CRPC Designing Retirement Income Streams 2 — Questions and Answers
Question 1: A retiree wants to maximize guaranteed lifetime income but also leave assets to heirs. Which annuity feature best balances these goals?
- Life-only annuity
- Life with period-certain annuity (Correct answer)
- Variable annuity with no rider
- Fixed deferred annuity
Correct answer: Life with period-certain annuity
A life with period-certain annuity guarantees payments for life while ensuring a minimum payout period to beneficiaries if the annuitant dies early.
Question 2: Which withdrawal sequencing strategy typically minimizes a retiree's overall tax burden over a long retirement?
- Withdraw from Roth accounts first, then tax-deferred, then taxable
- Withdraw from taxable accounts first, then tax-deferred, then Roth (Correct answer)
- Withdraw equally from all account types each year
- Withdraw from tax-deferred accounts first, then taxable, then Roth
Correct answer: Withdraw from taxable accounts first, then tax-deferred, then Roth
Withdrawing from taxable accounts first allows tax-deferred and Roth accounts to continue growing, generally producing lower lifetime taxes.
Question 3: A 70-year-old client is concerned about outliving assets. Which strategy directly addresses longevity risk by providing income starting at advanced age?
- Immediate fixed annuity purchased at 70
- Deferred income annuity (longevity annuity) starting at age 85 (Correct answer)
- Treasury bond ladder maturing over 10 years
- Systematic withdrawal of 5% annually
Correct answer: Deferred income annuity (longevity annuity) starting at age 85
A deferred income annuity (longevity annuity) begins payments at a future advanced age, insuring specifically against outliving other assets.
Question 4: Under the IRS rules, what is the primary purpose of Required Minimum Distributions (RMDs) from traditional IRAs?
- To encourage retirees to spend conservatively
- To ensure tax-deferred money is eventually taxed as ordinary income (Correct answer)
- To prevent overcontribution to retirement accounts
- To fund Social Security trust reserves
Correct answer: To ensure tax-deferred money is eventually taxed as ordinary income
RMDs force distributions from tax-deferred accounts so the government can collect income taxes on previously untaxed contributions and earnings.
Question 5: When applying the 'flooring' retirement income approach, which assets are typically used to create the income floor?
- High-dividend growth stocks and REITs
- Social Security, pensions, and annuities (Correct answer)
- Certificates of deposit and money market funds
- Municipal bonds and index funds
Correct answer: Social Security, pensions, and annuities
The flooring approach uses guaranteed income sources like Social Security, pensions, and annuities to cover essential non-discretionary expenses.
Question 6: A client receives $2,400/month from Social Security and $1,800/month from a pension. Their essential expenses are $3,800/month. What is their income surplus or gap?
- $400 surplus (Correct answer)
- $1,600 gap
- $1,600 surplus
- $400 gap
Correct answer: $400 surplus
$2,400 + $1,800 = $4,200 guaranteed income minus $3,800 essential expenses leaves a $400 monthly surplus.
Question 7: Which of the following best describes the 'bucket strategy' in retirement income planning?
- Dividing assets into short-term liquid, medium-term balanced, and long-term growth buckets (Correct answer)
- Maximizing contributions to tax-free retirement buckets
- Splitting income equally between fixed and variable sources
- Investing all assets in a single diversified mutual fund
Correct answer: Dividing assets into short-term liquid, medium-term balanced, and long-term growth buckets
The bucket strategy segments assets by time horizon: liquid assets for near-term needs, balanced assets for mid-term, and growth assets for long-term spending.
CRPC Designing Retirement Income Streams 2
A retiree wants to maximize guaranteed lifetime income but also leave assets to heirs.
Which annuity feature best balances these goals?