Financial Advisor Retirement Planning for Financial Advisors 2 — Questions and Answers
Question 1: In a defined benefit pension plan, the retirement benefit is primarily based on:
- Account balance at retirement
- Employee contributions only
- Years of service and final salary (Correct answer)
- Investment performance
Correct answer: Years of service and final salary
Defined benefit plans promise a specific monthly benefit at retirement, typically calculated using a formula based on years of service and final average salary.
Question 2: The 4% withdrawal rule for retirement income planning suggests that:
- Retirees should invest 4% of assets in bonds
- Withdrawing 4% of the initial portfolio value annually has historically sustained a 30-year retirement (Correct answer)
- Annual withdrawals should not exceed 4% of each year's portfolio value
- 4% annual returns are guaranteed in retirement accounts
Correct answer: Withdrawing 4% of the initial portfolio value annually has historically sustained a 30-year retirement
The 4% rule, derived from the 'Trinity Study,' suggests that withdrawing 4% of the initial portfolio annually (adjusted for inflation) has a high probability of lasting 30 years.
Question 3: A 403(b) retirement plan is primarily available to employees of:
- Private for-profit corporations
- Government agencies and military
- Public schools and non-profit organizations (Correct answer)
- Financial services firms only
Correct answer: Public schools and non-profit organizations
403(b) plans are tax-advantaged retirement plans available to employees of public schools, non-profits, churches, and certain other tax-exempt organizations.
Question 4: What is the 'sequence of returns' risk in retirement planning?
- The risk of earning below-average investment returns during accumulation
- The danger that poor returns early in retirement can permanently impair portfolio longevity (Correct answer)
- Volatility in the order of dividend payments
- Risk of interest rates rising during the retirement savings phase
Correct answer: The danger that poor returns early in retirement can permanently impair portfolio longevity
Sequence of returns risk refers to the danger that negative portfolio returns occurring early in retirement, combined with withdrawals, can permanently deplete a portfolio faster than average returns would predict.
Question 5: Under ERISA, what does 'vesting' refer to in a company-sponsored retirement plan?
- The investment options available in the plan
- The employee's ownership rights to employer contributions over time (Correct answer)
- The annual contribution maximum set by the IRS
- The plan's compliance with non-discrimination tests
Correct answer: The employee's ownership rights to employer contributions over time
Vesting refers to the process by which an employee gains non-forfeitable ownership rights to employer contributions based on years of service.
Question 6: Which Social Security filing strategy, now restricted by the Bipartisan Budget Act of 2015, allowed one spouse to collect spousal benefits while deferring their own benefit?
- Delayed retirement credit strategy
- File and suspend strategy
- Restricted application strategy (Correct answer)
- Spousal offset strategy
Correct answer: Restricted application strategy
The restricted application strategy allowed a spouse to collect only spousal benefits while letting their own benefit grow, but it was largely eliminated for those born after January 1, 1954.
Financial Advisor Retirement Planning for Financial Advisors 2
In a defined benefit pension plan, the retirement benefit is primarily based on: