section 1 - The American College Online Learning Center

(b) A traditional fund company(c) An investment bank(d) A hedge fund(4) The issue is always about first recognizing the risk and then abouttransferring it elsewhere. It is risk management…not investments!(5) Annuities should be sold first and foremost as a risk management product,not an investment product.(6) For the individual, it is both about growing assets and managing liabilities.(a) In this case, liabilities are such things as the dignity of one’s lifestyleand covering the necessary costs of health care.f. One of the biggest things to change in our society is the phaseout ofdefined-benefit pensions in favor of defined-contribution plans, which means morerisk for the individual.(1) Tomorrow’s retirees are more susceptible than today’s retirees (today’sretirees have defined-benefit plans).LO 7-4-2: Understand how to adjust sustainable withdrawal rates1. One sustainable withdrawal strategy allows a slightly higher initial withdrawal rate as longas the client is willing to adjust withdrawals when triggers are tripped.a. An important way to do this is the capital preservation rule (also known as theguardrail rule).2. There are four different things that can happen to a decumulation portfolio from yearto year: (Video: What are the strategies that can be used to modify the systematicwithdrawal technique when volatile market conditions occur? Tacchino, Kitces, Guyton)a. Increase this year’s rate distribution by the rate of inflation.b. Freeze at last year’s distribution level.c. Increase this year’s distribution level by more than the rate of inflation.d. Reduce this year’s rate of distribution from last year’s amount.3. Is there an effect on the safe withdrawal rate if another option besides increasing annualwithdrawals by the rate of inflation is used? — Yes!4. Under the default position, planners should increase this year’s distribution by the rate ofinflation.5. If last year’s portfolio had a loss, the client should freeze the distribution at last year’slevel. In other words, there will be no adjustment for inflation.6. If the withdrawal rate is more than 20 percent above where the client started (this happensin falling markets), then the client needs to reduce what they are taking out by 10 percent.a. Example: The client starts withdrawals at 5.5 percent of asset value. Markets godown and the amount that the client might have taken out next year would havein fact equaled 6.8 percent of their asset value. This should trigger the capitalpreservation rule and the client should cut spending by 10 percent.b. Capital preservation rule – this rule goes into effect when the client hits the 20percent “guardrail.” It calls for the client to reduce his/her distribution by 10 percentof what they would have taken when a triggering event occurs.7.32