CRPC Retirement Planning Principles 4 — Questions and Answers
Question 1: What is the primary purpose of a 'bridge' strategy using non-retirement assets between early retirement and Social Security claiming at age 70?
- To avoid paying Medicare Part B premiums before age 65
- To allow Social Security delayed retirement credits to accumulate while funding living expenses (Correct answer)
- To convert taxable accounts to Roth IRAs without tax consequence
- To qualify for additional defined benefit pension credits
Correct answer: To allow Social Security delayed retirement credits to accumulate while funding living expenses
A bridge strategy uses savings or other income to cover expenses from retirement until age 70 so Social Security benefits grow at 8% per year via delayed retirement credits.
Question 2: A married couple wants to maximize survivor income from Social Security. Which claiming strategy is generally most effective for a higher-earning spouse in good health?
- Both spouses claim at age 62 to maximize total lifetime payments
- The higher earner delays to age 70 to maximize the survivor benefit available to the lower-earning spouse (Correct answer)
- Both spouses claim at full retirement age simultaneously
- The lower earner delays to 70 while the higher earner claims at 62
Correct answer: The higher earner delays to age 70 to maximize the survivor benefit available to the lower-earning spouse
The survivor benefit equals the deceased spouse's benefit amount, so maximizing the higher earner's benefit by delaying to 70 maximizes the survivor's lifetime income.
Question 3: In the context of retirement income planning, what is 'longevity risk'?
- The risk of poor investment returns early in retirement
- The risk of outliving one's financial resources due to a longer-than-expected lifespan (Correct answer)
- The risk that inflation erodes purchasing power
- The risk that healthcare costs exceed insurance coverage
Correct answer: The risk of outliving one's financial resources due to a longer-than-expected lifespan
Longevity risk is the possibility that a retiree will live longer than their financial resources last, requiring planning for lifespans well beyond average life expectancy.
Question 4: A client age 55 wants to take penalty-free distributions from their 401(k). Which rule allows this without the 10% early withdrawal penalty?
- The Rule of 55, which allows penalty-free 401(k) withdrawals after separating from service in or after the year turning 55 (Correct answer)
- 72(t) SEPP rules require waiting until age 59½
- Hardship distributions are always penalty-free after age 50
- Roth conversion rules eliminate the penalty for all employer plan withdrawals
Correct answer: The Rule of 55, which allows penalty-free 401(k) withdrawals after separating from service in or after the year turning 55
The Rule of 55 allows penalty-free withdrawals from a current employer's 401(k) if the employee separates from service in or after the calendar year they turn 55.
Question 5: Which type of risk refers to the possibility that rising prices will erode the purchasing power of fixed retirement income over time?
- Sequence-of-returns risk
- Liquidity risk
- Inflation risk (Correct answer)
- Reinvestment risk
Correct answer: Inflation risk
Inflation risk is the danger that a fixed nominal income stream buys progressively less over a retirement that may span 20–30+ years.
Question 6: A retirement plan uses a 'total return' investment philosophy. What does this approach emphasize?
- Investing exclusively in dividend-paying stocks and bond coupons to cover expenses
- Combining capital appreciation and income to meet withdrawal needs, rebalancing periodically (Correct answer)
- Matching every investment to a specific liability to eliminate market risk
- Holding only Treasury Inflation-Protected Securities (TIPS) to hedge inflation
Correct answer: Combining capital appreciation and income to meet withdrawal needs, rebalancing periodically
Total return investing uses the combined return from both income and capital appreciation to fund withdrawals, allowing broader diversification than an income-only approach.
Question 7: When evaluating whether to take a pension lump sum versus an annuity payout, which factor most favors choosing the lump sum?
- The pensioner is in excellent health and expects above-average longevity
- The pension plan sponsor has weak financial health, raising concerns about future payment security (Correct answer)
- The annuity includes a generous COLA adjustment tied to CPI
- The pensioner has no surviving spouse or dependents who need survivor income
Correct answer: The pension plan sponsor has weak financial health, raising concerns about future payment security
If the plan sponsor's financial stability is questionable, taking the lump sum eliminates the risk that future annuity payments could be reduced or defaulted.
CRPC Retirement Planning Principles 4
What is the primary purpose of a 'bridge' strategy using non-retirement assets between early retirement and Social Security claiming at age 70?