CRPC Retirement Needs Analysis 3 — Questions and Answers
Question 1: A client has a defined benefit pension that pays $3,000/month and Social Security of $1,800/month. Her estimated retirement budget is $6,500/month. What is the monthly income gap she must fund from savings?
- $1,500
- $1,700 (Correct answer)
- $2,200
- $3,500
Correct answer: $1,700
$6,500 − ($3,000 + $1,800) = $1,700 per month must come from personal savings or investments.
Question 2: Which factor most significantly increases a client's required retirement nest egg when all other variables are held constant?
- Starting retirement one year earlier
- Reducing the assumed portfolio return by 1%
- Increasing the inflation assumption by 0.5%
- Increasing life expectancy by 5 years (Correct answer)
Correct answer: Increasing life expectancy by 5 years
Extending the distribution period by 5 years substantially increases the required capital because withdrawals must be sustained over a longer horizon.
Question 3: What does the term 'sequence of returns risk' refer to in retirement planning?
- The risk that inflation will outpace portfolio growth
- The danger that poor investment returns early in retirement can permanently deplete a portfolio (Correct answer)
- The probability that Social Security benefits will be reduced
- The risk of outliving annuity income
Correct answer: The danger that poor investment returns early in retirement can permanently deplete a portfolio
Sequence of returns risk is the danger that a portfolio will be severely damaged by poor early-retirement returns combined with ongoing withdrawals.
Question 4: A 65-year-old client has $900,000 in retirement savings. Using the 4% withdrawal guideline, what initial annual withdrawal is recommended?
- $27,000
- $36,000 (Correct answer)
- $45,000
- $54,000
Correct answer: $36,000
$900,000 × 4% = $36,000 per year as the initial sustainable withdrawal under the 4% rule.
Question 5: Which of the following is an example of a non-recurring retirement expense that a retirement needs analysis should account for?
- Monthly utility bills
- Annual property taxes
- One-time home renovation upon retirement (Correct answer)
- Weekly grocery costs
Correct answer: One-time home renovation upon retirement
Non-recurring expenses like a home renovation at retirement represent lump-sum costs outside regular monthly income needs.
Question 6: When using the expense method to estimate retirement income needs, which spending category typically DECREASES significantly in retirement compared to working years?
- Healthcare costs
- Work-related expenses such as commuting and clothing (Correct answer)
- Leisure and travel spending
- Property taxes
Correct answer: Work-related expenses such as commuting and clothing
Work-related costs like commuting, business attire, and lunches typically disappear or drop sharply after retirement.
Question 7: A client's pension offers a single-life annuity of $2,500/month or a joint-and-survivor annuity of $2,100/month. The primary consideration in choosing between them should be:
- The client's marginal tax rate
- Whether the spouse has independent retirement income (Correct answer)
- The current federal funds rate
- The client's asset allocation
Correct answer: Whether the spouse has independent retirement income
If the spouse has sufficient independent income, the single-life annuity may be acceptable; otherwise the survivor benefit is critical to spousal financial security.
CRPC Retirement Needs Analysis 3
A client has a defined benefit pension that pays $3,000/month and Social Security of $1,800/month.
Her estimated retirement budget is $6,500/month.
What is the monthly income gap she must fund from savings?