Module 5

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SAngell3
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Module 5
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2011-09-18 22:11:34
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Module 5
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  1. A retiree’s personal buying habits will affect his or her actual inflation rate.

    a) True
    b) False
    a) True
  2. Historically, goods have inflated at a higher rate than services.

    a) True
    b) False
    b) False

    Services have historically inflated at a higher rate than goods. For this reason, many experts believe inflation is understated for retirees (who use more services than goods).
  3. The higher the inflation assumption used, the greater the savings required by a client.

    a) True
    b) False
    a) True
  4. The average retirement age in the United States is 64.

    a) True
    b) False
    b) False

    The average retirement age in the United States has been 62.
  5. Corporate downsizing is an important reason for early retirement.

    a) True
    b) False
    a) True
  6. Golden handshakes typically include lump-sum payments based on service with the firm, funding for retiree health care, and/or other monetary inducements.

    a) True
    b) False
    a) True
  7. A client with a defined-benefit plan will be unaffected if he or she chooses early retirement.

    a) True
    b) False
    b) False

    The impact of early retirement on a client with a defined-benefit plan is threefold. First, the pension is lower because the final average salary on which the pension is based does not account for the peak earning years. Second, the client will have fewer years of service. Third, pensions are often adjusted downward to reflect the longer payout period.
  8. Only 5 percent of current retirees retired earlier than planned.

    a) True
    b) False
    b) False

    Forty-seven percent of current retirees retired earlier than planned.
  9. Current workers today report that they are planning to retire later than previous generations.

    a) True
    b) False
    a) True
  10. Many clients must liquidate their retirement savings throughout the retirement period.

    a) True
    b) False
    a) True
  11. Higher socioeconomic groups tend to have shorter life expectancies because of job-related stress.

    a) True
    b) False
    b) False

    Higher socioeconomic groups tend to have longer life expectancies. Many believe this is due in part to easy access to medical care.
  12. The average number of years until the surviving spouse or partner dies is longer than the individual life expectancy of either person alone.

    a) True
    b) False
    a) True
  13. The 80 percent replacement ratio deals only with the first year of retirement and does not account for postretirement inflation.

    a) True
    b) False
    a) True
  14. Clients pay FICA taxes on pensions that are paid in the form of a life annuity or a joint and survivor annuity.

    a) True
    b) False
    b) False

    • There are no FICA taxes paid on annuity benefits. Retirees receiving
    • only pension income are no longer required to pay into the Social Security system.
  15. In some states, there is an exemption of all or part of a client’s retirement benefit from the state income tax base.

    a) True
    b) False
    a) True
  16. Many clients no longer save a percentage of income when they retire. For this reason, a retiree who has been saving 10 percent of his or her income needs to maintain only 90 percent of income to enjoy the same purchasing power.

    a) True
    b) False
    a) True
  17. Many younger retirees encounter increased expenses in the areas of travel and vacations.

    a) True
    b) False
    a) True
  18. The expense method of generating a replacement ratio is generally preferred for younger clients, whereas the replacement-ratio method is preferred for older ones.

    a) True
    b) False
    b) False

    • The expense method usually works well for clients at or near retirement since they have a handle on their projected retirement budget. The
    • replacement-ratio method works best for younger clients.
  19. There is nearly a 20 percent decline in spending for clients who are over 75.

    a) True
    b) False
    a) True
  20. Clients have a tendency to receive a lower rate of return after they retire because they invest more conservatively.

    a) True
    b) False
    a) True
  21. Computer software used for conducting a retirement needs analysis will internally
    calculate inflation protection for the money a client has and will have.

    a) True
    b) False
    a) True
  22. Computer software often projects the stream of payments (annual savings) needed to meet the retirement target.

    a) True
    b) False
    a) True
  23. Different retirement planning software programs can generate very different results.

    a) True
    b) False
    a) True
  24. When selecting retirement planning software, it is important to consider the program’s reporting capabilities.

    a) True
    b) False
    a) True
  25. The bundling of all retirement expenses in the traditional approach to calculating retirement needs creates a planning problem because the substantially higher inflation rates for leisure and health care cannot be explicitly accounted for as component
    costs.

    a) True
    b) False
    a) True
  26. The traditional approach to calculating retirement needs easily incorporates the impact of a long-term care insurance policy when determining the amount needed for retirement.

