RFP Module 4 cheat sheet

The financial planning process: establish the client-planner relationship, gather data and goals, analyze the current situation, develop the plan, implement, monitor and review.

Net worth = total assets − total liabilities; it measures stock at a point in time, whereas cash flow measures movement over a period.

Personal cash flow surplus = income − expenses − taxes − debt payments; a negative value means the client is consuming capital or borrowing.

Time value of money: FV = PV(1+r)^n; PV = FV/(1+r)^n; annuity FV factor = [(1+r)^n − 1]/r for end-of-period payments.

Real return ≈ nominal return − inflation (exact: (1+nominal)/(1+inflation) − 1); use real returns when the goal is stated in today's money.

Emergency reserve target is typically 3–6 months of essential expenses, rising toward 12 months for single-income or variable-income households.

Rule of 72: years to double ≈ 72 ÷ annual percentage return; useful for quick compounding checks with clients.

Inflation erodes purchasing power: at 3% inflation, prices roughly double in about 24 years (72 ÷ 3).

Regulatory and ethical duties usually require written engagement scope, disclosure of conflicts, confidentiality, and suitability of recommendations to the client's objectives.

Risk management sequence: identify exposures, measure them, select treatment (avoid, reduce, retain, transfer), implement, then monitor.

Insurable risk requires a large number of similar exposure units, accidental and measurable loss, no catastrophic concentration, and premiums that are affordable.

Human life value = present value of the insured's future earnings available to dependents; needs approach = PV of future needs minus existing resources.

Life insurance death benefit is generally income-tax free to beneficiaries, but the estate may include the proceeds if the insured owns the policy at death.

Term insurance provides pure death benefit with no cash value; whole life combines permanent coverage with cash value and level premiums.

Indemnity principle: property claims restore the insured to the pre-loss financial position, subject to policy limits, deductibles, and coinsurance.

Coinsurance clause: recovery = (amount carried ÷ amount required) × loss, capped at the policy limit, when the insured is underinsured.

Deductibles reduce moral hazard and premium; a higher deductible lowers the premium but raises retained loss exposure.

Disability cover typically defines benefit as a percentage of pre-disability income (often 60–70%) with waiting periods and own-occupation vs any-occupation definitions.

Expected portfolio return = weighted average of asset expected returns; portfolio risk depends on variances and covariances, not just individual risks.

Diversification reduces unsystematic risk; systematic (market) risk remains and is compensated with a risk premium.

CAPM: required return = risk-free rate + beta × (market return − risk-free rate); beta measures sensitivity to market movements.

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation; it measures excess return per unit of total risk.

Correlation ranges from −1 to +1; lower correlation between assets lowers portfolio volatility for a given set of expected returns.

Bond price and yield move inversely; longer duration means greater price sensitivity to interest-rate changes.

Real return ≈ nominal return − inflation; after-tax return = nominal return × (1 − marginal tax rate) for fully taxable income.

Asset allocation drives most of the variability of portfolio returns over time; security selection and market timing contribute less.

Risk tolerance has both ability (financial capacity, time horizon) and willingness (psychological attitude) components; the lower of the two governs the plan.

Zakat is an annual obligatory levy on qualifying wealth held for one lunar year (hawl) at the nisab threshold, commonly 2.5% of zakatable assets.

Nisab is commonly referenced at 85 g of gold or 595 g of silver; the silver standard is often used because it is lower and captures more payers.

Zakatable assets typically include cash and bank balances, gold and silver, trade inventory, receivables, and business assets held for sale; personal residence and tools of trade are excluded.

Zakat base = zakatable assets − short-term liabilities due; deducting long-term debt in full is generally not required by most schools.

Zakat on agricultural produce (ushr) is commonly 10% on rain-fed land and 5% on irrigated land, due at harvest rather than after a hawl.

Tax planning timing levers: defer income into a lower-rate year, accelerate deductions into a higher-rate year, and use tax-advantaged accounts.

Capital gains treatment depends on holding period and jurisdiction; distinguish short-term (ordinary rates) from long-term (preferential rates) where applicable.

Marginal tax rate applies to the next unit of income; effective tax rate = total tax ÷ total taxable income and is always lower where progressive rates apply.

After-tax return = pre-tax return × (1 − tax rate); compare investments on an after-tax basis, not on headline yields.

Estate planning tools: will, trusts, beneficiary designations, powers of attorney, and lifetime gifts; each has different control, cost, and tax effects.

Intestacy rules apply when there is no valid will; distribution then follows statutory shares, which may not match the client's wishes.

Gross estate generally includes all property owned at death plus certain lifetime transfers (retained interests, revocable transfers) and life insurance proceeds where the insured held incidents of ownership.

Marital deduction defers estate tax on property passing to a surviving spouse; charitable deduction removes qualifying gifts from the taxable estate.

Annual exclusion gifts and lifetime exemption reduce the taxable estate; gifts above the annual exclusion generally use lifetime exemption.

Irrevocable life insurance trust (ILIT) removes policy proceeds from the insured's estate if the trust is properly structured and the three-year look-back is respected.

Step-up in basis at death eliminates capital gains on appreciation for assets included in the decedent's estate in many jurisdictions.

Probate is the court-supervised process of validating a will and transferring title; trusts and beneficiary designations typically pass outside probate.

Power of attorney covers financial decisions during incapacity; a healthcare directive or living will covers medical decisions.

Retirement need is estimated by the replacement ratio method or the expense method; the expense method is more precise because it itemizes post-retirement spending.

Capital needed at retirement = annual retirement shortfall ÷ real return, when the shortfall is treated as a perpetuity in real terms.

Accumulation phase: FV = PMT × [((1+r)^n − 1)/r]; solve for PMT to find the annual saving required to reach the target.

Sequence-of-returns risk: poor returns early in retirement deplete capital faster than the same average return spread evenly.

Inflation and longevity are the two largest risks in retirement projections; use real returns or inflate expenses consistently.

Social security or state pension benefits reduce the required private capital; delaying claiming generally raises the benefit but shortens the payout period.

Pension lump-sum vs annuity: compare the present value of the annuity stream at a realistic discount rate against the lump sum offered.

Withdrawal-rate rules of thumb (e.g., 4%) assume a diversified portfolio, inflation-adjusted withdrawals, and a 25–30 year horizon; they are not guarantees.

Required minimum distributions, where applicable, begin at a statutory age and are based on account balance ÷ life-expectancy factor.

Case approach: state the client's goals, quantify the gap, recommend a solution, then verify the recommendation against constraints (liquidity, tax, risk, time).

Prioritize goals by funding order: emergency reserve and insurance protection first, then debt reduction, then long-term investing.

When a client's stated risk tolerance conflicts with capacity, the binding constraint governs the recommended allocation.

Education funding: estimate future cost = current cost × (1+inflation)^n, then compute the required annual saving at the assumed return.

Debt paydown vs invest: compare the after-tax cost of debt with the expected after-tax return of the investment; the higher after-tax value wins.

Mortgage refinancing is beneficial when the interest saving over the remaining horizon exceeds closing costs and the break-even period fits the client's holding horizon.

Insurance adequacy check: compare the death benefit with the needs-approach estimate (income replacement, debts, education, final expenses minus existing assets).

Client communication: document assumptions, disclose conflicts, and record the rationale for each recommendation in the file.

Review triggers include a change in marital status, job loss, inheritance, new dependent, or a shift in market conditions affecting the plan.