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RFP Module 5 study materials
RFP Module 5 study resources

RFP Module 5: Module 5: Retirement Planning

RFP Module 5 · Work through your exam, one topic at a time.

All guide sections

Module 5: Retirement Planning

What Module 5 tests

The source does not enumerate Module 5's sub-domains; this section covers the retirement-planning content that Module 5 exams typically assess: replacement ratios, inflation-adjusted projections, accumulation math, decumulation risks, and coordination of pension, employer, and personal assets.

Core rules

  • Work in real terms. Real return = (1 + nominal)/(1 + inflation) − 1. Project contributions and withdrawals in today's dollars unless the question asks for nominal values.
  • Accumulation: FV = PV(1 + r)^n + PMT[((1 + r)^n − 1)/r], with r real and n years to retirement. Solve for PMT when the target is given.
  • Decumulation: the 4% rule is a heuristic, not a guarantee. It ignores fees, taxes, and sequence risk.
  • Sequence risk: two portfolios with the same average return can end differently if poor returns occur early in retirement.
  • Longevity risk: plan to age 95 or older or use mortality-weighted scenarios; life expectancy is not a planning horizon.
  • Coordinate sources: public pension, DB/DC employer plans, annuities, and taxable savings. Early public-pension claiming permanently reduces the benefit.

Worked example

Client, 40, retires at 65. Savings 100,000. Needs 40,000 a year in today's dollars for 25 years. Inflation 2.5%; pre-retirement return 6%; post-retirement return 4.5%. Real pre-ret return = 1.06/1.025 − 1 = 3.41%. Real post-ret return = 1.045/1.025 − 1 = 1.95%. FV of current savings = 100,000(1.0341)^25 ≈ 231,000. PV of retirement need = 40,000 × [1 − (1.0195)^−25]/0.0195 ≈ 784,000. Gap = 553,000. Annual real saving = 553,000 × 0.0341/[(1.0341)^25 − 1] ≈ 14,400. Reasoning: keep every figure in real terms; the annual saving rises with inflation each year.

Traps

  • Mixing nominal returns with real spending.
  • Ignoring taxes and fees, which lower both accumulation and sustainable withdrawals.
  • Treating the 4% rule as safe for a 30-year horizon with high equity volatility.
  • Forgetting that early withdrawals from tax-deferred accounts can trigger penalties and higher marginal rates.