    a) True
    b) False
    b) False

    • A weakness of the traditional retirement calculator system is that it
    • often fails to account for long-term care insurance. The age-banding model of retirement calculation rectifies this issue by enabling the planner to incorporate contingency instruments such as long-term care insurance.
  27. The age-banding model segregates retirement expenses into four expense groups: basic living expenses, taxes, leisure expenses, and medical expenses.

    a) True
    b) False
    a) True
  28. Planners can depict the relationship among aging, health care, and health-care cost inflation by using the age-banding technique to calculate retirement needs.

    a) True
    b) False
    a) True
  29. A deficiency of using the age-banding technique to calculate related benefits is that it encourages clients to invest their portfolio too conservatively.

    a) True
    b) False
    b) False

    • The age-banding model allows the planner to divide retirement
    • calculations into distinct expenditures, time phases, and portfolios. The primary benefit of this division is that it allows the retiree to seek somewhat higher rates for the longer-term portfolios.
  30. Age banding not only provides a more accurate portrayal of retirement expenses, but it also leads to a reduction in funding needs.

    a) True
    b) False
    a) True
  31. The age-banding model of calculating retirement needs leads to less investment control for clients.

    a) True
    b) False
    b) False

    • The age-banding model allows for greater risk control because a 5-
    • year cushion for risk management is included. The investment advisor has time to monitor the performance of the dedicated portfolios and make appropriate readjustment decisions as business cycles and portfolio values dictate.
  32. The age-banding retirement calculator allows a planner to fine-tune the calculation at the individual level for atypical cases such as a larger-than-normal age disparity between spouses.

    a) True
    b) False
    a) True
  33. Which of the following budget items typically decreases after retirement?

    A) utilities and telephone
    B) clothing
    C) medical and dental
    D) recreation and entertainment
    B) clothing

    The others increase after retirement.
    (this multiple choice question has been scrambled)
  34. Which of the following is (are) reasonable strategies to help insure that a client does not outlive his assets during retirement?

    I. Divide retirement assets into two portfolios, one for meeting retirement needs assuming an average life expectancy and a second to fund unexpected longevity.

    II. Add several years to the life expectancy factor to plan for an unexpectedly long life expectancy.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    C) Both I and II
    (this multiple choice question has been scrambled)
  35. Which of the following statements concerning the assumptions used when calculating a client’s retirement need is (are) correct?

    I. It is common to assume that the investment return will be somewhat lower after the client has retired.

    II. It is uncommon to use historical rates of return to estimate future investment returns.

    A) Neither I nor II
    B) Both I and II
    C) I only
    D) II only
    C) I only

    II is incorrect because it is quite common to determine the investment assumption based on historical returns.
    (this multiple choice question has been scrambled)
  36. Which of the following statements comparing the replacement-ratio method and the expense method of estimating a person’s retirement needs is (are) correct?

    I. The expense method usually works better than the replacement-ratio method for a person at or near retirement because he or she has a handle on his or her projected retirement budget.

    II. The expense method focuses on retirement expenses whereas the replacement-ratio method focuses on salary.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    C) Both I and II
    (this multiple choice question has been scrambled)
  37. Which of the following statements comparing the traditional method of calculating retirement benefits to the Age Banding method is (are) correct?

    I. The Age Banded model typically calls for larger amounts of funding than the traditional approach to calculating retirement needs.

    II. The Age Banded model typically encourages clients to invest retirement assets more conservatively than the traditional approach.

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    D) Neither I nor II

    I is incorrect because the Age Banded model typically calls for less funding than the traditional approach.

    II is incorrect because the Age Banded model typically clarifies why clients may want to invest more aggressively.
    (this multiple choice question has been scrambled)
  38. Reasons why it is difficult to make an accurate inflation assumption include all the following EXCEPT

    A) Retirees buy more goods than services, so the national average of inflation may be overstated for retirees.
    B) Medical inflation is twice the national average.
    C) A retiree’s personal buying habits will affect his or her actual inflation rate.
    D) There are significant regional variations in inflation from the national rate.
    A) Retirees buy more goods than services, so the national average of inflation may be overstated for retirees.

    Retirees buy more services than goods. Historically, services have inflated at a higher rate than goods, so the national average of inflation would be understated, rather than overstated, for retirees.
    (this multiple choice question has been scrambled)
  39. Reasons why people opt for early retirement include all the following EXCEPT

    A) golden handshakes
    B) health problems
    C) financial independence
    D) Increasing Social Security full retirement age
    D) Increasing Social Security full retirement age

    The increasing Social Security full retirement age works against an early retirement decision.
    (this multiple choice question has been scrambled)
  40. All the following statements concerning retirement needs software programs are correct EXCEPT

    A) it is important to consider the software’s reporting capabilities when choosing a program.
    B) Software output is often a very accurate prediction of future results.
    C) Some programs are goal based while others are flow based.
    D) Different software programs can generate very different results.
    B) Software output is often a very accurate prediction of future results.

