Certified Financial Planner (CFP) Retirement Savings and Income Planning Syllabus

Retirement Savings and Income Planning syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Retirement Savings and Income Planning in Certified Financial Planner (CFP), not a summary of it.

1. 1

   Retirement Needs Analysis

   4 topics

   • Capital Needs Estimation
     • Replacement ratio method
     • Capital preservation vs. depletion models
   • Inflation and Longevity Risk
   • Sources of Retirement Income
   • Sustainable Withdrawal Strategies
     • Safe withdrawal rate and dynamic spending
     • Sequence of returns risk
2. 2

   Qualified Retirement Plans

   4 topics

   • Defined Benefit Plans
     • Traditional and cash balance plans
   • Defined Contribution Plans
     • 401(k), profit sharing, and money purchase
     • ESOPs and stock bonus plans
   • Plan Qualification Requirements
     • Coverage, vesting, and nondiscrimination testing
     • Contribution and benefit limits
   • ERISA and Fiduciary Responsibilities
3. 3

   Individual and Small Business Plans

   4 topics

   • Traditional and Roth IRAs
     • Contribution limits and deductibility phaseouts
     • Backdoor and conversion strategies
   • SEP, SIMPLE, and Solo 401(k) Plans
   • 403(b) and 457 Plans
   • Nonqualified Deferred Compensation
     • Section 409A rules
     • Stock options (ISOs and NSOs)
4. 4

   Distributions and Social Security

   4 topics

   • Required Minimum Distributions (RMDs)
     • SECURE Act rules and beneficiary categories
     • 10-year and stretch rules
   • Early Distribution Penalties and Exceptions
   • Rollovers and Plan-to-Plan Transfers
   • Social Security Benefits
     • Claiming strategies and full retirement age
     • Taxation of benefits and earnings test

Retirement Savings and Income Planning flashcards for Certified Financial Planner (CFP)

24 of 60 cards from the Retirement Savings and Income Planning deck — real questions with worked answers.

1. In retirement capital needs analysis, what is the difference between the "capital preservation" and "capital utilization" (annuity) approaches?

   Capital preservation assumes the client dies with the inflation-adjusted principal fully intact (only earnings are spent), requiring a larger nest egg. Capital utilization (annuity method) assumes the principal is fully depleted to $0 by the end of the planning horizon, requiring less savings.

2. What are the four main inputs needed to estimate a client's retirement capital need using the present value approach?

   (1) The annual retirement income shortfall (need minus other income), (2) the number of years in retirement (life expectancy), (3) the assumed inflation rate, and (4) the expected investment rate of return (used as an inflation-adjusted/real return for serial payments).

3. How do you compute an inflation-adjusted (real) rate of return for retirement funding calculations?

   $$r_{real}=\frac{1+r_{nominal}}{1+i}-1$$ where $i$ is the inflation rate. This real return is used as the discount rate when modeling an income stream that grows with inflation (annuity due, payments at beginning).

4. Why must retirement income calculations typically use an annuity due rather than an ordinary annuity?

   Retirees draw living expenses at the beginning of each period (they need the money up front), so payments occur at the start of the period, which is the definition of an annuity due. This generally increases the required capital versus an ordinary annuity.

5. Define longevity risk and one common planning technique to mitigate it.

   Longevity risk is the risk that a retiree outlives their assets by living longer than expected. Mitigation techniques include purchasing a single-premium immediate annuity (SPIA) or a deferred income annuity/QLAC, and delaying Social Security to age 70 to maximize the guaranteed lifetime benefit.

6. Why is using average life expectancy dangerous when planning a single client's retirement horizon?

   Average life expectancy means roughly half of people live longer than it. Planning only to average life expectancy gives a ~50% chance of outliving assets, so planners typically extend the horizon (e.g., age 90-95+) to reduce longevity risk.

7. What is sequence-of-returns risk and why does it matter most early in retirement?

   Sequence-of-returns risk is the danger that poor investment returns occurring early in the withdrawal phase, combined with ongoing withdrawals, permanently deplete a portfolio even if the long-run average return is adequate. Losses early are magnified because there is less time and principal to recover.

8. List the traditional "three-legged stool" sources of retirement income.

   (1) Social Security benefits, (2) employer-sponsored retirement plans/pensions, and (3) personal savings and investments (including IRAs).

9. What is the "4% rule" for sustainable withdrawals, and how does it adjust over time?

   The 4% rule (Bengen) suggests withdrawing 4% of the initial portfolio value in year one, then increasing that dollar amount by inflation each subsequent year, providing a high probability the portfolio lasts ~30 years. Example: $1{,}000{,}000 portfolio → $40{,}000 first-year withdrawal.

