CRPC Designing Retirement Income Streams 3 — Questions and Answers
Question 1: A retiree wants inflation-adjusted income that cannot be outlived. Which Social Security claiming strategy best achieves this for a single individual in good health?
- Claim at age 62 to maximize total years of payments
- Delay claiming until age 70 to maximize the monthly benefit (Correct answer)
- Claim at full retirement age to avoid earnings test penalties
- Claim at 65 to coordinate with Medicare enrollment
Correct answer: Delay claiming until age 70 to maximize the monthly benefit
Delaying Social Security to age 70 increases the monthly benefit by approximately 8% per year beyond full retirement age and the benefit is automatically adjusted for inflation via COLA.
Question 2: Which retirement income risk does a TIPS (Treasury Inflation-Protected Securities) bond ladder specifically address?
- Longevity risk
- Inflation risk (Correct answer)
- Sequence-of-returns risk
- Cognitive decline risk
Correct answer: Inflation risk
TIPS principal adjusts with the Consumer Price Index, so a TIPS ladder provides cash flows that maintain purchasing power against inflation.
Question 3: A married couple wants to protect the surviving spouse's income. Which Social Security strategy is most relevant?
- Both spouses claim at 62 to collect the most combined payments
- The higher-earning spouse delays to age 70 to maximize the survivor benefit (Correct answer)
- Both spouses claim at their respective full retirement ages
- The lower-earning spouse delays to age 70 while the higher earner claims at 62
Correct answer: The higher-earning spouse delays to age 70 to maximize the survivor benefit
The surviving spouse inherits the deceased spouse's benefit, so maximizing the higher earner's benefit by delaying to 70 provides the largest possible survivor income.
Question 4: In the context of retirement income, what does 'sequence-of-returns risk' refer to?
- The risk that tax rates will rise during retirement
- The risk that poor early-retirement market returns permanently reduce portfolio longevity (Correct answer)
- The risk that Social Security benefits will be reduced
- The risk that annuity payments will not keep pace with inflation
Correct answer: The risk that poor early-retirement market returns permanently reduce portfolio longevity
Negative returns in the early years of retirement, combined with ongoing withdrawals, can permanently deplete a portfolio even if long-run average returns are acceptable.
Question 5: Which distribution approach involves withdrawing a fixed percentage of the portfolio's current value each year, rather than a fixed dollar amount?
- Dollar-cost averaging withdrawal
- Fixed percentage withdrawal (Correct answer)
- Systematic fixed dollar withdrawal
- Annuitization
Correct answer: Fixed percentage withdrawal
Fixed percentage withdrawals automatically adjust the dollar amount taken based on the portfolio's current value, reducing the risk of depleting the account in a down market.
Question 6: A client converts a portion of IRA assets to a Roth IRA at retirement. What is the primary income planning benefit of this strategy?
- Converted assets are permanently exempt from RMD rules
- Roth withdrawals in retirement are tax-free, providing flexibility to manage taxable income (Correct answer)
- Roth IRAs eliminate the need to purchase long-term care insurance
- Conversion eliminates Social Security benefit taxation
Correct answer: Roth withdrawals in retirement are tax-free, providing flexibility to manage taxable income
Tax-free Roth withdrawals allow retirees to control their taxable income, which can reduce Medicare IRMAA surcharges, taxes on Social Security, and overall tax liability.
Question 7: What is the primary disadvantage of purchasing a single-premium immediate annuity (SPIA) with a large lump sum?
- Payments begin too far in the future to cover near-term expenses
- The retiree permanently loses access to the lump-sum principal (Correct answer)
- Payments are subject to ordinary income tax on 100% of each payment
- SPIAs cannot include survivor or period-certain guarantees
Correct answer: The retiree permanently loses access to the lump-sum principal
Once the premium is paid to the insurer, the client typically cannot reclaim the lump sum, sacrificing liquidity and the ability to respond to unexpected large expenses.
CRPC Designing Retirement Income Streams 3
A retiree wants inflation-adjusted income that cannot be outlived.
Which Social Security claiming strategy best achieves this for a single individual in good health?