CRPC Retirement Needs Analysis 5 — Questions and Answers
Question 1: A couple estimates $90,000/year in retirement expenses. Social Security provides $36,000/year combined. What lump-sum portfolio is needed at retirement to fund the $54,000 annual gap for 25 years, assuming a 5% real return?
- Approximately $620,000
- Approximately $760,000 (Correct answer)
- Approximately $920,000
- Approximately $1,100,000
Correct answer: Approximately $760,000
The present value of a $54,000 annuity for 25 years at 5% is approximately $760,000 using the PV of annuity formula.
Question 2: Which of the following adjustments to a retirement income plan would MOST reduce the probability of portfolio depletion?
- Increasing equity allocation from 40% to 80%
- Reducing the initial withdrawal rate from 4.5% to 3.5% (Correct answer)
- Moving to a shorter planning horizon of 20 years
- Deferring Roth conversions until age 75
Correct answer: Reducing the initial withdrawal rate from 4.5% to 3.5%
Reducing the initial withdrawal rate significantly lowers the annual draw on the portfolio, which is the most powerful lever for improving plan sustainability.
Question 3: In retirement needs analysis, the 'present value of a future lump sum' calculation is most commonly used to:
- Determine how much to invest today to meet a future retirement goal (Correct answer)
- Calculate the monthly pension payment from a defined benefit plan
- Estimate the inflation-adjusted cost of living in year one of retirement
- Project the required minimum distribution from an IRA at age 73
Correct answer: Determine how much to invest today to meet a future retirement goal
The present value formula tells the planner how much must be invested today at a given rate to accumulate to a target lump sum at a future date.
Question 4: A client's retirement plan assumes 6% annual portfolio growth and 3% inflation. What is the approximate 'real' rate of return used in purchasing-power-adjusted projections?
- 1.5%
- 2.9% (Correct answer)
- 3.0%
- 9.0%
Correct answer: 2.9%
The real rate of return ≈ (1.06 / 1.03) − 1 ≈ 2.91%, approximately 2.9% after adjusting for inflation.
Question 5: A CRPC practitioner discovers that a client's retirement plan has only a 55% probability of success in a Monte Carlo analysis. The MOST appropriate first step is to:
- Recommend the client immediately purchase a variable annuity
- Discuss adjustments such as reducing spending or delaying retirement (Correct answer)
- Switch the entire portfolio to fixed-income securities
- Advise the client to apply for Social Security immediately
Correct answer: Discuss adjustments such as reducing spending or delaying retirement
A low success probability warrants a conversation about flexible adjustments—spending reductions, later retirement, or higher savings—before recommending product changes.
Question 6: Healthcare costs in retirement are a significant planning concern. Which statement about Medicare is most accurate for retirement income planning purposes?
- Medicare covers 100% of all healthcare expenses after age 65
- Clients must budget for premiums, deductibles, and uncovered expenses not paid by Medicare (Correct answer)
- Medicare Part A has no monthly premium for most retirees but significant gaps still exist
- Medicare costs are fixed by law and not affected by income
Correct answer: Clients must budget for premiums, deductibles, and uncovered expenses not paid by Medicare
Medicare covers many costs but clients still face premiums, deductibles, co-pays, and uncovered services like dental and long-term care that must be budgeted.
Question 7: A client with a high retirement income replacement ratio (e.g., 95%) most likely has which characteristic?
- Very high pre-retirement income with substantial discretionary spending
- Low pre-retirement income where fixed costs dominate spending (Correct answer)
- A large defined benefit pension that covers most expenses
- Significant investment losses reducing available assets
Correct answer: Low pre-retirement income where fixed costs dominate spending
Lower-income households have less discretionary spending, so fixed essential costs represent a larger share of income, requiring a higher replacement ratio.
CRPC Retirement Needs Analysis 5
A couple estimates $90,000/year in retirement expenses.
Social Security provides $36,000/year combined.
What lump-sum portfolio is needed at retirement to fund the $54,000 annual gap for 25 years, assuming a 5% real return?