CRC Retirement Planning 2 — Questions and Answers
Question 1: A client retires at age 62 and begins Social Security benefits. Compared to waiting until full retirement age (FRA), their benefit will be permanently reduced by approximately how much per year early?
- 3.5%
- 6.67% (Correct answer)
- 5%
- 8%
Correct answer: 6.67%
Benefits are reduced by 6.67% per year (5/9 of 1% per month) for the first three years before FRA.
Question 2: Which of the following best describes the 'sequence of returns' risk in retirement?
- The risk that inflation will erode purchasing power over time
- The risk that poor investment returns early in retirement disproportionately deplete the portfolio (Correct answer)
- The risk that Social Security benefits will be reduced
- The risk of outliving all assets regardless of return order
Correct answer: The risk that poor investment returns early in retirement disproportionately deplete the portfolio
Sequence of returns risk refers to the danger that early negative returns, combined with withdrawals, can permanently impair a retirement portfolio even if long-run averages are acceptable.
Question 3: A Roth IRA conversion is most advantageous when the account holder expects their tax rate in retirement to be:
- Lower than their current tax rate
- The same as their current tax rate
- Higher than their current tax rate (Correct answer)
- Zero, due to standard deduction offsets
Correct answer: Higher than their current tax rate
Converting to a Roth makes most sense when future tax rates are expected to be higher, because taxes are paid now at the lower rate.
Question 4: Under the SECURE 2.0 Act, the required beginning date for RMDs from traditional IRAs for individuals born in 1951 or later is April 1 following the year they turn:
- 70½
- 72
- 73 (Correct answer)
- 75
Correct answer: 73
SECURE 2.0 raised the RMD starting age to 73 for individuals born between 1951 and 1959.
Question 5: Which withdrawal strategy is designed to keep a retiree's portfolio balanced by withdrawing proportionally from each asset class?
- Bucket strategy
- Systematic withdrawal plan
- Proportional withdrawals (Correct answer)
- Dynamic spending rule
Correct answer: Proportional withdrawals
Proportional withdrawals maintain asset allocation by drawing from all asset classes in proportion to their current portfolio weights.
Question 6: A client has a defined benefit pension offering a life-only annuity of $3,000/month or a joint-and-survivor (J&S) option of $2,400/month. The pension maximization strategy would suggest:
- Always choose the J&S option to protect the spouse
- Take the life-only annuity and use the $600 difference to purchase life insurance on the pensioner (Correct answer)
- Take the J&S option and invest the difference in a Roth IRA
- Delay pension start to increase the life-only benefit
Correct answer: Take the life-only annuity and use the $600 difference to purchase life insurance on the pensioner
Pension maximization involves taking the higher life-only annuity and using the monthly difference to buy life insurance, potentially providing more income to both spouses.
Question 7: When calculating the present value of a pension benefit, which factor does NOT directly affect the calculation?
- Discount rate used
- Expected benefit payment amount
- Beneficiary's current account balance in a 401(k) (Correct answer)
- Life expectancy of the pensioner
Correct answer: Beneficiary's current account balance in a 401(k)
A separate 401(k) balance is not an input in present value calculations for a defined benefit pension.
CRC Retirement Planning 2
A client retires at age 62 and begins Social Security benefits.
Compared to waiting until full retirement age (FRA), their benefit will be permanently reduced by approximately how much per year early?