CRPC Investment Strategies for Retirement 4 — Questions and Answers
Question 1: A client is evaluating a deferred income annuity (DIA) that begins payments at age 85. The PRIMARY benefit of this product is:
- Maximum liquidity for the next 15 years
- Inexpensive longevity insurance with a low premium (Correct answer)
- Guaranteed growth tied to an equity index
- Elimination of all investment risk immediately
Correct answer: Inexpensive longevity insurance with a low premium
A DIA purchased at retirement for a distant start date costs relatively little but ensures income if the client outlives their portfolio, making it an efficient longevity hedge.
Question 2: Which statement BEST describes the role of rebalancing in a retirement portfolio?
- Rebalancing guarantees higher returns by buying low and selling high
- Rebalancing maintains the intended risk level as markets shift allocations (Correct answer)
- Rebalancing should be avoided in retirement to minimize taxes
- Rebalancing works only if done daily
Correct answer: Rebalancing maintains the intended risk level as markets shift allocations
Over time, strong asset classes grow to dominate the portfolio, raising risk beyond the target; rebalancing restores the original risk exposure regardless of return impact.
Question 3: A retiree has a $1,000,000 portfolio and wants to use the 4% rule. How much can she withdraw in year one, and what happens to that amount in subsequent years under the original Bengen framework?
- $40,000 in year one; amount stays fixed at $40,000
- $40,000 in year one; amount is adjusted for inflation each year (Correct answer)
- $40,000 in year one; amount is recalculated as 4% of the remaining balance
- $50,000 in year one; amount decreases by 10% per year
Correct answer: $40,000 in year one; amount is adjusted for inflation each year
Bengen's original research calls for withdrawing 4% of the initial portfolio ($40,000) and increasing that dollar amount by inflation each year to maintain purchasing power.
Question 4: What is the primary difference between a fixed annuity and a variable annuity in retirement planning?
- Fixed annuities allow equity investment; variable annuities do not
- Variable annuities guarantee a minimum interest rate; fixed annuities do not
- Fixed annuities credit a declared interest rate; variable annuities invest in subaccounts with market-linked returns (Correct answer)
- Variable annuities have no fees; fixed annuities charge annual premiums
Correct answer: Fixed annuities credit a declared interest rate; variable annuities invest in subaccounts with market-linked returns
Fixed annuities credit a declared rate to the accumulation value, while variable annuities allocate premiums to investment subaccounts whose returns fluctuate with market performance.
Question 5: A 65-year-old client holds 40% of his retirement portfolio in his former employer's stock. A CRPC practitioner would FIRST recommend:
- Immediately selling all shares to diversify
- Evaluating the tax consequences of selling before recommending a diversification plan (Correct answer)
- Transferring shares to a Roth IRA to avoid taxes
- Donating all shares to charity using a qualified charitable distribution
Correct answer: Evaluating the tax consequences of selling before recommending a diversification plan
Before recommending any action on a concentrated position, the advisor must assess embedded capital gains, holding period, and tax basis to develop a tax-efficient diversification strategy.
Question 6: Which bond characteristic makes it MOST suitable for liability-matching in a retirement income portfolio?
- High credit rating (AAA)
- Maturity date that coincides with a known future spending need (Correct answer)
- Floating interest rate
- High current yield
Correct answer: Maturity date that coincides with a known future spending need
Liability matching pairs bonds with known maturity dates to specific future cash flow needs, ensuring funds are available when required regardless of interest rate changes.
Question 7: A client asks whether to choose a single-life or joint-and-survivor pension option. A CRPC practitioner would place the GREATEST emphasis on:
- Which option provides the highest monthly payment
- The health status, ages, and financial independence of both spouses (Correct answer)
- Whether the pension is from a government or private employer
- The current interest rate environment
Correct answer: The health status, ages, and financial independence of both spouses
The choice between single-life and J&S depends heavily on each spouse's health, life expectancy, and whether the survivor has independent income to replace the lost pension benefit.
CRPC Investment Strategies for Retirement 4
A client is evaluating a deferred income annuity (DIA) that begins payments at age 85.
The PRIMARY benefit of this product is: