section 1 - The American College Online Learning Center

employed will receive a lower replacement ratio from Social Security than lessaffluent clients who earned average or below average wages.f. Example: Glenn was a “low” earner who made $20,000 last year and comparableamounts in previous years. He will receive about $10,500 per year from SocialSecurity, which replaces over 50 percent of his salary when retired on a cost ofliving adjusted basis. Planning for Glenn is made easier because the planneronly needs to worry about the remaining portion of retirement income. However,planning may become more complicated if Glenn has little saved.g. Example: Christella was a “high” earner who always made over the taxable wagebase in her career. In the year before retirement, she earned $250,000. She willreceive about $30,000 per year from Social Security. However, this only replaces12 percent of her income. The retirement income approach and the risks that needto be addressed are much greater in Christella’s situation than in Glenn’s situation.5. Tax diversification may help to create a better after-tax retirement income stream.a. Tax-planning strategies to diversify assets across investments with various taxtreatments (tax deferred, tax free, taxable at ordinary income rates, taxableat capital gains rates) may help clients manage retirement distributions moreefficiently.b. Tax diversification can be part of any retirement approach (systematic withdrawals,buckets, or floors)c. Tax diversification can be used to minimized tax risk, but it also may help withother risks because a tax-efficient income stream will last longer than an incomestream that is not tax-efficient.6. Balance the client’s need for sufficient income, investment losses, avoidance of risks, andthe control to change their minds.a. All clients face competing interests including:(1) Control over assets versus guaranteed income(2) Using income today versus holding income for growth so it can be usedtomorrow(3) Investment growth versus investment security(4) Trading off one risk for anotherb. Retirement income planning is all about finding the approach, products, and riskmitigation strategies that balance these competing interests.7. Balance the trade-offs necessary to create an optional plan for the client’s situation.a. Trade-offs include:(1) High investment returns vs. safety of investments(2) Investment returns vs. predictability of income(3) Guarantees vs. access to assets(4) Guarantees vs. liquidity(5) Guarantees vs. bequests(6) Uncertain asset adequacy vs. longevity risk protection(7) Limiting expenditures vs. uncertain asset adequacy(8) More longevity protection vs. funds to be used for long-term care anduncertain health expenses6.26