CRPC Retirement Income and Management 5 — Questions and Answers
Question 1: What is the primary purpose of including Treasury Inflation-Protected Securities (TIPS) in a retirement income portfolio?
- To maximize current income yield
- To protect purchasing power by adjusting principal with inflation (Correct answer)
- To eliminate income tax on interest payments
- To provide equity-like growth potential
Correct answer: To protect purchasing power by adjusting principal with inflation
TIPS principal values adjust with the Consumer Price Index, protecting retirees from the erosion of purchasing power caused by inflation.
Question 2: Under the SECURE 2.0 Act, beginning in 2033, at what age must most individuals start taking required minimum distributions from traditional IRAs?
- 72
- 73
- 75 (Correct answer)
- 70½
Correct answer: 75
SECURE 2.0 further raised the RMD age to 75, effective for those who turn 74 after December 31, 2032.
Question 3: A couple is considering long-term care insurance. Which premium payment structure provides the most certainty of cost over time?
- Indeterminate premium policy with guaranteed insurability
- Non-cancelable, guaranteed renewable policy with level premiums (Correct answer)
- Conditionally renewable policy with automatic inflation adjustments
- Annually renewable term long-term care policy
Correct answer: Non-cancelable, guaranteed renewable policy with level premiums
A non-cancelable, guaranteed renewable policy with level premiums cannot have premiums increased, providing maximum premium certainty for the policyholder.
Question 4: What is 'reverse dollar-cost averaging' and why does it negatively affect retirees?
- Buying more shares when prices are high, reducing average cost
- Selling more shares when prices are low during withdrawals, permanently depleting the portfolio faster (Correct answer)
- Investing a lump sum instead of gradually buying shares
- Converting traditional IRA assets to Roth when markets are elevated
Correct answer: Selling more shares when prices are low during withdrawals, permanently depleting the portfolio faster
When withdrawing a fixed dollar amount from a declining portfolio, more shares must be sold at lower prices, accelerating portfolio depletion.
Question 5: Which strategy allows a retiree to tap home equity for retirement income while remaining in the home?
- Home equity line of credit only
- Reverse mortgage (Home Equity Conversion Mortgage) (Correct answer)
- Sale-leaseback arrangement only
- Second mortgage refinancing
Correct answer: Reverse mortgage (Home Equity Conversion Mortgage)
A HECM reverse mortgage allows homeowners 62 or older to convert home equity into income or a line of credit while continuing to live in the home.
Question 6: What is the income 'replacement ratio' concept used for in retirement income planning?
- The ratio of Roth to traditional IRA assets at retirement
- The percentage of pre-retirement income needed to maintain the same standard of living in retirement (Correct answer)
- The portion of income replaced by Social Security alone
- The ratio of fixed income to equity in a retirement portfolio
Correct answer: The percentage of pre-retirement income needed to maintain the same standard of living in retirement
The replacement ratio estimates what percentage of pre-retirement income must be replaced to sustain a retiree's lifestyle, typically cited as 70-90%.
Question 7: A retiree chooses a 'dynamic withdrawal strategy' that adjusts spending based on portfolio performance. What is the main benefit compared to a fixed dollar withdrawal strategy?
- It guarantees a minimum income floor regardless of market conditions
- It reduces the probability of portfolio depletion by cutting spending during poor market periods (Correct answer)
- It maximizes income during bull markets and ignores bear markets
- It eliminates the need for Social Security income
Correct answer: It reduces the probability of portfolio depletion by cutting spending during poor market periods
Dynamic withdrawal strategies improve portfolio longevity by reducing withdrawals when returns are poor, adapting spending to actual portfolio performance.
CRPC Retirement Income and Management 5
What is the primary purpose of including Treasury Inflation-Protected Securities (TIPS) in a retirement income portfolio?