section 1 - The American College Online Learning Center

(2) If you have locked in food, rent, and the basic expenses, then you can be alittle more adventurous with your discretionary funds.3. What is interest rate risk?a. Interest rate risk is risk associated with changes in market interest rates.b. There are two sources of interest rate risk:(1) Price risk(a) When interest rates go up, prices go down.(b) When interest rates go down, prices go up.(2) Reinvestment rate risk(a) When interest rates are up, better yields on reinvested cash(b) When interest rates are down, worse yields on reinvested cashc. In recent years, interest rates have only fallen.4. Another risk is timing risk.(1) Retirees have found that their interest income has declined.a. Buy an interest rate product today, such as an annuity, and then have interestrates go up tomorrow, which means one could have gotten a better dealb. Best way to deal with timing risk on annuity purchases is to not buy the annuity allat once.(1) This is referred to as laddering one’s purchase, or engaging in timediversification.5. A risk that is specific to annuities is carrier risk.a. Even though there are state guarantee funds, the client may still want to splitthe annuity between issuers.6. Public policy risk is almost as scary as inflation risk.a. Currently, everyone believes Medicare will change.b. Social security will also likely change, although the changes may not be draconian.c. Prayer is certainly one way to deal with this, but a better way is just to havea good cushion.d. Although some people are concerned that late claiming exposes one to SocialSecurity rule changes, this is unlikely.(1) If there is no change in Social Security benefits or contributions, thenaround 2035, there would need to be a 23% cut in benefits, so they willhave to make some fine-tuning.(2) It really makes no sense to claim early because of uncertainty of whatmight happen with regard to the rules.(3) Remember, we are already means testing with regard to taxation ofbenefits.e. The real issue is not to build plans around the long-term operation of the existingtax rules.(1) This is referred to as tax diversification.f. Medicare is already essentially bankrupt, so something dramatic really does haveto happen with regard to this program.(1) Medicaid is another system that will have to change.5.32