CRPC Investment Strategies for Retirement 3 — Questions and Answers
Question 1: A 70-year-old retiree has all her savings in certificates of deposit earning 1.5%. The GREATEST long-term risk she faces is:
- Credit risk
- Purchasing power (inflation) risk (Correct answer)
- Sequence-of-returns risk
- Longevity risk
Correct answer: Purchasing power (inflation) risk
With CDs yielding below inflation, her real purchasing power erodes each year, meaning her savings will buy progressively less over a potentially 20-30 year retirement.
Question 2: A couple wants guaranteed income to cover essential expenses in retirement. Which product BEST provides this guarantee without market risk?
- Variable annuity with GMWB rider
- Balanced mutual fund
- Single premium immediate annuity (SPIA) (Correct answer)
- Equity-indexed annuity
Correct answer: Single premium immediate annuity (SPIA)
A SPIA converts a lump sum into a contractually guaranteed income stream for life, eliminating both investment and longevity risk for essential expense coverage.
Question 3: In the context of retirement planning, what does 'sequence of returns risk' primarily describe?
- The risk that returns will be lower than expected on average
- The risk that poor returns early in retirement permanently impair the portfolio (Correct answer)
- The risk that asset classes return in an unexpected order
- The risk of a bear market occurring late in retirement
Correct answer: The risk that poor returns early in retirement permanently impair the portfolio
Sequence of returns risk is the danger that negative returns early in retirement, combined with ongoing withdrawals, deplete the portfolio before recovery can occur.
Question 4: Which alternative investment is MOST commonly recommended to improve diversification within a retirement portfolio?
- Cryptocurrency
- Collectibles (art, wine)
- Real Estate Investment Trusts (REITs) (Correct answer)
- Commodity futures
Correct answer: Real Estate Investment Trusts (REITs)
REITs offer real estate exposure with daily liquidity, pass-through dividends, and historically low correlation to core equity holdings, making them the most practical diversifier.
Question 5: A retiree uses a 'flooring strategy.' The floor is BEST described as:
- A minimum acceptable portfolio value
- Guaranteed income streams that cover essential living expenses (Correct answer)
- A stop-loss trigger that shifts assets to cash
- The bond allocation of a balanced portfolio
Correct answer: Guaranteed income streams that cover essential living expenses
In the flooring strategy, guaranteed income sources (Social Security, pensions, annuities) cover essential expenses, while the upside portfolio is invested for growth.
Question 6: Which withdrawal strategy is MOST tax-efficient for a retiree with both traditional IRA and Roth IRA assets?
- Withdraw from traditional IRA first, then Roth
- Withdraw from Roth first, then traditional IRA
- Withdraw proportionally from both accounts each year
- Withdraw from taxable accounts first, then tax-deferred, then Roth (Correct answer)
Correct answer: Withdraw from taxable accounts first, then tax-deferred, then Roth
The conventional order (taxable → tax-deferred → Roth) allows tax-advantaged accounts to grow longer, though Roth conversions in low-income years may improve on this further.
Question 7: A client's portfolio returned 10% in year 1 and -10% in year 2. What is the geometric (compound) average return?
- 0%
- -0.5%
- -1% (Correct answer)
- 0.5%
Correct answer: -1%
Multiplying (1.10 × 0.90) = 0.99, so the geometric mean is √0.99 - 1 ≈ -0.5%, not 0%, because gains and losses are asymmetric.
CRPC Investment Strategies for Retirement 3
A 70-year-old retiree has all her savings in certificates of deposit earning 1.5%.
The GREATEST long-term risk she faces is: