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d. Clients give up investment control. If a client has confidence in their personalfinancial abilities, investing the floor amount may be a more desirable strategyfor their situation.e. The annuity may be redundant. After all, any client who receives Social Securityalready gets an inflation-adjusted annuity.f. Annuities may be overpriced. In addition, your client may be dissuaded fromannuitizing in today’s low interest rate environment.g. Some client’s see annuities as a longevity gamble where they believe they will notlive long enough to make back their initial investment.h. The irrevocable and absolute nature of the annuity could be responsible for aclient’s aversion to the product.SECTION 5: HOW THE APPROACHES MITIGATE RISKSLO 6-5-1: Analyze how the three strategies to create retirement incomeaffect retirement risks1. Longevity riska. Longevity risk is best addressed through the flooring strategy because of thereliance of this strategy on annuities.b. Systematic withdrawals and the bucket approaches can also be very good hedgesagainst longevity risk because:2. Excess withdrawal risk(1) In many cases, the systematic withdrawal approach has a large portfolioleft after a 30-year time horizon. This is not the case for a worst casescenario.(2) The 30-year time horizon can be adjusted to create a time frame thatexceeds any reasonable life expectancy expectation.(3) The bucket approach and the systematic withdrawal strategy allow assetsto grow and add wealth that can be used in the later stages of retirement.a. Excess withdrawal risk is best addressed through the flooring strategy because ofthe reliance of this strategy on annuities.b. Systematic withdrawal and the bucket approach can also be a very good hedgeagainst excess withdrawal risk because:3. Inflation risk(1) These strategies control (but do not limit) the amount consumed each year.A client following the plan will generally eliminate excess withdrawal risk.A client who abandons the plan will do so at the sacrifice of exacerbatingexcess withdrawal risk.(2) The bucket approach and the systematic withdrawal strategy allow forgreater asset accumulation than an annuitized flooring strategy. Thepossibility for greater growth of assets may prove to be a greater hedgeagainst systematic withdrawals which block excess consumption (basedon annuitization) if the assets grow sufficiently to produce additionalincome for the later retirement period.6.23
a. Inflation risk is best addressed through an approach that allows more of theclient’s assets to be invested in equities for a longer period of time. This wouldtypically be the systematic withdrawal and the bucket approach.b. The flooring approach does not typically provide for a hedge against inflationunless a cost of living rider is added to the annuity or a variable annuity is used.c. Planning Point: Cost of living riders are often capped at a stipulated percentage,which may be lower than actual inflation.d. A flooring strategy that relies on a delayed Social Security claiming for most ofthe flooring can be very effective because the Social Security benefit is adjustedfor inflation.4. Reinvestment riska. The bucket strategy will have the greatest difficulty managing reinvestment riskbecause the near-term bucket must be replenished with short-term investmentslike bonds, CDs, and other investments that are particularly sensitive toreinvestment risk.b. The systematic withdrawal strategy can also be subject to reinvestment risk but toa lesser extent than the bucket strategy.5. Liquidity and legacy riska. The flooring strategy creates the greatest liquidity and legacy risk problembecause of the use of an annuity to create the floorb. Systematic withdrawals preserve more liquidity than the bucket strategy becausetheoretically less of the investments are tied up in short-term, illiquid investments.However, this may not always be the case depending on the asset allocationmodel used.LO 6-5-2: Recognize common sense solutions1. Regardless of the approach or products used, set aside two-to-five years’ worth ofwithdrawals into low risk investments that can provide income in the short-term period.This avoids the need to draw down variable assets during a down market.a. This strategy is emphasized in the bucket approach. In fact, one could argue it isthe central point of the bucket approach. However, it can be easily implementedin the systematic withdrawal approach by tapping into the conservative partof the portfolio in down markets. It is less necessary in the flooring approachbecause fundamental spending has been secured in a manner that reducesmarket variability.b. This common sense solution illustrates both a strength and a weakness of theflooring strategy. By locking in flooring with a bond ladder, immediate annuity, oranother method, the client has secured assets to account for basic expenseswithout having to be concerned with market risk. On the other hand, if too manyassets are used to create the floor, the client is “missing out on” the samevariability that provides upside return potential to grow assets to be sufficient tosatisfy retirement income needs.2. Regardless of the approach or products used, use a sufficient amount of assets to providegrowth in the long-term. By investing in equities and trying to gain greater return throughgreater risk, the client is effectively addressing longevity risk, inflation risk, and other risks.a. This strategy is emphasized in a systematic withdrawal approach that calls forproper asset allocation over the long-term retirement horizon. The strategy is builtinto the bucket approach because the second and especially the third buckets are6.24
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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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(1) Charity needs only to payout in
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c. Access should be granted to an a
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nightmare of living probate might h
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(6) Powers to represent their princ
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c. If the policy is term coverage w
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e. Factoring personal and family he
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problem. On the other hand, we can
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d. Adding a cost of living adjustme
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g. Planning Point: Sometimes a high
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(2) Clients may not be able to “a
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c. Ensure that the client is receiv
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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 166 and 167: Assignment 6CHOOSE APPROPRIATE STRA
Page 168 and 169: c. Example: Chuck and Sarah divide
Page 170 and 171: e. The bucket approach can be thoug
Page 172 and 173: 3. Understanding systematic withdra
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 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
Page 198 and 199: (a) Dividend taxed in year paid out
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 210 and 211: protection from the downside risk w
Page 212 and 213: 6. Today’s annuitization rates ar
Page 214 and 215: h. Planning Point: Markets are very
Page 216 and 217: a. The client may not be clear abou
Page 218 and 219: a. Problems with implementation are
Page 220 and 221: c. Product solutions work together
Page 222 and 223: (1) A problem is that if the client
Page 224 and 225: (b) A traditional fund company(c) A
Page 226 and 227: d. Evelyn is in great health and he
Page 228: RESOURCES FOR COMPETENCY 7: INTEGRA
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