Exam #3 PFP

Jeremy ​(age 21) is a student​ (and US​ taxpayer) who works​ part-time during school breaks. In 2020 he earned ​$3,000 from all of his jobs. His parents gave him ​$6,000 as a gift in 2020. Jeremy wants to start investing for his retirement after listening to some old bald guy talk about the importance of starting to invest for retirement as early in life as possible. What is the maximum that Jeremy can invest in his Roth IRA for tax year​ 2020?

$3000

You want to have​ $5 million in your retirement account at the end of your​ 45-year working career. Your account will earn an average rate of return of​ 9% annually. You currently have​ $0 invested for retirement. How much will you need to invest each MONTH to reach your retirement​ goal? Use Beginning of Period PMTs.

$670.20 FV = 5,000,000 PV= 0 I = 9%/12 = 0.75 N = 45 x 12 = 540 PMT=? PMT = -$670.20400

Which of the following investment portfolios is not an example of proper​ (or good)​ diversification

50 shares of Ford​ stock, 50 shares of General Motors​ stock, 50 shares of Toyota stock

​Annmarie's financial planner asked her if she wanted to invest in Class​ A, Class​ B, or Class C shares of her mutual funds. Which class of shares has the highest annual operating​ expenses, but has no​ "front-load" or​ "back-load" fees?

Class C

You have​ $5,000 that you want to​ invest, but​ you're not sure how to invest these funds. Which of the following is NOT one of the three main questions that Doc White​ (or any good financial​ planner) will ask you before helping you figure out what investments are best for​ you?

Do you want to minimize your income ​taxes?

You have​ $5,000 that you want to​ invest, but​ you're not sure how to invest these funds. Which of the following is NOT one of the three main questions that Uncle Al​ (or any good financial​ planner) will ask you before helping you figure out what investments are best for​ you?

Do you want your investments to maximize your annual income​ taxes?

​You've just graduated and taken a job with​ Al-Mart. Your benefits package includes a​ 401(k). You have no idea how to invest your funds in the​ 401(k), so you decide to use the​ "default investment." Which of the following mutual funds is most likely to be the default investment for a​ 21-year old college​ graduate?

Fidelity 2060 Lifecycle Allocation fund

The concept of​ "Power Payments" will help you repay your loans faster and reduce your total interest payments. Consider a situation where you have 3​ loans: Loan A has a loan payment of​ $500/month and an interest rate of​ 5% APR; Loan B has a payment of​ $200/month and an interest rate of​ 3% APR; Loan C is a credit card with a payment of​ $300/month and interest rate of​ 18% APR. If you have an extra​ $100/month that you can pay towards your​ loans, to which loan would you first apply the extra​ $100/month payment so that you would save yourself the most in​ interest?

Loan C

What is Doc​ White's opinion on Payday​ Loans?

Payday loans are​ "legalized robbery" because they prey on​ low-income families.

When you apply for a consumer loan​ (auto loan) you need to be prepared to meet with the lender. ​ Ideally, which of the following items should you be able to provide to the lender to prove that you can repay the​ loan?

Proof of income​ (pay stubs), a balance​ sheet, and a monthly budget

According to good old Doc​ White, what should you do as soon as you possibly can when you get a​ job?

Start participating in your​ company's 401(k) plan as soon as you are eligible.

Which of following is a major benefit of investing in a Roth​ 401(k) account with your​ employer? ​ (Note: Roth​ = post-tax; Traditional​ = pre-tax)

The earnings of the account are​ tax-free when you withdraw them after age 59​ ½.

You want to get a variable rate loan that has an interest rate of​ "5% 2/7". Which of the following is​ true?

The highest the interest rate can be over the life of the loan is​ 12% APR

Investing​ isn't really as complicated as most people think. The key is to understand your​ goals, know your time​ frame, understand your risk​ tolerance, and ask for help from qualified advisers as needed.

True

True or False. Most of you young folks​ (including old Doc​ White) should NOT plan on getting any retirement funds from Social Security when you retire. You should plan on funding your retirement through your​ employer's retirement​ plan, 401(k)-type​ plans, and individual retirement accounts​ (IRAs).

True

You can increase the probability of getting accepted for a new loan if you are willing to make a large down payment. Which of the following statements is the most​ correct?

You should NOT deplete your emergency savings when you make a down payment

Your employer said that you have a​ 5-year graduated vesting plan for your​ employer's retirement plan. This means that if you leave your job after 3 years you​ will:

be able to take​ 60% of your​ employer's contributions and the earnings on those contributions with you to your new​ employer's retirement plan​ (or a rollover​ IRA).

