Investment and Retirement Planning Flashcards

A client has $50,000 in savings earning 1% while inflation is 3.5%. What concept should the counselor explain?

Answer: Nominal versus real interest rate

The real interest rate (1% - 3.5% = -2.5%) reveals the client is losing purchasing power.

What is asset allocation and why is it the most important investment decision?

Answer: The strategic division of investments among different asset classes

Asset allocation accounts for over 90% of portfolio return variation according to research, making it the primary driver of risk and return.

A client asks about the 4% withdrawal rule for retirement. What does this guideline suggest?

Answer: Withdraw 4% of original portfolio value annually, adjusted for inflation, to sustain a 30-year retirement

Withdraw 4% in the first year, then adjust that dollar amount for inflation annually, with a high probability of funds lasting 30 years.

What is the primary advantage of index funds compared to actively managed mutual funds?

Answer: Index funds have significantly lower costs and historically outperform most active funds over long periods

Index funds offer lower costs (0.03-0.20% vs. 0.50-1.50%) and about 85-90% of active funds underperform their benchmark over 15 years.

A 55-year-old with no retirement savings earns $70,000. What catch-up provision should the counselor highlight?

Answer: Individuals 50+ can make additional catch-up contributions beyond standard limits

Workers 50+ can contribute extra: $7,500 catch-up for 401(k) and $1,000 for IRAs above standard limits.

What is diversification and how does it reduce investment risk?

Answer: Spreading investments across different asset classes, sectors, and geographies so poor performance in one area is offset by others

Diversification reduces unsystematic risk by spreading investments so losses in one area can be offset by gains in others.