    Even the most sophisticated software is still an estimate, and is often outdated soon after it has been run.
    (this multiple choice question has been scrambled)
  41. Assumptions that are typically required in most retirement worksheet and computer models include allof the following EXCEPT:

    A) Current and future tax rate.
    B) Step-up rate
    C) Ratio of current assets to debt.
    D) Replacement ratio needed.
    C) Ratio of current assets to debt.

    The ratio of current assets to debt is not an assumption required to perform a retirement planningcalculation.
    (this multiple choice question has been scrambled)
  42. Most retirement planning software models will ask the planner to make several assumptions. All of thefollowing are assumptions EXCEPT:

    A) The age at which the client will retire.
    B) The retirement income shortfall.
    C) The rate of inflation.
    D) The expected rate of return on investments.
    B) The retirement income shortfall.

    The retirement income shortfall (RIS) will be calculated by the computer model.
    (this multiple choice question has been scrambled)
  43. Reasons why it is difficult to make an accurate inflation assumption include all of the followingEXCEPT:

    A) Inflation accounts heavily for housing costs.
    B) Published data focuses on the annual inflation rate, not the long-term inflation rate.
    C) Retirees buy more goods than services.
    D) A decision would have to be made as to whether the CPT or the PPI would be a bettermeasure of inflation for the client.
    C) Retirees buy more goods than services.

    Retirees buy more services than goods. Historically, services have inflated at a higher rate than goods.
    (this multiple choice question has been scrambled)
  44. Which of the following statements is/are correct when estimating pre-retirement and post-retirementinflation?

    I. Risk-averse clients may prefer to use lower inflation rate assumptions during the accumulationand retirement periods.

    II. Most planners use an inflation assumption between 3 and 4 percent.

    A) Only II.
    B) Only I.
    C) Both I and II.
    D) Neither I nor II.
    A) Only II.

    I is incorrect. Risk-averse clients may prefer to use higher inflation rate assumptions during theaccumulation and retirement periods.
    (this multiple choice question has been scrambled)
  45. All of the following represent reasons why people opt for early retirement EXCEPT:

    A) Corporate downsizing.
    B) Death of a spouse.
    C) Financial independence.
    D) Decreased exposure to inflation.
    D) Decreased exposure to inflation.

    Early retirement means increased exposure to inflation.
    (this multiple choice question has been scrambled)
  46. All of the following represent reasons against early retirement EXCEPT:

    A) Loss of health insurance.
    B) Death of the worker’s spouse.
    C) Increasing Social Security normal retirement age.
    D) Increased exposure to inflation.
    B) Death of the worker’s spouse.

    Statistics indicate that widows are more likely to retire early. This is possibly due to the receipt of lifeinsurance death benefits and inheritances received after the death of their spouse.
    (this multiple choice question has been scrambled)
  47. Which of the following is/are reasons planners should advise against early retirement?

    I. Early retirement may result in the loss of health insurance.

    II. Early retirement may result in lower Social Security benefits.

    A) Neither I nor II.
    B) Only II.
    C) Both I and II.
    D) Only I.
    C) Both I and II.
    (this multiple choice question has been scrambled)
  48. Factors that should be considered when estimating a client’s life expectancy include all of thefollowing EXCEPT:

    A) The client’s family history.
    B) The tendency that higher socioeconomic groups have longer life expectancies, due in part to access to better medical care.
    C) The physical condition of the client.
    D) The fact that the average number of years until the second death of a couple is shorter than the individual life expectancies.
    D) The fact that the average number of years until the second death of a couple is shorter than the individual life expectancies.

    The average number of years until the second death of a couple is longer than the individual lifeexpectancy of either person by themselves.
    (this multiple choice question has been scrambled)
  49. Which of the following budget items typically increases after retirement?

    A) Travel.
    B) Retirement savings.
    C) Taxes.
    D) Clothing.
    A) Travel.

    Social Security taxes are generally eliminated at retirement. In addition, an individual age 65 or older benefits from an increased income tax standard deduction. Social Security benefits may beincome tax-free as well.

