CRPC Investment Strategies for Retirement 2 — Questions and Answers
Question 1: A retiree in the 'go-go' phase wants maximum growth. Which portfolio allocation is LEAST appropriate for a 68-year-old with no pension?
- 60% equities / 40% bonds
- 100% equities / 0% bonds (Correct answer)
- 40% equities / 60% bonds
- 50% equities / 30% bonds / 20% cash
Correct answer: 100% equities / 0% bonds
A 100% equity allocation exposes a retiree to severe sequence-of-returns risk with no buffer assets to draw from during downturns.
Question 2: Which strategy involves holding increasingly liquid assets in successive 'buckets' to fund near-term, mid-term, and long-term retirement spending?
- Core-satellite strategy
- Liability-matching strategy
- Time segmentation (bucket) strategy (Correct answer)
- Tactical asset allocation
Correct answer: Time segmentation (bucket) strategy
The time segmentation or bucket strategy segments assets by time horizon, with cash/short-term bonds covering near-term needs and equities funding later years.
Question 3: An investor holds a large concentrated stock position in her former employer. The PRIMARY risk she faces is:
- Inflation risk
- Idiosyncratic (unsystematic) risk (Correct answer)
- Interest rate risk
- Liquidity risk
Correct answer: Idiosyncratic (unsystematic) risk
Idiosyncratic risk is company-specific risk that cannot be diversified away when a portfolio is heavily concentrated in one stock.
Question 4: A CRPC practitioner recommends dividend-growth stocks for a client seeking retirement income. The MAIN advantage over high-yield bonds for income is:
- Guaranteed income stream
- Principal protection
- Potential for rising income that can outpace inflation (Correct answer)
- Lower volatility than bonds
Correct answer: Potential for rising income that can outpace inflation
Dividend-growth stocks have historically increased distributions over time, providing an income stream that can keep pace with or exceed inflation unlike fixed bond coupon payments.
Question 5: The 'rising equity glidepath' concept in retirement suggests that equity allocation should:
- Decrease steadily throughout retirement
- Remain constant throughout retirement
- Increase in the early retirement years before declining later (Correct answer)
- Mirror the traditional target-date glide path
Correct answer: Increase in the early retirement years before declining later
Research by Pfau and Kitces suggests starting with a lower equity allocation and increasing it gradually reduces sequence-of-returns risk in early retirement.
Question 6: Which fixed-income investment provides the BEST inflation protection within a retirement portfolio?
- 30-year Treasury bonds
- Treasury Inflation-Protected Securities (TIPS) (Correct answer)
- High-yield corporate bonds
- Municipal bonds
Correct answer: Treasury Inflation-Protected Securities (TIPS)
TIPS adjust their principal value with CPI changes, ensuring both interest payments and the inflation-adjusted principal protect purchasing power.
Question 7: A client asks about 'factor investing' for retirement. Which factor has historically provided the MOST reliable long-term premium relevant to retirement portfolios?
- Momentum
- Low volatility
- Value (Correct answer)
- Quality (profitability)
Correct answer: Value
The value factor—buying underpriced stocks relative to fundamentals—has one of the longest documented return premiums dating back to academic research by Fama and French.
CRPC Investment Strategies for Retirement 2
A retiree in the 'go-go' phase wants maximum growth.
Which portfolio allocation is LEAST appropriate for a 68-year-old with no pension?