RMA Risk Assessment & Mitigation 3 — Questions and Answers
Question 1: A client retiring at 60 wants to know her 'safe withdrawal rate.' Which factor would MOST likely cause an adviser to recommend a LOWER initial withdrawal rate than the traditional 4%?
- A shorter time horizon due to early retirement
- A longer retirement horizon because of early retirement age (Correct answer)
- A larger fixed-income allocation
- Higher Social Security benefits
Correct answer: A longer retirement horizon because of early retirement age
A longer retirement horizon increases longevity risk and the number of years the portfolio must sustain withdrawals, requiring a more conservative initial rate.
Question 2: Which of the following is the PRIMARY purpose of purchasing a deferred income annuity (DIA) for longevity risk mitigation?
- To provide immediate liquidity in retirement
- To guarantee income starting at an advanced age, covering the tail of longevity risk (Correct answer)
- To maximize estate value for heirs
- To hedge against short-term market volatility
Correct answer: To guarantee income starting at an advanced age, covering the tail of longevity risk
A DIA (often called longevity insurance) begins payments at a future date—such as age 80 or 85—providing guaranteed income if the client lives to advanced ages.
Question 3: An adviser evaluates a client's exposure to taxes on required minimum distributions (RMDs). This is an example of managing which type of risk?
- Market risk
- Tax risk (Correct answer)
- Inflation risk
- Credit risk
Correct answer: Tax risk
Tax risk in retirement includes the possibility that RMDs push taxable income into higher brackets, increasing the tax burden on retirement assets.
Question 4: A couple's retirement plan fails in Monte Carlo simulations at a 25% rate. Which action would MOST directly improve plan survivability?
- Increasing equity allocation to 100%
- Reducing planned annual spending (Correct answer)
- Switching entirely to cash equivalents
- Delaying all insurance purchases
Correct answer: Reducing planned annual spending
Reducing planned annual spending lowers the withdrawal rate and directly decreases the amount drawn from the portfolio each year, improving survival probability.
Question 5: Which risk is BEST addressed by laddering Treasury Inflation-Protected Securities (TIPS) in a retirement portfolio?
- Sequence-of-returns risk
- Inflation risk (Correct answer)
- Longevity risk
- Interest rate reinvestment risk
Correct answer: Inflation risk
TIPS provide principal and interest payments that adjust with the CPI, directly protecting purchasing power against inflation.
Question 6: A client's entire retirement income depends on variable annuity payments with no guaranteed minimum. Which risk is MOST prominent?
- Inflation risk
- Market risk affecting the income amount (Correct answer)
- Credit risk from the insurer
- Regulatory risk
Correct answer: Market risk affecting the income amount
Without a guaranteed minimum, variable annuity income fluctuates directly with underlying sub-account performance, exposing the retiree to full market risk.
Question 7: An adviser recommends delaying Social Security to age 70 to reduce retirement income risk. Which statement BEST supports this recommendation?
- It avoids all investment risk permanently
- It maximizes the inflation-adjusted, longevity-protected guaranteed benefit (Correct answer)
- It eliminates the need for a portfolio entirely
- It reduces the client's tax liability in retirement
Correct answer: It maximizes the inflation-adjusted, longevity-protected guaranteed benefit
Delaying Social Security to 70 increases the monthly benefit by roughly 8% per year beyond full retirement age and provides a larger inflation-indexed, guaranteed lifetime income.
RMA Risk Assessment & Mitigation 3
A client retiring at 60 wants to know her 'safe withdrawal rate.' Which factor would MOST likely cause an adviser to recommend a LOWER initial withdrawal rate than the traditional 4%?