CRPC Retirement Planning Principles 2 — Questions and Answers
Question 1: A 68-year-old retiree wants to minimize sequence-of-returns risk in early retirement. Which strategy best addresses this concern?
- Invest 100% in equities for maximum growth
- Maintain a cash reserve or bond ladder to avoid selling equities during downturns (Correct answer)
- Delay all withdrawals until age 72
- Allocate entirely to fixed annuities
Correct answer: Maintain a cash reserve or bond ladder to avoid selling equities during downturns
A cash reserve or bond ladder provides a buffer so the retiree avoids selling equities at depressed prices during early-retirement market downturns.
Question 2: Which retirement income approach matches withdrawals to specific future expenses using individual bonds or CDs that mature when funds are needed?
- Systematic withdrawal plan
- Bucket strategy
- Liability-matching (time-segmentation) strategy (Correct answer)
- Dividend income strategy
Correct answer: Liability-matching (time-segmentation) strategy
Liability-matching (time-segmentation) aligns specific assets—individual bonds or CDs—to mature when known future expenses arise.
Question 3: Under the SECURE 2.0 Act, what is the required beginning date for RMDs for individuals born in 1951?
- April 1 of the year after they turn 70½
- April 1 of the year after they turn 72
- April 1 of the year after they turn 73 (Correct answer)
- April 1 of the year after they turn 75
Correct answer: April 1 of the year after they turn 73
SECURE 2.0 raised the RMD age to 73 for individuals born between 1951 and 1959, so those born in 1951 must begin RMDs by April 1 of the year after turning 73.
Question 4: What is the primary advantage of a Qualified Longevity Annuity Contract (QLAC) within a traditional IRA?
- It eliminates all investment risk immediately
- It allows the excluded balance to be removed from RMD calculations until payouts begin (up to age 85) (Correct answer)
- It converts traditional IRA funds to Roth treatment tax-free
- It provides unlimited survivor benefits to heirs
Correct answer: It allows the excluded balance to be removed from RMD calculations until payouts begin (up to age 85)
A QLAC lets up to a limited dollar amount (indexed annually) be excluded from RMD calculations, with payouts deferred up to age 85, protecting against outliving assets.
Question 5: A married couple both age 62 are deciding when to claim Social Security. Which factor most strongly supports delaying claiming to age 70?
- They have poor health and expect below-average longevity
- They have sufficient other income and expect long life expectancy (Correct answer)
- Their combined benefit would be subject to the Social Security earnings test
- They need to fund Roth conversions immediately
Correct answer: They have sufficient other income and expect long life expectancy
Sufficient bridge income and longer life expectancy make delay to 70 advantageous, as the 8% per year delayed retirement credits maximize lifetime benefits.
Question 6: In retirement planning, what does the term 'replacement ratio' refer to?
- The percentage of pre-retirement income needed to maintain the same lifestyle in retirement (Correct answer)
- The ratio of equity to fixed income in a retirement portfolio
- The proportion of Social Security benefits replaced by pension income
- The share of retirement assets held in tax-deferred versus taxable accounts
Correct answer: The percentage of pre-retirement income needed to maintain the same lifestyle in retirement
The replacement ratio is the percentage of pre-retirement income a retiree needs to maintain a comparable standard of living after work ends.
Question 7: Which of the following best describes the 'funded ratio' used in retirement planning?
- The percentage of a portfolio invested in bonds
- The ratio of retirement assets plus future income streams to projected retirement liabilities (Correct answer)
- The share of employer contributions versus employee contributions in a plan
- The fraction of Social Security benefits subject to income tax
Correct answer: The ratio of retirement assets plus future income streams to projected retirement liabilities
The funded ratio compares total retirement resources (assets plus PV of future income) to total projected liabilities, with a ratio above 1.0 indicating financial security.
CRPC Retirement Planning Principles 2
A 68-year-old retiree wants to minimize sequence-of-returns risk in early retirement.
Which strategy best addresses this concern?