Retirement Planning
Accumulation and Decumulation
Retirement planning has two phases. In accumulation, the planner projects future needs, assumes inflation and returns, and calculates required savings. In decumulation, the planner sequences withdrawals, manages longevity risk, and coordinates Social Security, pensions, and personal savings. Candidates must understand the replacement ratio concept, the effect of inflation over long horizons, and the difference between nominal and real returns.
Sources of Retirement Income
Know the main sources: Social Security, employer plans (defined benefit and defined contribution), individual accounts, and taxable savings. Understand the taxation of distributions, required minimum distributions, and the role of Roth conversions. Know the concept of sequence-of-returns risk: poor returns early in retirement permanently impair a portfolio because withdrawals lock in losses.
Traps in Exam Questions
A frequent trap is projecting retirement needs in today's dollars while compounding at a nominal return, which double-counts or omits inflation inconsistently. Either use real returns with today's dollars or nominal returns with inflated dollars, never mix. Another trap is delaying Social Security without considering health and cash flow needs. Watch for questions that ignore taxes on withdrawals or assume a single average return with no volatility. Also watch for the assumption that a pension is fully inflation-adjusted.
Worked Example
A client needs $60,000 annually in today's dollars, retiring in 20 years, with 3% inflation. The inflated need is $60,000 times 1.03 to the 20th power, about $108,000. If Social Security covers $40,000 in today's dollars, the portfolio must fund the remainder. The planner then applies a withdrawal rate assumption, such as 4%, to estimate the required portfolio, and stress-tests with lower returns and higher inflation.
Rule of Thumb
Be consistent: pair real returns with today's dollars or nominal returns with inflated dollars.