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Assignment 6CHOOSE APPROPRIATE STRATEGIES FORTURNING ASSETS INTO INCOME6Assignment 6SECTION 1: APPROACHES USED TO CONVERT RETIREMENTASSETS INTO RETIREMENT INCOMELO 6-1-1: Describe the three major approaches that can be used to turnretirement assets into retirement income1. Clients will be looking for help in converting the assets they saved for retirement into awell rationed stream of income in retirement.a. Changing from accumulation to decumulation is the crucial retirement incomeplanning issue.b. Clients will want to take the “pile of money” they saved for retirement andaccomplish several important objectives:(1) They will want to have enough income to maintain the standard of livingthey enjoyed prior to retirement.(2) Example: Sam and Diane are both currently age 66 and will look to retirenext year. They currently have a budget of $7,000 per month (it used to behigher but their mortgage is paid off and their kids have moved out and nolonger need the parents’ support). When they retire they want to continuepaying for the same budget items (e.g., food, entertainment, cell phone,cable, electricity, gas, water, property taxes, homeowners insurance, carpayments, car insurance, etc.)(3) They will want to maintain their purchasing power throughout retirement.(4) Example: The goods and services Sam and Diane needed at 66 cost$7,000. However, they soon experience inflation which means they need$8,000 to pay the same bills and make comparable purchases.(5) They will want to be able to adapt their budget to their changing needsthroughout retirement.(6) Example: As time goes on Sam and Diane find they are spending lessmoney on travel and entertainment and more money on out-of-pockethealth care costs.(7) They typically will want to make it so they parcel out their “pile of money”so that it lasts for their entire lifetime and, if possible, leave a legacy totheir children when both have died.(8) Example: Sam and Diane will want a plan in place that makes it so theyare not going to run out of assets to convert into income in the laterstages of retirement. They would like to leave an inheritance if possible,but not if it means severely restricting living on the budget to which theyare accustomed.6.1
(9) In addition to inflation and longevity risk, they want products and strategiesto protect against the other risks discussed in the prior section of thiscourse.(10)Example: Sam and Diane come to their planner to discuss an approach toproviding an inflation and longevity protected stream of income that whencombined with Social Security will help them to maintain a comfortablelifestyle and handle the myriad risks they may encounter.c. The research indicates that the overwhelming majority of surveyed advisors (over78 percent) first select an approach to provide retirement income, and then selectand manage the products needed to implement the approach—rather than using aproduct with an embedded strategy.d. There are three prevalent approaches used in the current retirement incomeplanning environment:(1) The structured systematic withdrawal approach(2) The time-based segmentation approach (also known as the “bucketapproach” or the “age-banded” approach)(3) The essential-versus-discretionary approach (also known as flooring)(4) Planning Point: A combination of these approaches is also a distinctpossibility.2. The structured systematic withdrawal approacha. The Financial Planning Association (FPA) defines the systematic withdrawalapproach like this:(1) Diversify investments based on the client’s risk profile and manage thetotal return of the client’s entire portfolio. To provide income, withdraweither a predetermined or policy-based amount funded by a combination ofinterest, dividends, and/or portfolio holdings based on the client’s incomeneeds and economic conditions.b. The majority of surveyed financial advisors use the systematic withdrawalapproach and in 2011 recommended on average a 4.17 percent initial sustainablewithdrawal amount (discussed later). This dropped from 4.75 percent in theprevious year.c. Example: Rachel and Ross have $1,000,000 saved for their retirement. In thefirst year of retirement the planner using the structured systematic withdrawalapproach recommends that they consume $41,700 of their portfolio and combinethis with their Social Security checks to pay for expenses.3. The time-based segmentation approach (also known as the “bucket approach” or the“age-banded” approach)a. The FPA defines the time-based segmentation approach as follows:(1) Set up separate pools of investments with lowest risk investments in thenear-term time horizon “segment,” somewhat higher risk investments in thenext segment, and riskiest portfolio in the longest-term segment. Income isdrawn from one segment at a time. Once the first segment is depleted,assets from the second segment are used for income.b. About 38 percent of surveyed advisors frequently use or always use the so-calledbucket strategy.6.2
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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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a. Tax-exempt plans include Roth IR
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8. Calculating required distributio
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(2) Exception: If there are separat
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5. Impactc. Tax rates are low in ea
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(7) Based on ordering rules, identi
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7. A married couple who file jointl
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(1) Needed to provide the appropria
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13. Transfers at deatha. Wills(2) A
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(1) The Retirement Equity Act manda
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(2) Beneficiary designation of bene
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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
Page 138 and 139: a. Example: Because of physical and
Page 140 and 141: options about where to get his/her
Page 142 and 143: (2) Facilities, monthly fees, and s
Page 144 and 145: 8. Other strategies that help to co
Page 146 and 147: standard deviations of the returns
Page 148 and 149: a collapse in the real estate marke
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
Page 160 and 161: (1) Excess withdrawal risk—The us
Page 162 and 163: (5) Frailty risk—Managing assets
Page 164 and 165: 7. Practice good career management:
Page 168 and 169: c. Example: Chuck and Sarah divide
Page 170 and 171: e. The bucket approach can be thoug
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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
Page 180 and 181: (2) Annuities and long-term care an
Page 182 and 183: anticipates ramping down her activi
Page 184 and 185: c. Each of the three portfolios wil
Page 186 and 187: SECTION 4: THE ESSENTIAL VERSUS DIS
Page 188 and 189: d. Clients give up investment contr
Page 190 and 191: geared toward long-term growth. Thi
Page 192 and 193: . Trade-offs involve:(1) Irrevocabl
Page 194 and 195: (1) Rate at which banks lend to the
Page 196 and 197: . Dollar-denominated liabilities of
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Page 200 and 201: 4. Taxationtheir return generating
Page 202 and 203: . Close ended(1) IPO style launch(2
Page 204 and 205: (3) Tax control17. Conversations in
Page 206 and 207: (3) Mutual funds provide lower cost
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Page 212 and 213: 6. Today’s annuitization rates ar
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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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