    The cost of work clothes will decrease after retirement.

    Many retirees no longer need to save for retirement because they have accumulatedsufficient funds for retirement.
    (this multiple choice question has been scrambled)
  50. Which of the following budget items typically decreases after retirement?

    A) Gifts.
    B) Property insurance.
    C) Repairs and maintenance.
    D) Property taxes.
    D) Property taxes.

    Property taxes are often reduced or frozen for elderly clients.

    Repairs and maintenance expenses (house upkeep, etc.) tend to increase after retirement.

    Clients who have accumulated sufficient net worth for retirement are likely to increase theamount of gifting to other family members.

    Property insurance premiums will typically increase over time.
    (this multiple choice question has been scrambled)
  51. Which of the following statements is correct regarding income requirement assumptions?

    A) The expense method is usually more appropriate for clients that are close to retirement.
    B) The expense method approach allows the planner to calculate retirement expenses for eachyear of the client’s retirement.
    C) Post-retirement inflation is factored into the replacement ratio approach.
    D) The replacement ratio method focuses on the projected expenses the retiree will incur in thefirst year of retirement.
    A) The expense method is usually more appropriate for clients that are close to retirement.

    Postretirement inflation is not factored into the replacement ratio.

    The expense method focuses on the projected expenses the retiree will incur in the firstyear of retirement.

    The expense method approach focuses on the projected expenses the retiree will have inthe first year of retirement.
    (this multiple choice question has been scrambled)
  52. Which of the following statements is/are correct regarding income requirement assumptions?

    I. The expense method focuses on the projected expenses the retiree will incur in the first year ofretirement.

    II. The replacement ratio can be measured as a percentage of salary.

    A) Both I and II.
    B) Only I.
    C) Neither I nor II.
    D) Only II.
    A) Both I and II.
    (this multiple choice question has been scrambled)
  53. Which of the following statements is/are correct regarding computer models that performretirement projections?

    I. Many current models ignore the existence of long-term care insurance.

    II. Many current models ignore the fact that clients relocate to less expensive geographic areasafter retirement.

    A) Both I and II.
    B) Only II.
    C) Neither I nor II.
    D) Only I.
    A) Both I and II.
    (this multiple choice question has been scrambled)
  54. All of the following are steps that are part of many computer models for calculating retirementneeds EXCEPT:

    A). The computer may project retirement income from existing resources.
    B) The computer may determine the lump sum savings needed at retirement.
    C) The computer may determine a client’s integrated defined benefit.
    D) The computer may determine the retirement income shortfall.
    C) The computer may determine a client’s integrated defined benefit.

    The computer generally makes generic calculations, not specific retirement plan benefit calculations. Thedefined benefit would have to be entered manually.
    (this multiple choice question has been scrambled)
  55. Which of the following sources of income during retirement will suffer a decline in purchasing power?

    I. Social Security benefits.
    II. Pension benefits.

    A) Neither I nor II.
    B) Both I and II.
    C) Only I.
    D) Only II.
    D) Only II.

    I is incorrect. Social Security benefits will not suffer a decline in purchasing power because they aresubject to an annual cost-of-living adjustment.
    (this multiple choice question has been scrambled)
  56. A correct statement regarding the Age Banding model of calculating retirement benefits is that themodel:

    A) Encourages clients to invest more conservatively than the traditional method of calculating retirement benefits.
    B) Requires less funding than the traditional method of calculating retirement benefits.
    C) Fails to take into account long term care benefits.
    D) Assumes that the client’s leisure activities increase throughout the retirement period.
    B) Requires less funding than the traditional method of calculating retirement benefits.

    The Age Banding model, unlike the traditional approach to retirement planning, takes intoaccount long term care benefits.

    The Age Banding model calls for more aggressive investments during the retirement periodthan those required by the traditional method of calculating retirement benefits.

    Although the Age Banding model initially assumes the client’s leisure activities increasewhen retirement begins, there is a decline in leisure activities (and an increase in healthcare costs)throughout the retirement period.
    (this multiple choice question has been scrambled)
  57. Which of the following statements is/are correct regarding the Age Banding method for planning retirement needs?

    I. It allows planners to display the relationship between aging, health care, and health care costinflation.

    II. It includes a 5-year cushion for risk management, thus allowing for greater risk control.

    A) Only II.
    B) Neither I nor II.
    C) Only I.
    D) Both I and II.
    D) Both I and II.
    (this multiple choice question has been scrambled)

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