Retirement Income Management Flashcards

A retiree's portfolio falls 30% in the first year of retirement. Which strategy BEST mitigates the impact of this sequence-of-returns event?

Answer: Reduce withdrawals temporarily or use a cash reserve to avoid selling depressed assets

Reducing withdrawals or drawing from a cash reserve during a downturn prevents selling equities at depressed prices, giving the portfolio time to recover.

How is the 'exclusion ratio' used in calculating taxes on non-qualified annuity payments?

Answer: It determines what percentage of each annuity payment represents a tax-free return of after-tax premium

The exclusion ratio divides the investment in the contract by the total expected return, and that percentage of each payment is received tax-free as a return of basis.

What does 'provisional income' determine in Social Security taxation?

Answer: The amount of Social Security benefits subject to federal income tax

Provisional income (AGI + non-taxable interest + 50% of Social Security benefits) determines whether 0%, 50%, or 85% of Social Security benefits are included in taxable income.

Which type of withdrawal strategy adjusts spending based on portfolio performance each year?

Answer: Dynamic or flexible withdrawal strategy

Dynamic withdrawal strategies (such as the 'guardrails' or Guyton-Klinger approach) adjust spending upward or downward based on portfolio performance to balance sustainability and income.

A married couple both age 65 has a 50% probability that at least one will reach what age, according to common actuarial estimates?

Answer: Age 90

Actuarial data shows a healthy married couple at 65 has roughly a 50% chance that at least one partner will reach age 90, underscoring the importance of planning for long retirements.

What is the primary criticism of the 4% rule as originally formulated by William Bengen?

Answer: It may be too aggressive given today's lower bond yields and higher equity valuations

Many researchers argue the 4% rule, derived from historical U.S. data, may overstate sustainable withdrawals in a lower-yield, higher-valuation environment, suggesting a rate closer to 3–3.5%.

Which approach to Social Security timing typically maximizes lifetime benefits for a healthy single retiree with average life expectancy?

Answer: Delaying until age 70 to earn maximum delayed retirement credits

For a healthy single individual, delaying Social Security to age 70 maximizes the monthly benefit by earning 8% delayed retirement credits per year past FRA, and typically produces the highest lifetime benefit if the retiree lives to average or above-average life expectancy.