CRPC flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Ability vs willingness

Ability is financial capacity to bear risk, based on assets, income, and time horizon; willingness is psychological comfort. The planning allocation is constrained by the lower of the two.

Discovery data categories

Quantitative discovery captures income, assets, liabilities, and cash flow; qualitative discovery captures goals, health, family, risk tolerance, and preferences. Both are needed before recommendations.

Fiduciary standard

A fiduciary must act in the client's best interest, disclose conflicts, and provide prudent advice. Suitability only requires a reasonable basis that a recommendation fits the client.

Savings rate formula

Savings rate equals gross income minus total spending, divided by gross income. It measures cash flow available for retirement contributions and emergency reserves.

Replacement ratio

Retirement spending divided by pre-retirement gross income. Common planning ranges are 70 to 80 percent, but actual needs vary with lifestyle, housing, and health.

Capital needs method

Estimates retirement capital by discounting the present value of annual cash flow shortfalls, after subtracting guaranteed income such as Social Security and pensions.

Real return formula

Real return equals (1 plus nominal return) divided by (1 plus inflation), minus one. The approximation subtracts inflation from nominal return and overstates real return when inflation is high.

Defined benefit formula

A DB benefit often equals a percentage of final average pay multiplied by years of service. The employer bears investment risk and typically funds the promised benefit.

Vesting schedules

Cliff vesting gives ownership after a set period, often five years in DB plans. Graded vesting phases in ownership over three to seven years; employee deferrals are always fully vested.

402(g) limit

The annual limit on elective deferrals to 401(k), 403(b), and eligible 457(b) plans. It is indexed and separate from the total annual additions limit under section 415(c).

Top-heavy minimum

If a defined contribution plan is top-heavy, the employer generally must contribute at least three percent of compensation for non-key employees. Employee deferrals may not satisfy this minimum.

Roth IRA five-year rule

Qualified Roth IRA distributions require a five-taxable-year period and a triggering event such as age 59½, death, disability, or first-time home purchase. Otherwise earnings may be taxable.

SEP IRA contribution limit

Employer contributions are limited to the lesser of 25 percent of compensation or an indexed dollar limit. SEP contributions are made by the employer, not by employee salary deferral.

SIMPLE IRA features

SIMPLE IRAs allow employee salary deferrals plus an employer match or nonelective contribution. Contributions vest immediately, and a two-year restriction applies to rollovers to other plans.

Annuity surrender charge

A fee for withdrawing more than the allowed amount during the early contract years. Surrender charges typically decline annually and compensate the insurer for acquisition costs.

Rebalancing bands

Threshold rules trigger trades when an asset class drifts from target by a set band, such as five percentage points. Bands reduce trading compared with continuous rebalancing.

Sequence-of-returns risk

The risk that poor investment returns early in retirement, combined with withdrawals, permanently reduce portfolio longevity. It is greatest near and just after retirement.

Glide path

A planned reduction in equity exposure as the retirement date approaches. Target-date funds implement a glide path and may continue reducing risk after the target date.

Correlation benefit

Combining assets with correlation below one can reduce portfolio volatility without proportionally reducing expected return. Diversification benefit depends on correlations and weights.

Four percent rule

A planning heuristic that withdraws four percent of the initial portfolio, adjusted for inflation annually. It is not guaranteed and depends on returns, fees, and longevity.

RMD Uniform Lifetime Table

The IRS table used to calculate required minimum distributions from most retirement accounts. The divisor decreases with age, increasing the percentage that must be withdrawn.

Qualified charitable distribution

A direct transfer from an IRA to a qualified charity, available at age 70½ and later. The amount is excluded from gross income and can satisfy an RMD.

Bucket strategy

Segments retirement assets by time horizon: cash for near-term spending, bonds for intermediate needs, and equities for long-term growth. It manages sequence risk.

Full retirement age

The Social Security age at which a worker receives the full primary insurance amount. It is 67 for workers born in 1960 or later.

Delayed retirement credits

Benefit increases for claiming Social Security after full retirement age. Credits are eight percent per year for those born in 1943 or later, up to age 70.

IRMAA

Income-related monthly adjustment amount added to Medicare Part B and Part D premiums. It uses modified adjusted gross income from two years prior.

Spousal Social Security benefit

A spouse can receive up to 50 percent of the worker's primary insurance amount at the spouse's full retirement age. Delayed retirement credits do not apply to spousal benefits.

LTC elimination period

The waiting period before long-term care insurance begins paying benefits, often 30 to 90 days. A longer elimination period lowers the premium.

Hybrid LTC policy

Combines long-term care coverage with a life insurance or annuity benefit. If care is not used, a death benefit or return of premium may be paid.

HSA triple tax advantage

Contributions are deductible, growth is tax-free, and qualified medical withdrawals are tax-free. After age 65, non-medical withdrawals are taxed but not penalized.

Beneficiary designation

A contract provision naming who receives an account or policy at death. It generally overrides a will, so it must be reviewed after marriage, divorce, or death.

Step-up in basis

Inherited assets generally receive a basis equal to fair market value at the decedent's death, reducing capital gains tax. It does not apply to traditional IRA balances.