Employers who offer pension plans to their employees have a choice of 2 main types of pensions. One of these retirement plans involves the employer making a contribution each pay period into the​ employee's retirement account. The employee must decide how to invest the funds in this account. When the employee​ retires, the funds in this account represent the money​ he/she will have to meet​ his/her retirement living needs. This type of plan is called​ a:

defined contribution plan

Doc​ White's sure-fire rule for determining that you have too much risk in your investment portfolio​ says:

if you are waking up at night worrying about your​ stocks, you have too much risk.

When you properly diversify your​ investments, you can​ expect: ​

less risk but probably lower returns

When choosing your investments you should always try​ to:

match the​ goal/purpose of that investment to your investing goal.

Your employer said that you have a​ 3-year cliff vesting plan for your​ employer's retirement plan. This means that if you leave your job after 2 years you​ will:

not be entitled to any of the​ employer's funds in your retirement plan.

The​ "Price/Earnings" ratio is a common measure of whether the overall stock market is​ "undervalued" or​ "overvalued". The average​ Price/Earnings ratio tends to be in the​ 15-20 range historically. If the current​ Price/Earnings ratio is 35 you would say that the overall stock market​ is:

overvalued​ - watch for the growth in stock prices to slow down or turn negative in the upcoming months.

Aisha has a​ 401(k) retirement plan through her employer. She earns a salary of​ $70,000/year. Her employer will match her contributions​ "dollar-for-dollar" up to​ 5% of her annual salary. According to good old Doc​ White, what is the minimum amount that Aisha should have taken out of her paychecks to contribute to her​ 401(k) retirement plan each​ year?

​$3,500

JJ has a Payday loan for​ $500. The Payday loan company is charging JJ​ 12% interest for a​ 1-month loan. JJ thinks​ he's getting a great deal​ - only​ 12%! What is the true APR of this payday​ loan? ​ (Remember, APR​ = ANNUAL Percentage​ Rate)

​144% ​ (12% x 12​ months/year)

Inflation will drive up the cost of living for you young folks. That means you will need to accumulate a lot of money in your retirement accounts by the time you retire. Approximately how much money will you need to have in your retirement account the day you retire​ (according to old Doc​ White)?

​$3-5 million dollars

Ashkan is 30 years old and he has a relatively low tolerance for risk in his investments. That​ is, he​ doesn't like to see his investments fluctuate wildly in value from week to​ week; he wants to earn a relatively consistent return from year to year. Using Doc​ White's advice​ (as in his​ "asset allocation​ flowchart"), which of the following asset allocations would you recommend for​ Ashkan's retirement​ plan?

​60% stocks,​ 40% bonds

For a home equity loan​ (or line of​ credit), what is the maximum that most lenders will allow you to​ borrow?

​80-85% of the equity you have in your house

Jazmin earned ​$36,590 this year. Calculate her total FICA contribution for the year. How much did her employer pay toward​ FICA?

​Jazmin's total FICA contribution for the year is ​$2799.14 ​Jazmin's employer's contribution toward FICA is ​$2799.14 Employees pay FICA taxes of 7.65 percent of their gross salary. To calculate​ Jazmin's total FICA​ contribution, use the following​ formula: Amount paid to FICA=$36,590×.0765=$2,799.14. ​ Jazmin's total FICA contribution for the year is ​$2,799.14. Employers match FICA taxes of 7.65 percent of an​ employee's gross salary. To calculate​ Jazmin's employer's total FICA​ contribution, use the following​ formula: Amount paid to FICA=$36,590×.0765=$2,799.14. ​Jazmin's employer's contribution toward FICA is ​$2,799.14.

The last day that you can make a Roth IRA contribution for tax year 2020​ is:

April​ 15, 2021

One of the easiest and most powerful investment strategies that ANYONE can use and EVERYONE should use involves investing the same dollar amount in your investment​ (ex. mutual​ fund) each period. The official name of this strategy​ is:

Dollar Cost Averaging

Mahmed ​(age 21) is a student​(and US​taxpayer) who works​part-time during school breaks. In 2020 he earned ​$3,000 from all of his jobs. His parents gave him ​$6,000 as a gift in 2020. Mahmed wants to start investing for his retirement after listening to some old bald guy talk about the importance of starting to invest for retirement as early in life as possible. What is the maximum that Mahmed can invest in his Roth IRA for tax year​2020?

$3000 Total Earning = $3000 Receipt of gift = $6,000 According to Roth IRA rule a person below 50 year can invest maximum $5,500 in Roth IRA. So maximum amount Mahmed can invest is $3000.

