RAA Retirement Planning & Income Strategies 2 — Questions and Answers
Question 1: A retiree wants guaranteed income that cannot be outlived and is willing to give up liquidity. Which annuity payout option BEST satisfies this goal?
- Period-certain annuity
- Life-only annuity (Correct answer)
- Lump-sum withdrawal
- Systematic withdrawal plan
Correct answer: Life-only annuity
A life-only annuity provides payments for the annuitant's entire life, eliminating longevity risk at the cost of liquidity and death benefits.
Question 2: The 'sequence of returns' risk is most damaging to a retiree who is:
- Accumulating assets in a tax-deferred account
- Making systematic withdrawals from a portfolio (Correct answer)
- Deferring Social Security past age 70
- Purchasing a single-premium immediate annuity
Correct answer: Making systematic withdrawals from a portfolio
Sequence of returns risk causes the most harm during the distribution phase when negative early returns permanently reduce the portfolio base from which withdrawals are taken.
Question 3: Under the 4% rule for retirement income, a retiree with a $1,000,000 portfolio would withdraw how much in the first year?
- $20,000
- $40,000 (Correct answer)
- $60,000
- $80,000
Correct answer: $40,000
The 4% rule prescribes an initial withdrawal of 4% of the portfolio, which equals $40,000 on a $1,000,000 balance.
Question 4: Which Social Security claiming strategy generally maximizes lifetime benefits for a healthy individual with an average life expectancy above 82?
- Claiming at age 62 for maximum cumulative months of payments
- Claiming at full retirement age to avoid reductions
- Delaying until age 70 to earn delayed retirement credits (Correct answer)
- Claiming at 65 when Medicare eligibility begins
Correct answer: Delaying until age 70 to earn delayed retirement credits
Delaying Social Security until age 70 earns 8% per year in delayed retirement credits, substantially increasing the monthly benefit for long-lived individuals.
Question 5: A bucket strategy for retirement income typically separates assets into how many 'buckets' based on time horizon?
- Two (short-term and long-term)
- Three (near, mid, and long-term) (Correct answer)
- Four (annual, biennial, decade, legacy)
- Five (one per decade of retirement)
Correct answer: Three (near, mid, and long-term)
The classic bucket strategy uses three buckets: a near-term liquid bucket, a mid-term moderate-growth bucket, and a long-term growth bucket.
Question 6: Required Minimum Distributions (RMDs) from a traditional IRA must generally begin by April 1 of the year following the year the account owner turns:
- 70½
- 72
- 73 (Correct answer)
- 75
Correct answer: 73
Under the SECURE 2.0 Act, the RMD starting age was raised to 73 for individuals born between 1951 and 1959.
Question 7: An inflation-adjusted annuity (cost-of-living rider) compared to a flat-payment annuity will typically start with:
- Higher initial payments that gradually decrease
- The same initial payments but different tax treatment
- Lower initial payments that increase over time (Correct answer)
- Higher initial payments that remain constant
Correct answer: Lower initial payments that increase over time
Inflation-adjusted annuities begin with lower payments than flat annuities because the insurer prices in future cost-of-living increases.
RAA Retirement Planning & Income Strategies 2
A retiree wants guaranteed income that cannot be outlived and is willing to give up liquidity.
Which annuity payout option BEST satisfies this goal?