLIENT IS HOLDINGINVESTMENTS ASSETS DURING THE RETIREMENT PERIODLO 5-3-1: Analyze the risks of running out of money from depending oninvestments in retirement1. Overview—There are 3 risks embedded in every retirement income plan that holdsinvestment assets that need to be converted into retirement income. These risks apply toboth married and single clients. They also apply to every client for which you need toplan regardless of his/her financial status. These include:a. Investment risk (including but not limited to asset allocation risk, market risk,and sequence of returns risk)b. Reinvestment riskc. Liquidity riskd. When one holds investment assets, there are several issues to consider thatinvolve trade-offs between the different types of risk.e. The traditional financial securities for investment are stocks, bonds, and cash.Stocks may be purchased directly or through any of several different types ofinvestment company arrangements such as mutual funds, closed-end funds,ETFs, hedge funds, etc. Bonds are even more likely to be purchased via aninvestment company arrangement because of trading problems associated withtrying to buy smaller amounts (e.g., under $100,000 of a particular bond issue).When we refer to cash, we are actually referring to money market instrumentssuch as Treasury bills, negotiable CDs, commercial paper, bankers’ acceptances,a bank money market account, or a high-yield savings account. In this case, theinvestment of choice is almost always a money market mutual fund.f. Research has consistently shown that large portfolios of stocks always providesubstantially higher returns over long time periods than do large portfolios ofbonds, and that the bonds substantially outperform cash over long time periods.However, the amount of risk implicit in these investments, as represented by the5.21
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Huebner School SeriesHS 353 STUDY O
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THEAMERICANCOLLEGE.EDUThrough The A
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c. But it is more comprehensive bec
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(3) Work part-time during retiremen
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SECTION 2: UNDERSTANDING RETIREMENT
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d. Solutions(1) The model considers
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. Other sources of retirement incom
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c. Another option for solving cash
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(b) Net worth statements that ident
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d. Be ready to reengage with the cl
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(b) In financial planning(c) In inv
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j. Planning Point: Planners can use
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e. We also need them to have a bett
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Assignment 2IDENTIFY RETIREMENT INC
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(2) Income4. Determining risk toler
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collaborative experience which focu
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6. Asset allocation and risk tolera
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c. How long will the income last?d.
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. Durationc. Reliabilityd. Other6.
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c. Supplemental Security Income (SS
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. An unused emergency fund can supp
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5. Inflation(2) The expense method
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Assignment 3CHOOSE APPROPRIATE STRA
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. Save as a percentage of income an
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(1) Note that 38% of second income
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(4) The AARP website has a national
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4. Contributions to IRAs and Roth I
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carve out the nondeductible contrib
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(2) Plus salary deferrals (for an i
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a. Example:(1) Save $10,000 in 25%
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(a) This requires knowing four fact
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. Solution(1) Li and Lin Lin are bo
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(1) The increase in dollar amounts
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9. In some circumstances, an indivi
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2. Reverse mortgage basicsa. Almost
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5. Planning considerations(b) Keep
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(2) Some funds that are promoted as
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(1) Berstresser, Chalmers, and Tufa
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RESOURCES FOR COMPETENCY 3: CHOOSE
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(2) From the previous employer(s) p
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8. IRA funded plans (IRAs, SEPs, SI
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. Does the distribution election fi
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6. Net unrealized appreciation rule
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Page 108 and 109: 13. Transfers at deatha. Wills(2) A
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Page 112 and 113: (2) Beneficiary designation of bene
Page 114 and 115: 13. Overview14. Types(2) The donor
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Page 118 and 119: c. Access should be granted to an a
Page 120 and 121: nightmare of living probate might h
Page 122 and 123: (6) Powers to represent their princ
Page 124 and 125: c. If the policy is term coverage w
Page 126 and 127: e. Factoring personal and family he
Page 128 and 129: problem. On the other hand, we can
Page 130 and 131: d. Adding a cost of living adjustme
Page 132 and 133: g. Planning Point: Sometimes a high
Page 134 and 135: (2) Clients may not be able to “a
Page 136 and 137: c. Ensure that the client is receiv
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Page 142 and 143: (2) Facilities, monthly fees, and s
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Page 150 and 151: a. In a later competency we will di
Page 152 and 153: years of service with the employer)
Page 154 and 155: a. Planning Point: Planners should
Page 156 and 157: (2) If you have locked in food, ren
Page 158 and 159: (4) Loss-of-spouse risk—Deferred
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Page 162 and 163: (5) Frailty risk—Managing assets
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Page 166 and 167: Assignment 6CHOOSE APPROPRIATE STRA
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Page 174 and 175: (1) The time horizon used in the ca
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Page 178 and 179: markets have declined by a specifie
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Page 184 and 185: c. Each of the three portfolios wil
Page 186 and 187: SECTION 4: THE ESSENTIAL VERSUS DIS
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(1) Rate at which banks lend to the
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. Dollar-denominated liabilities of
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(a) Dividend taxed in year paid out
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4. Taxationtheir return generating
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. Close ended(1) IPO style launch(2
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(3) Tax control17. Conversations in
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(3) Mutual funds provide lower cost
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way to obtain increasing payments t
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protection from the downside risk w
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6. Today’s annuitization rates ar
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h. Planning Point: Markets are very
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a. The client may not be clear abou
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a. Problems with implementation are
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c. Product solutions work together
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(1) A problem is that if the client
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(b) A traditional fund company(c) A
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d. Evelyn is in great health and he
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RESOURCES FOR COMPETENCY 7: INTEGRA
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