section 1 - The American College Online Learning Center

(2) Income4. Determining risk tolerance(a) Taxable — wages, bonuses, commissions, investment earnings(b) Not taxable — gifts, refunds from previous years, Roth distributions(c) Identify taxable income and tax-free income(3) Expenses — can be either fixed or variable.(a) Fixed expenses — meaning they come up no matter what, such asfood, shelter, transportation, income taxes, insurance premiums(b) Required (fixed) but the amounts are uncertain such as health careexpenses or replacing a roof on the client’s home(c) Variable expenses — those items that you have control over andcan modify, such as the cable bill(d) The expense statement should be as detailed as possible becauseit can provide a tremendous amount of information necessary todevelop a retirement income plan.(e) Planning Point: The cash flow statement can give us great insightinto the client.(f) Suggestions to make this task easier for clients:• Keep detailed track of every expense for one month.• Use credit cards that provide reporting services.• Charge all expenses on a credit card to make it easier totrack expenses.(g) Cash flow statement is for an annual period and is used to get aclear sense of income and expenses(h) Budgeting is a different process• Goal is to help a client stay within spending limits• General categories of expenses may be better suited tokeep on tracka. Risk should be measured when the client is not stressed.b. It can be useful to measure risk tolerance several times.c. Until the market drops, we do not know the risk tolerance of a client. Risktolerance is a function of loss aversion.d. Separate spouses when measuring their risk tolerance because one spouse mayinfluence the other.e. Planning Point: The education process stemming from an advisor working with aclient may help to change the client’s risk tolerance.LO 2-1-2: Determine the client’s retirement goals and objectives1. Objective (Video: Advising in a digital age: Littell, Freitag, Henry)a. Retirement income planning is about having the financial means to support alifestyle in retirement.b. In the previous objective, we began to understand the client better by learningabout the client’s current situation.c. Now it is time to consider what might be different about the client’s vision ofretirement. There is clearly a point when it is time to step away from money and2.3