TOOLS & TECHNIQUES OF LIFE INSURANCE PLANNING



TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING

11th Edition

College Course Materials

Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®

Associate Professor

CFP® Program Director

Personal Financial Planning Department

University of Missouri-Columbia

Please Note: Correct answers for each question are indicated in bold type. After each question, the number of the page containing information relevant to answering the question is given. When a calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale for the correct answer is also given.

Part A: Retirement Planning

Government Benefits

Chapter 2: Planning for Retirement Needs

True/False

2.1 The amount that a client has invested in real estate is not included in an assessment of retirement income need.

2.2 Retirement planning must consider current or future alimony and child support payments.

2.3 When helping a client plan for retirement, it is far more important to use an estimation process that is accurate as opposed to one that the client understands.

Answer:

2.1 False [p. 18]

2.2 True [ p.18 – payment of liabilities reduces the amount of funds available for retirement so these must be considered when estimating funds available for retirement savings]

2.3 False [p. 19 – although it is important to be as accurate as possible, there is no perfect method. It is better to use a simple approach that a client understands and thus will be more likely to implement than a more accurate method that simply leaves the client bewildered.]

Multiple Choice

2.4 Which of the following would not be included in a retirement ‘fact finder’?

a. balance in profit sharing plan

b. expected Social Security income

c. amounts invested in mutual funds

d. amount of last year’s tax refund

e. client goals and objectives in retirement

Answer: D [p. 18]

2.5 Which of the following is not an acceptable method for overcoming a retirement shortfall?

a. cut back on expenses before retirement

b. invest a large portion of a retirement portfolio in a high risk investment to obtain a higher return

c. increase pre-retirement savings

d. retire later

e. tap into home equity

Answer: B [ p. 22 – High risk investments can lead to large losses, making a large investment in them inappropriate in a retirement account. Also, having a large portion of a portfolio invested in any one asset violates the rule of ‘asset diversification’ in prudent investing.]

Application

2.6 Cathy Atwater is 60, 5 years away from retirement. The most accurate method for her to use in calculating her income needs during retirement is

a. expense method

b. replacement ratio method

Answer: A [pp. 19-20 – The closer a client is to retirement, the more accurate a count of current expenses will be.]

2.7 Gene and Norma Alton are both age 65 and will retire later this year. Their financial planner evaluated their financial situation and found that the Altons are going to be approximately $100 per month short of what they need to sustain their desired lifestyle. The Altons should consider:

a. adjusting their expenses downward before and during retirement and saving more

b. placing the bulk of their retirement assets into one or two risky assets with good potential for a high yield

c. continuing to work and contribute to a retirement plan for a few more years

d. a and b

e. a and c

Answer: E [p. 22]

2.8 William Best is completing a retirement plan for a client. Which of the following sources of his client’s income would William ignore when estimating client’s income sources?

a. current and future asset income

b. pension income from a former employer

c rent from a duplex owned by the client

d. income tax refunds

e. Social Security income

Answer: D [p. 20 – Although they constitute a flow of dollars into the client’s hands, income tax refunds are typically quite small and simply represent a refund rather than income, per se.]

2.9 Tom Closten is the owner of a closely held business. Tom’s financial planner told Tom that developing a retirement plan for him will be much simpler than developing a retirement plan for non-business owners who do not have the bulk of their assets tied up in one place. The statement of Tom’s financial planner is:

a. true

b. false

Answer: B [p. 18 – Retirement planning for a small business owner is very complex.]

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