CRPC Designing Retirement Income Streams 4 — Questions and Answers
Question 1: A client has a $1 million portfolio and uses the 4% rule. Approximately how much can they withdraw in the first year, and how are subsequent withdrawals adjusted?
- $40,000 first year; subsequent withdrawals adjusted for inflation (Correct answer)
- $40,000 every year regardless of portfolio performance
- $40,000 first year; subsequent withdrawals reset to 4% of current balance
- $10,000 per quarter; no subsequent adjustments
Correct answer: $40,000 first year; subsequent withdrawals adjusted for inflation
The 4% rule prescribes an initial $40,000 withdrawal (4% of $1M) with subsequent withdrawals increased annually by inflation to maintain purchasing power.
Question 2: Which type of annuity rider allows a retiree to receive guaranteed minimum income based on a benefit base that grows even when the market declines?
- Guaranteed minimum accumulation benefit (GMAB)
- Guaranteed lifetime withdrawal benefit (GLWB) (Correct answer)
- Return of premium rider
- Systematic withdrawal rider
Correct answer: Guaranteed lifetime withdrawal benefit (GLWB)
A GLWB rider on a variable or indexed annuity allows withdrawals based on a protected benefit base that can ratchet up with market gains but never decreases due to losses.
Question 3: A retiree has both taxable and tax-deferred accounts. Why might a planner recommend drawing down taxable accounts before tax-deferred accounts in a low-income year?
- Taxable accounts have lower withdrawal penalties
- Selling appreciated taxable assets when income is low may result in 0% long-term capital gains tax (Correct answer)
- Tax-deferred accounts do not earn returns after age 70½
- Taxable account withdrawals reduce Social Security benefits
Correct answer: Selling appreciated taxable assets when income is low may result in 0% long-term capital gains tax
Long-term capital gains rates can be 0% for taxpayers in the 10–12% ordinary income brackets, making low-income years ideal for realizing gains from taxable accounts.
Question 4: How does purchasing a deferred income annuity (DIA) early in retirement reduce the required withdrawal rate from a portfolio?
- The DIA provides tax deductions that lower portfolio costs
- The future guaranteed income allows the portfolio to be managed for a shorter time horizon, permitting more spending now (Correct answer)
- The DIA eliminates RMD obligations on qualified assets
- The DIA grows the portfolio at a guaranteed rate until income begins
Correct answer: The future guaranteed income allows the portfolio to be managed for a shorter time horizon, permitting more spending now
Knowing guaranteed income will start at a future date means the portfolio only needs to fund spending until that date, allowing a higher sustainable withdrawal in the interim.
Question 5: Which factor most strongly determines the monthly payout rate offered by an immediate annuity?
- The annuitant's credit score and financial history
- Interest rates at the time of purchase and the annuitant's life expectancy (Correct answer)
- The annuitant's investment experience and risk tolerance
- The insurance company's stock price at the time of issue
Correct answer: Interest rates at the time of purchase and the annuitant's life expectancy
Annuity payout rates are primarily driven by current interest rates and actuarial life expectancy tables used by the insurer to price the longevity guarantee.
Question 6: A planner recommends a 'rising equity glidepath' during retirement. What does this strategy involve?
- Increasing bond allocation annually as the client ages
- Starting retirement with a lower equity allocation and gradually increasing it over time (Correct answer)
- Holding 100% equities in the first decade of retirement for maximum growth
- Reducing equity exposure by 1% per year throughout retirement
Correct answer: Starting retirement with a lower equity allocation and gradually increasing it over time
A rising equity glidepath begins with a conservative allocation to reduce sequence-of-returns risk early in retirement, then increases equity exposure as the portfolio survives the critical early years.
Question 7: A retiree earns wages of $25,000 before reaching full retirement age while receiving Social Security benefits. Under the earnings test, what happens?
- Their Social Security benefit is permanently reduced by 50%
- A portion of their benefit may be temporarily withheld, with amounts restored later via a higher benefit (Correct answer)
- All Social Security benefits are suspended until they stop working
- Their benefit is increased by the amount of wages earned
Correct answer: A portion of their benefit may be temporarily withheld, with amounts restored later via a higher benefit
The earnings test withholds $1 of benefits for every $2 earned above the annual exempt amount, but the SSA recalculates the benefit at FRA to credit back withheld amounts.
CRPC Designing Retirement Income Streams 4
A client has a $1 million portfolio and uses the 4% rule.
Approximately how much can they withdraw in the first year, and how are subsequent withdrawals adjusted?