10. Contrast the "floor-and-upside" (essential vs. discretionary) withdrawal strategy with a systematic fixed-percentage strategy.

    Floor-and-upside covers essential expenses with guaranteed income (Social Security, annuities, bond ladders) and funds discretionary spending from a riskier growth portfolio. A systematic fixed-percentage strategy withdraws a set percentage of the current balance each year, so income fluctuates with the market but never fully depletes the account.

11. In a defined benefit (DB) pension, who bears the investment risk and how is the benefit typically determined?

    The employer (plan sponsor) bears the investment and funding risk. The benefit is determined by a formula, commonly based on years of service and final-average compensation (e.g., $1.5\%\times\text{years}\times\text{final average pay}$), not on account performance.

12. What is the 2025 annual benefit limit under IRC §415(b) for a defined benefit plan, and what is the §415(c) annual additions limit for defined contribution plans?

    For 2025 the §415(b) DB maximum annual benefit is $280{,}000, and the §415(c) DC annual additions limit (employee + employer contributions) is $70{,}000 (plus catch-up where applicable). These amounts are indexed for inflation.

13. What is a cash balance plan and why is it called a "hybrid" plan?

    A cash balance plan is legally a defined benefit plan (employer bears investment risk, PBGC-insured) but expresses each participant's benefit as a hypothetical account balance with annual pay credits and interest credits. It is a hybrid because it looks like a DC plan to participants but is funded and guaranteed like a DB plan.

14. In a defined contribution (DC) plan, who bears investment risk and what is guaranteed?

    The employee/participant bears the investment risk. Only the contributions (and any employer match) are defined; the ultimate retirement benefit depends entirely on contributions plus investment performance—no specific benefit amount is guaranteed.

15. What is the 2025 elective deferral limit for a 401(k), and the standard age-50 catch-up amount?

    For 2025 the §402(g) elective deferral limit is $23{,}500, with an additional age-50 catch-up of $7{,}500 (total $31{,}000). SECURE 2.0 also adds a higher catch-up of $11{,}250 for ages 60–63.

16. Explain the difference between a money purchase pension plan and a profit-sharing plan.

    A money purchase plan requires a fixed, mandatory annual employer contribution stated as a percentage of pay (rigid). A profit-sharing plan allows discretionary employer contributions that can vary or be skipped year to year (flexible).

17. What are the two permitted vesting schedules for employer matching contributions after the Pension Protection Act?

    (1) 3-year cliff vesting (0% until 3 years, then 100%), or (2) 2-to-6 year graded vesting (20% per year starting in year 2, fully vested after 6 years). Employee elective deferrals are always 100% immediately vested.

18. State the two main coverage tests a qualified plan must satisfy under IRC §410(b).

    The ratio percentage test (the plan must cover a percentage of non-highly-compensated employees equal to at least 70% of the percentage of highly compensated employees covered) or, failing that, the average benefits test.

19. For 2025, what compensation threshold defines a Highly Compensated Employee (HCE), and what defines a key employee for top-heavy testing?

    An HCE earns more than $160{,}000 (2025, prior-year compensation) or owns >5% of the business. A key employee includes a >5% owner, a >1% owner earning over $150{,}000, or an officer earning more than $230{,}000 (2025).

20. What makes a qualified plan "top-heavy," and what minimum contribution is then required?

    A plan is top-heavy when more than 60% of plan assets/accrued benefits belong to key employees. If top-heavy, the employer must provide non-key employees a minimum contribution of 3% of compensation (DC plans) or a minimum accrual (DB plans).

21. List four core tax advantages of a qualified retirement plan to the employer and employee.

    (1) Employer contributions are currently tax-deductible, (2) employee pre-tax deferrals reduce current taxable income, (3) earnings grow tax-deferred inside the plan, and (4) special tax treatment may apply to distributions (e.g., NUA, 10-year averaging for certain participants, rollover deferral).

22. What is the primary purpose of ERISA, and which plans does it generally cover?

    The Employee Retirement Income Security Act of 1974 sets minimum standards to protect private-sector plan participants—covering participation, vesting, funding, fiduciary conduct, and reporting/disclosure. It applies to private employer plans but generally NOT to governmental or most church plans.

23. State ERISA's "prudent expert" fiduciary standard of care.

    A fiduciary must act with the care, skill, prudence, and diligence that a prudent person familiar with such matters (an expert) would use—acting solely in the interest of participants and beneficiaries, diversifying investments to minimize large losses, and following the plan documents.

24. Under ERISA, what is a prohibited transaction and name two examples.

    A prohibited transaction is a dealing between the plan and a "party in interest" that risks self-dealing. Examples: the plan lending money to or buying property from the employer/fiduciary, or a fiduciary using plan assets for personal benefit. Such transactions trigger excise taxes and fiduciary liability.

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