CRPC Retirement Needs Analysis 4 — Questions and Answers
Question 1: A CRPC practitioner uses a 'bottom-up' budget approach for retirement needs analysis. This involves:
- Applying a replacement ratio to pre-retirement income
- Itemizing each anticipated expense category in retirement (Correct answer)
- Using average national spending data for the client's age group
- Projecting employer pension benefits forward
Correct answer: Itemizing each anticipated expense category in retirement
The bottom-up approach builds a retirement budget by detailing each individual expense category rather than applying a broad income percentage.
Question 2: How does delaying Social Security from age 67 to age 70 affect a retiree's benefit?
- Benefit increases by 4% per year
- Benefit increases by 8% per year (Correct answer)
- Benefit increases by 12% per year
- Benefit stays the same but becomes tax-free
Correct answer: Benefit increases by 8% per year
Delayed retirement credits increase the Social Security benefit by 8% per year for each year claimed after full retirement age up to age 70.
Question 3: In a retirement needs analysis, 'core' expenses are best described as:
- Investment management fees and taxes
- Non-discretionary costs like housing, food, and healthcare (Correct answer)
- Travel and entertainment budgets
- Estate planning legal fees
Correct answer: Non-discretionary costs like housing, food, and healthcare
Core expenses are essential, non-discretionary costs that must be funded regardless of market conditions or personal choice.
Question 4: Which of the following best explains why a 70% income replacement ratio may be insufficient for some retirees?
- Most retirees pay less in taxes than workers
- Retirees with paid-off mortgages have lower expenses
- Some retirees travel extensively or have high healthcare costs (Correct answer)
- Social Security automatically supplements to 70%
Correct answer: Some retirees travel extensively or have high healthcare costs
Individual spending patterns vary widely; clients with high travel, healthcare, or lifestyle aspirations may need 90–100% or more of pre-retirement income.
Question 5: A client plans to fund retirement with both a 401(k) and a Roth IRA. Which tax planning advantage does the Roth IRA specifically provide in retirement?
- Deductible contributions reduce current taxable income
- Qualified withdrawals are tax-free, providing tax diversification (Correct answer)
- Required minimum distributions begin at age 59½
- Contributions can be made after age 73
Correct answer: Qualified withdrawals are tax-free, providing tax diversification
Roth IRA qualified withdrawals are income-tax-free, allowing retirees to manage taxable income levels and reduce tax burden on other sources.
Question 6: A client is concerned about outliving her assets. Which strategy most directly addresses longevity risk?
- Holding 100% equities throughout retirement
- Purchasing a life annuity to guarantee income for life (Correct answer)
- Accelerating withdrawals in early retirement
- Investing only in Treasury bills
Correct answer: Purchasing a life annuity to guarantee income for life
A life annuity provides guaranteed income payments for the annuitant's lifetime, directly eliminating the risk of outliving assets.
Question 7: When assessing a client's retirement readiness, which ratio compares projected retirement income from all sources to projected retirement expenses?
- Savings rate ratio
- Income coverage ratio (Correct answer)
- Asset-to-debt ratio
- Withdrawal efficiency ratio
Correct answer: Income coverage ratio
The income coverage ratio measures whether total projected retirement income (Social Security, pension, portfolio withdrawals) covers total retirement expenses.
CRPC Retirement Needs Analysis 4
A CRPC practitioner uses a 'bottom-up' budget approach for retirement needs analysis.
This involves: