100+ Free IWI RMA Practice Questions

Explanation: Sequence-of-returns risk is the risk that the order (sequence) of returns is unfavorable, with poor returns occurring early in retirement when withdrawals are being made. Because shares are sold at depressed prices, the portfolio may never recover even if the average return is acceptable.

Explanation: Longevity risk is the risk of living longer than expected and exhausting one's assets. It is a foundational retirement risk because increasing life expectancies mean many retirees must plan for 30+ year horizons.

Explanation: During decumulation, withdrawals force the sale of assets even when prices are low, permanently removing shares that cannot participate in any later recovery. During accumulation, no withdrawals occur, so the order of returns has no effect on the ending value—only the average return matters.

Explanation: A fixed nominal income loses purchasing power each year as prices rise; over a 25–30 year retirement, even modest inflation can roughly halve real purchasing power. This makes inflation risk the dominant concern for a fixed, non-indexed income stream.

Explanation: Long-term care (custodial care for activities of daily living) is the largest health-related risk because Medicare does not cover extended custodial care, and costs for nursing homes or in-home aides can exceed six figures annually. This is why LTC insurance and self-funding strategies are central to retirement risk planning.

Explanation: Joint-and-survivor life expectancy is much longer than a single life; for a 65-year-old couple, there is a high probability one survives into the 90s. Advisors use these mortality statistics to set an appropriately long planning horizon and avoid underfunding longevity.

Explanation: Liquidity risk is the risk of not having accessible cash and being forced to liquidate assets—potentially at a loss—to meet sudden expenses such as a home repair or medical bill. Maintaining a cash reserve mitigates this risk.

Explanation: Market risk affects the whole market and cannot be diversified away entirely, but broad diversification across uncorrelated asset classes reduces a portfolio's exposure to any single market shock. Concentration increases risk rather than reducing it.

Explanation: When one spouse dies, the household may lose the smaller of two Social Security benefits and possibly a single-life pension, while many fixed expenses continue. This survivor (mortality) risk is addressed through joint-and-survivor pension elections, life insurance, and Social Security claiming coordination.

Explanation: The two risks compound: the longer a retiree lives, the more years inflation has to erode purchasing power, so a 30-year retirement faces far greater cumulative inflation impact than a 15-year one. Planning must therefore address both simultaneously, often with inflation-sensitive assets.