RAA Retirement Planning & Income Strategies 3 — Questions and Answers
Question 1: A 68-year-old client has a pension, Social Security, and a large IRA. Which asset should typically be drawn down LAST to maximize tax-deferred growth?
- Taxable brokerage account
- Roth IRA (Correct answer)
- Traditional IRA
- Money market savings account
Correct answer: Roth IRA
Roth IRAs have no RMDs and grow tax-free, so drawing them last preserves the most after-tax wealth over time.
Question 2: The primary purpose of a deferred income annuity (DIA) purchased at age 65 with payments beginning at age 85 is to:
- Maximize returns during the accumulation phase
- Hedge against longevity risk in advanced old age (Correct answer)
- Provide immediate liquidity for early retirement expenses
- Replace a life insurance death benefit
Correct answer: Hedge against longevity risk in advanced old age
A DIA (also called longevity insurance) is designed to provide guaranteed income if the annuitant lives to an advanced age, protecting against outliving other assets.
Question 3: Which retirement income strategy involves purchasing a series of bonds that mature in successive years to cover annual expenses?
- Laddering (Correct answer)
- Barbell strategy
- Systematic withdrawal
- Asset-liability matching
Correct answer: Laddering
Bond laddering staggers maturity dates so that bonds mature annually, providing predictable cash flows to cover retirement expenses each year.
Question 4: A client asks about the 'floor and upside' retirement framework. The 'floor' component is typically funded by:
- High-growth equities and alternatives
- Guaranteed income sources like annuities, Social Security, and pensions (Correct answer)
- Speculative real estate investments
- Leveraged bond funds
Correct answer: Guaranteed income sources like annuities, Social Security, and pensions
The floor represents non-negotiable baseline income needs and is funded by guaranteed sources so the client never falls below a minimum living standard.
Question 5: A reverse mortgage (HECM) can be used as a retirement income strategy primarily because it allows homeowners to:
- Sell the home and receive annual installments from the buyer
- Access home equity as tax-free income without selling the home (Correct answer)
- Convert their home into a Roth IRA contribution
- Defer property taxes indefinitely with no repayment obligation
Correct answer: Access home equity as tax-free income without selling the home
A HECM allows homeowners 62 or older to borrow against home equity, receiving proceeds that are generally not taxable income while retaining ownership.
Question 6: If a client's retirement income plan has a 'Monte Carlo probability of success' of 85%, this means:
- The portfolio will last exactly 85 years
- 85% of simulated scenarios show the portfolio surviving the entire retirement period (Correct answer)
- The client has an 85% chance of dying before depleting assets
- 85% of the portfolio is allocated to fixed income
Correct answer: 85% of simulated scenarios show the portfolio surviving the entire retirement period
Monte Carlo analysis runs thousands of market simulations; an 85% success rate means the portfolio survives the planned retirement horizon in 85% of those scenarios.
Question 7: Which of the following retirement risks is BEST mitigated by purchasing a fixed immediate annuity?
- Inflation risk
- Longevity risk (Correct answer)
- Healthcare cost risk
- Sequence of returns risk in the accumulation phase
Correct answer: Longevity risk
A fixed immediate annuity guarantees income for life, directly eliminating longevity risk by ensuring payments regardless of how long the annuitant lives.
RAA Retirement Planning & Income Strategies 3
A 68-year-old client has a pension, Social Security, and a large IRA.
Which asset should typically be drawn down LAST to maximize tax-deferred growth?