Retirement Planning
Retirement Planning
This domain tests accumulation and decumulation: qualified plans, IRAs, Social Security, RMDs, withdrawal rates, and inflation and longevity risk.
Core rules and concepts
- Employer plans: 401(k), 403(b), and defined-benefit plans; know vesting, matching, contribution limits, and loan provisions.
- IRAs: traditional deductible/nondeductible and Roth; contribution eligibility depends on earned income and income limits.
- RMDs generally begin at age 73 for those born 1951–1959 and age 75 for those born 1960 or later; missed RMDs trigger penalties.
- Social Security: full retirement age is 67 for those born 1960 or later; claiming early reduces benefits, delaying to 70 increases them by delayed credits.
- Withdrawal planning: 4% rule is a starting point, not a guarantee; sequence-of-returns risk matters.
- Coordinate Social Security, pensions, annuities, and portfolio withdrawals; account for taxes and Medicare premiums.
Worked example
A client needs $80,000 annually. Social Security provides $30,000 and a pension provides $10,000, leaving a $40,000 portfolio gap. At a 4% initial withdrawal rate, the required portfolio is $40,000/0.04 = $1,000,000. If the portfolio is $900,000, the gap is $100,000; options include delaying retirement, increasing savings, reducing spending, or using a higher but riskier withdrawal rate. The adviser should stress-test lower returns and higher inflation.
Traps
- Ignoring inflation and health-care costs.
- Using average returns without sequence risk.
- Missing RMD deadlines or beneficiary issues.
- Assuming Social Security is tax-free.