section 1 - The American College Online Learning Center

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a. Most investors are at least somewhat risk averse. That means that they are willingto pay a price, in the form of lower expected returns, to avoid risk when investing.(1) The more risk averse the investor, the more conservative they are withtheir investments.b. Risk Tolerance Surveys4. Risk capacity(a) That can work out okay during their careers because they canchoose to increase their savings rate to compensate for the lowerexpected return on their investments.(b) It can be a much bigger issue in retirement income portfoliosbecause they are no longer contributing to the portfolio - theyare counting on the portfolio to distribute the income they needin retirement.(1) Financial advisors will typically adopt a risk tolerance survey with a seriesof questions designed to establish the client’s risk tolerance. In the nextcourse in the RICP designation you will complete an exercise in evaluatinga client’s subjective risk tolerance.(2) It is important that the survey is a valid measure of a client’s risk tolerance.Firms consider validity when adopting a survey.a. In the accumulation years, the client has the ability to earn a return off of theirhuman capital, make consumption investment decisions with their income fromtheir human capital, and use part of that money to invest in financial capital tobuild their wealth.b. In the distribution years, human capital is depleted or virtually depleted, so it willbe the financial capital that drives the client’s retirement income.c. Risk capacity means that the client has enough income from guaranteed and othersources to meet his or her retirement income needs, so he or she can take onadditional risk in asset allocation in the retirement portfolio.d. There can be a disconnect between risk capacity and risk tolerance where theclient has the capacity, but not the stomach, for taking on additional risk.e. Guaranteed income in retirement can increase the client’s risk capacity in assetallocation.5. Risk tolerance (Video: Risk tolerance: Nanigian, Hanna)a. It is useful to think about risk tolerance in terms of the way economists whodevelop these prescriptive models for portfolio allocation use it.(1) Related to how one values increases in consumption compared todecreases in consumptionb. Subjective risk tolerance(1) Really related to the idea of how much you value higher consumptionversus lower consumption(2) Average, low, and high subjective risk tolerance(3) Risk capacity in a typical lifetime would vary because of human capital.(a) End up with patterns that look like target date mutual funds(b) Aggressive target date mutual funds might be appropriate forsomebody with fairly high subjective risk tolerance (90%-100%).2.6
6. Asset allocation and risk tolerancea. Risk to principal(c) Someone with low subjective risk tolerance would start off with asomewhat lower, but still pretty high, stock percentage (80%).(1) Considers the decline in the investment portfolio’s value due to investmentlosses(2) Clients that are unwilling to accept any potential risk to principal areextremely risk averse.(3) During their career, they can adjust for this aversion by increasing the levelof contributions to their retirement portfolio.(4) As the portfolio goals change from asset accumulation to retirementincome, the ability to achieve income goals in investments that areguaranteed to protect principal are limited.b. Purchasing power risk7. What does it mean?(1) Clients invest with the expectation that their investments will earn a positivereal return. In other words, they expect the purchasing power of theirinvested wealth to increase over time. For that to happen, the investmenthas to earn a return higher than the rate of inflation.(2) Adding tax considerations to the mix increases the problem. The client hasto expect to earn a positive real return after taxes for the purchasing powerof a dollar invested to increase over time.a. A key difference in risk tolerance in retirement versus accumulation years is inthe risk that the retirement income goals cannot be met because of portfolioperformance.b. Outcome based performance influences risk tolerance in retirement incomeportfolios.c. Validity of the survey instrument is important.d. Repeat measures of risk tolerance over time to capture changing risk tolerance.LO 2-1-4: Estimate the income needs required to support the desiredlifestyle in retirement1. People in the pre-retirement stage should start taking stock of their lives as they enter intothe new life stage of retirement (Video: Why assessing budgeting is such a critical part ofthe retirement planning process? Littell, Tacchino, Basu)a. Clients are generally not good at identifying how much they are spending currently.b. They are going to enter a stage that is new and that they do not understand.c. Planners cannot do a detailed retirement plan unless they can figure out the client’sfuture expenses, which they cannot do until they figure out their current expenses.d. Planners should approach budgeting as giving the client control over theirspending choices. Instead of sleepwalking through purchasing decisions, wouldn’tthe client prefer to make conscious choices?e. Building a retirement income plan starts with taking stock of the current lifestyleso that we can begin to look forward into the future(1) What are the spending habits now?(2) What is important in the client’s current lifestyle?2.7
Page 1: Huebner School SeriesHS 353 STUDY O
Page 6: THEAMERICANCOLLEGE.EDUThrough The A
Page 10 and 11: c. But it is more comprehensive bec
Page 12 and 13: (3) Work part-time during retiremen
Page 14 and 15: SECTION 2: UNDERSTANDING RETIREMENT
Page 16: d. Solutions(1) The model considers
Page 19 and 20: . Other sources of retirement incom
Page 21 and 22: c. Another option for solving cash
Page 23 and 24: (b) Net worth statements that ident
Page 25 and 26: d. Be ready to reengage with the cl
Page 27 and 28: (b) In financial planning(c) In inv
Page 29 and 30: j. Planning Point: Planners can use
Page 31 and 32: e. We also need them to have a bett
Page 33 and 34: Assignment 2IDENTIFY RETIREMENT INC
Page 35 and 36: (2) Income4. Determining risk toler
Page 37: collaborative experience which focu
Page 41 and 42: c. How long will the income last?d.
