CRPC Retirement Income and Management 2 — Questions and Answers
Question 1: Which withdrawal strategy involves taking only the income (interest and dividends) generated by a portfolio without touching principal?
- Systematic withdrawal plan
- Income-only strategy (Correct answer)
- Bucket strategy
- Dynamic withdrawal strategy
Correct answer: Income-only strategy
The income-only strategy preserves principal by limiting withdrawals to interest, dividends, and other portfolio income.
Question 2: A retiree uses the 'floor-and-upside' approach. What does the 'floor' represent?
- The minimum required minimum distribution
- Guaranteed income covering essential expenses (Correct answer)
- The lowest historical portfolio return
- A stop-loss limit on equity investments
Correct answer: Guaranteed income covering essential expenses
The 'floor' consists of guaranteed income sources (Social Security, pensions, annuities) designed to cover essential, non-discretionary expenses.
Question 3: What is 'sequence of returns risk' most problematic for retirees compared to accumulators?
- Retirees pay higher taxes on withdrawals
- Early negative returns permanently reduce the portfolio while withdrawals continue (Correct answer)
- Retirees cannot invest in equities
- Negative returns trigger required minimum distributions
Correct answer: Early negative returns permanently reduce the portfolio while withdrawals continue
For retirees making withdrawals, early poor returns deplete the portfolio before it can recover, permanently impairing the income stream.
Question 4: Which annuity payout option provides income for the longer of two lives, with payments continuing to the survivor?
- Life only annuity
- Joint and survivor annuity (Correct answer)
- Period certain annuity
- Life with refund annuity
Correct answer: Joint and survivor annuity
A joint and survivor annuity continues payments as long as either annuitant is alive, protecting the surviving spouse.
Question 5: Under IRS rules, what is the penalty for failing to take a required minimum distribution (RMD) on time?
- 10% excise tax on the shortfall
- 25% excise tax on the amount not distributed (Correct answer)
- 50% penalty on the entire account balance
- Ordinary income tax plus 10% penalty
Correct answer: 25% excise tax on the amount not distributed
The SECURE 2.0 Act reduced the RMD failure penalty to 25% (down from 50%) of the amount that should have been distributed.
Question 6: Which of the following best describes a 'longevity annuity' (QLAC)?
- An immediate annuity purchased at age 59½
- A deferred income annuity that begins payments at an advanced age such as 80 or 85 (Correct answer)
- An annuity tied to the S&P 500 index
- A fixed annuity with a 10-year surrender period
Correct answer: A deferred income annuity that begins payments at an advanced age such as 80 or 85
A QLAC (Qualified Longevity Annuity Contract) is a deferred income annuity designed to provide income starting at an advanced age, hedging longevity risk.
Question 7: When coordinating retirement income sources, which strategy generally maximizes lifetime Social Security benefits for a healthy married couple?
- Both spouses claim at age 62
- Both spouses claim at full retirement age
- The higher earner delays to age 70; the lower earner claims earlier (Correct answer)
- The lower earner delays to age 70; the higher earner claims at 62
Correct answer: The higher earner delays to age 70; the lower earner claims earlier
Having the higher earner delay to age 70 maximizes the permanent survivor benefit, while the lower earner can claim earlier to provide interim income.
CRPC Retirement Income and Management 2
Which withdrawal strategy involves taking only the income (interest and dividends) generated by a portfolio without touching principal?