CRPC Retirement Income and Management 4 — Questions and Answers
Question 1: What distinguishes a 'defined benefit' pension plan from a 'defined contribution' plan in terms of retirement income certainty?
- Defined benefit plans guarantee a specific monthly benefit; defined contribution plans have uncertain outcomes based on investment performance (Correct answer)
- Defined contribution plans guarantee monthly income; defined benefit plans depend on markets
- Both plans guarantee the same income level
- Defined benefit plans are only available in the private sector
Correct answer: Defined benefit plans guarantee a specific monthly benefit; defined contribution plans have uncertain outcomes based on investment performance
Defined benefit plans promise a specific monthly income based on a formula, while defined contribution plans accumulate assets whose income potential depends on investment returns.
Question 2: What is 'Medigap' (Medicare Supplement Insurance) designed to do?
- Replace Medicare with private coverage
- Cover costs not paid by Original Medicare such as copays, coinsurance, and deductibles (Correct answer)
- Provide prescription drug coverage
- Cover long-term care expenses
Correct answer: Cover costs not paid by Original Medicare such as copays, coinsurance, and deductibles
Medigap policies fill the gaps in Original Medicare coverage by paying cost-sharing amounts that beneficiaries would otherwise owe.
Question 3: A retiree implements a 'rising equity glidepath' strategy. What does this involve?
- Increasing bond allocation every year after retirement
- Starting retirement with a conservative allocation that gradually becomes more equity-heavy over time (Correct answer)
- Selling all equities at retirement and buying bonds
- Matching the equity percentage to age
Correct answer: Starting retirement with a conservative allocation that gradually becomes more equity-heavy over time
A rising equity glidepath begins conservatively to protect against early sequence risk, then shifts toward equities as the retiree ages and the remaining time horizon changes.
Question 4: Which form of Social Security benefit can a non-working spouse receive, and what is its maximum amount relative to the worker's benefit?
- Survivor benefit equal to 100% of the worker's benefit
- Spousal benefit equal to up to 50% of the worker's full retirement age benefit (Correct answer)
- Spousal benefit equal to 75% of the worker's benefit at any age
- Dependent benefit equal to 25% of the worker's benefit
Correct answer: Spousal benefit equal to up to 50% of the worker's full retirement age benefit
A spouse who did not work can claim a spousal benefit worth up to 50% of the working spouse's primary insurance amount (PIA) at full retirement age.
Question 5: What is the main risk associated with relying heavily on a single-premium immediate annuity (SPIA) for retirement income?
- The payments are subject to market fluctuations
- The lump sum is irrevocably committed and there is no liquidity for large unexpected expenses (Correct answer)
- SPIAs are not guaranteed by any regulatory body
- The annuity income is fully tax-exempt
Correct answer: The lump sum is irrevocably committed and there is no liquidity for large unexpected expenses
Once a SPIA is purchased, the premium is converted to an income stream and is no longer available as a liquid asset for emergencies.
Question 6: In retirement tax planning, what is the primary benefit of a Roth conversion ladder strategy?
- It eliminates Social Security taxes permanently
- It converts pre-tax funds to Roth over time to reduce future RMDs and taxable income in retirement (Correct answer)
- It allows penalty-free access to retirement funds before age 59½ without waiting
- It increases Social Security benefits through income averaging
Correct answer: It converts pre-tax funds to Roth over time to reduce future RMDs and taxable income in retirement
Systematically converting traditional IRA funds to Roth reduces future required minimum distributions and creates tax-free income later in retirement.
Question 7: A retiree wants to use a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB) rider. What does the GLWB primarily provide?
- A guaranteed fixed interest rate on the account value
- A guarantee that income withdrawals will continue for life even if the account value drops to zero (Correct answer)
- Full principal protection if markets decline
- Tax-free income for the life of the contract
Correct answer: A guarantee that income withdrawals will continue for life even if the account value drops to zero
The GLWB rider guarantees a specified annual withdrawal amount for the annuitant's lifetime, regardless of how the underlying investments perform.
CRPC Retirement Income and Management 4
What distinguishes a 'defined benefit' pension plan from a 'defined contribution' plan in terms of retirement income certainty?