Page 43 and 44: . Durationc. Reliabilityd. Other6.
Page 45 and 46: c. Supplemental Security Income (SS
Page 47 and 48: . An unused emergency fund can supp
Page 49 and 50: 5. Inflation(2) The expense method
Page 51 and 52: Assignment 3CHOOSE APPROPRIATE STRA
Page 53 and 54: . Save as a percentage of income an
Page 55 and 56: (1) Note that 38% of second income
Page 57 and 58: (4) The AARP website has a national
Page 59 and 60: 4. Contributions to IRAs and Roth I
Page 61 and 62: carve out the nondeductible contrib
Page 63 and 64: (2) Plus salary deferrals (for an i
Page 65 and 66: a. Example:(1) Save $10,000 in 25%
Page 67 and 68: (a) This requires knowing four fact
Page 69 and 70: . Solution(1) Li and Lin Lin are bo
Page 71 and 72: (1) The increase in dollar amounts
Page 73 and 74: 9. In some circumstances, an indivi
Page 75 and 76: 2. Reverse mortgage basicsa. Almost
Page 77 and 78: 5. Planning considerations(b) Keep
Page 79 and 80: (2) Some funds that are promoted as
Page 81 and 82: (1) Berstresser, Chalmers, and Tufa
Page 83 and 84: RESOURCES FOR COMPETENCY 3: CHOOSE
Page 85 and 86: (2) From the previous employer(s) p
Page 87 and 88: 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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a. Example: Because of physical and
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options about where to get his/her
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(2) Facilities, monthly fees, and s
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8. Other strategies that help to co
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standard deviations of the returns
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a collapse in the real estate marke
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a. In a later competency we will di
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years of service with the employer)
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a. Planning Point: Planners should
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(2) If you have locked in food, ren
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(4) Loss-of-spouse risk—Deferred
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(1) Excess withdrawal risk—The us
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(5) Frailty risk—Managing assets
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7. Practice good career management:
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Assignment 6CHOOSE APPROPRIATE STRA
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c. Example: Chuck and Sarah divide
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e. The bucket approach can be thoug
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3. Understanding systematic withdra
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(1) The time horizon used in the ca
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12. Four percent is not the number.
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markets have declined by a specifie
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(2) Annuities and long-term care an
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anticipates ramping down her activi
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c. Each of the three portfolios wil
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SECTION 4: THE ESSENTIAL VERSUS DIS
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d. Clients give up investment contr
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geared toward long-term growth. Thi
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. Trade-offs involve:(1) Irrevocabl
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(1) Rate at which banks lend to the
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. Dollar-denominated liabilities of
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(a) Dividend taxed in year paid out
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4. Taxationtheir return generating
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. Close ended(1) IPO style launch(2
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(3) Tax control17. Conversations in
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(3) Mutual funds provide lower cost
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way to obtain increasing payments t
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protection from the downside risk w
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6. Today’s annuitization rates ar
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h. Planning Point: Markets are very
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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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