section 1 - The American College Online Learning Center

(4) Loss-of-spouse risk—Deferred claiming of Social Security benefits couldresult in a larger survivor benefit for a widow or widower.(5) Investment risk—Deferred claiming of Social Security benefits achievesthe purpose of using assets to increase the annuity value of SocialSecurity, which effectively transfers the investment risk on those assetsfrom the client to the government.b. Hurts by potentially exacerbating(1) Liquidity risk—Deferred claiming of Social Security benefits will mean thatassets are consumed to pay for expenses while the client waits for largerSocial Security checks. Consuming those assets might impede the clientfrom having the funds needed for major expenses in retirement.(2) Public policy risk—Deferred claiming of Social Security benefits mightresult in the client losing the opportunity to get benefits which are takenaway (e.g., means testing) or missing the opportunity to be grandfatheredinto an existing system which is more beneficial to the client.2. Elect (from the employer plan) or purchase an immediate annuity to create a stream ofincome that will last a lifetime. This strategy:a. Helps to potentially minimize:(1) Longevity risk—An immediate annuity accomplishes providing a monthlycheck as long as he or she lives. The client cannot outlive this income.(2) Excess withdrawal risk—Using assets to purchase an immediate annuitymeans that those assets won’t be prematurely spent.(3) Inflation risk—If the immediate annuity has an inflation rider, it will help tomaintain purchasing power throughout retirement.(4) Reinvestment risk—The use of an immediate annuity locks in some assetswhen the annuity is purchased. These funds are therefore not subject toreinvestment risk. What’s more, the annuity may be perceived to be the“conservative” portion of the portfolio and therefore the need to invest inTreasury bills and certificates of deposit (conservative investments that areespecially vulnerable to reinvestment risk) may be minimized or eliminated.(5) Investment risk—The use of an immediate annuity shifts the investmentrisk for the funds used to purchase the annuity from the client to the insurer.(6) Loss-of-spouse risk—Using a joint and survivor annuity will help to provideincome to the widowed spouse. However, a life only immediate annuity willhurt the economic status of the surviving spouse.b. Hurts by potentially exacerbating:(1) Liquidity risk—The use of an immediate annuity means assets areconsumed to pay for the annuity. Consuming those assets might impedethe client from having the funds needed for major expenses in retirement.(2) Loss-of-spouse risk—Using a life-only immediate annuity based on the lifeof the first to die will hurt the economic status of the surviving spouse.(3) Bequest opportunity—An annuity takes away the client’s ability to leavethose assets to his or her heirs.3. Purchase an advanced life delayed annuity (ALDA), also known as longevity insurance,that will pay regular income but beginning at a later age (such as 80). This strategy:5.34