Competency 18 Section 5

Question 1

1. The distribution of underfunding from minimum needs tends to show the most severe outcomes for the fixed SPIA income strategy

Answer 1

False. The worst outcomes are generally observed with the constant inflation-adjusted withdrawal amount strategy. (LO 18-5-1)

Question 2

2. Relative to the other strategies, the withdrawal percentages based on remaining life expectancy strategy tends to support spending amounts which increase over the retirement period.

Answer 2

True. (LO 18-5-1)

Question 3

3. In the case study observed, minimizing the probability that spending will fall below minimum needs tends to reduce the opportunity for the client to achieve their lifestyle spending goal.

Answer 3

True. (LO 18-5-1)

Question 4

4. An important outcome measure described in the video is the failure rate, or the probability of financial wealth depletion.

Answer 4

False. Failure rates do not serve a purpose in this analysis. Among other reasons, they are not compatible with partial annuitization approaches, or when income sources are available from outside the financial portfolio. (LO 18-5-1)

Question 5

5. Even if current interest rates are much lower than historical averages, it is an acceptable practice to base an analysis of systematic withdrawals on historical average bond returns and to base payout rates for single-premium immediate annuities on the current market rates.

Answer 5

False. These two approaches are not consistent. Lower interest rates imply lower bond returns for systematic withdrawals. (LO 18-5-2)

Question 6

6. Fixed SPIAs generally offer higher payout rates than inflation-adjusted SPIAs.

Answer 6

True. (LO 18-5-2)

Question 7

7. Holding a reserve of liquid financial assets can be a useful technique to manage a variety of risks facing retirees.

Answer 7

True. (LO 18-5-2)

Question 8

8. The analysis shows that a variable annuity with a GLWB rider is often part of the efficient frontier due to its unique ability to provide both downside protection and upside potential.

Answer 8

False. The analysis shows that downside protection and upside potential can be more effectively found by combining other approaches, such as a mixture of fixed SPIAs and stocks. (LO 18-5-2)

Question 9

9. A retiree should expect to meet a smaller percentage of their lifestyle spending goals as the value of these goals grows as a percentage of retirement date assets

Answer 9

True. (LO 18-5-2)

Question 10

99. All of the following statements concerning Wade Pfau’s six different measurements of the success of a retirement income plan are correct EXCEPT (LO 18-5-1)
    A. The “total spending value” approach captures the concept of diminishing marginal satisfaction from increased spending.
    B. The “direction of spending” measure generally results in an increasing spending direction over the retirement period for the illustrated case study.
    C. The “average spending approach” considers how high spending might go, and what percentage of lifestyle goals can be met on average.
    D. The “minimum spending amount in real terms” is another downside risk measure which indicates just how far spending may fall.

Answer 10

99. The answer is B. The direction of spending measure usually shows a decrease in spending as the client ages

Question 11

100. All of the following statements concerning the safe withdrawal rate literature are correct EXCEPT (LO 18-5-2)
     A. Historically low bond yields could present a situation where the 4 percent rule may not apply.
     B. The failure rate is a downside measure and ignores spending utility.
     C. Annuitized assets can be used to build a floor that allows the retiree to be more aggressive with his or her other financial assets.
     D. Failure rates from the safe withdrawal rate literature take into account all sources of retirement income.

Answer 11

100. The answer is D. Safe withdrawal rate literature’s failure rates are not compatible with a complete retirement income strategy because it only focuses on the portfolio of stocks and bonds but not all assets like Social Security etc.