You just graduated and started your new job. Your starting salary is ​$60,000​/year. Your​ employer's 401(k) plan states that your employer will contribute 2​% of your salary to your​ 401(k) and the will match your​ contributions, $1-for​ $1, up to 6​% of your salary. Please answer the following​ questions: 1. How much​ ($) will your employer contribute to your​ 401(k) per year if you make​ $0 contributions. 2. What is the minimum amount​ ($) that you must contribute per year to get the maximum match from your​ employer? 3. Assume that you make the minimum contribution to get the maximum match from your employer. What is the total amount​ ($) that will be contributed to your​ 401(k) for the​ year, including all of the employer contributions and your​ contributions? 4. Assume that this annual total contribution is made for 45 years and your​ 401(k) earns an average annual return of 7​%. How much will you have in your account at the end of this time​ period? Assume Beginning of Period Contributions. 5. After doing a​ budget, you realize that you can make a contribution of ​$6,000 per year to a Roth​ IRA, in addition to the total contributions to your​ 401(k) - including your​ employer's total contributions. Assuming the same annual rate of return and number of years to retirement as​ above, how much will you have in your accounts​ (4019k) and Roth​ IRA) when you​ retire? Assume Beginning of Period payments.

1. $1200 (60,000 x 0.02) 2. $3600 (60,000 x 0.06) 3. $8400 $1200 + ($3600 x 2) = 8400 4. $2,568,314.81 5. 4,402,825.38

Old Doc White gave you his advice for choosing the best loan for you. In​ general, when you have the choice of a​ 3-year loan or a​ 5-year loan, which loan does Doc recommend that you​ take?

5-year loan because the lower monthly payments are easier to make in bad financial times

​You've just graduated and taken a job with​ Al-Mart. Your benefits package includes a​ 401(k). You have no idea how to invest your funds in the​ 401(k), so you decide to use the​ "default investment." Which of the following mutual funds is most likely to be the default investment for a​ 22-year old college​ graduate?

A 2060 Lifecycle Allocation fund

The two main ways to earn money by investing in corporate stocks​ are:

Capital gains and dividends​ (cash or​ stock)

Ernie is facing very hard financial times. He lost his job 8 months ago and he has not been able to make his monthly loan payments until now. He recently got a new​ job, but his lenders are demanding that he repay his loans. Ernie is thinking of declaring bankruptcy. Ernie wants to repay all of his​ loans, but he​ doesn't have enough money to do so. He thinks that he will be able to repay his loans over a​ 3-year period, if his lenders will be patient with him. Which form of federal bankruptcy is best for​ Ernie?

Chapter 13​ Wage-earner bankruptcy

Old Doc White advised you to do your homework before applying for a consumer loan. Which of the following is his main piece of advice on preparing to get a consumer​ loan?

Check your credit history at least​ 3-6 months before applying for the loan.

You are having trouble making your credit card payments on time. Which of the following is a good resource for helping you manage your credit card debt by negotiating lower interest rates or reduced​ payments?

Consumer Credit Counseling Sevice​ (CCCS)

Which of the followingsources of consumer loans typically offers the lowest interest rates​ (APR) on consumer​ loans?

Credit Unions

True or False. You cannot make contributions to your​ 401(k) plan and your Roth or traditional IRA in the same tax year.

False

True or False. You should try to keep your investment in precious metals​ (gold, silver) greater than​ 10% of your investment portfolio.

False

How would you recommend that Ragnar​ (age 25) allocate his retirement investments in his​ 401(k) to match his risk​ tolerance, age, and retirement​ goal? Please type in the percentage of his​ 401(k) that should be invested in each of the following investment assets. For​ example, if you think he should invest​ 5% in Fixed Income​ Assets, enter​ "5", not​ "5%". Your answers should total to 100. ​ Relax, your answers do NOT have to be exact​ - you will get credit if you answers fall within an appropriate range of values.

Fixed Income Assets​ (Bonds, bond mutual​ funds): 25 International​ Investments: 10 Real Estate​ (REITS, rental​ properties): 5 US Stock Market​ (Stocks, stock mutual​ funds): 60 Precious Metals​ (Gold, silver,​ platinum): 5

Which of the following works in a very similar manner to a credit card in that it has a stated credit limit and a flexible repayment​ plan?

Home Equity Line of Credit​ (HELOC)

As an investment​ category, bonds tend to be less risky than stocks. What are the two​ (2) primary ways to make money by investing in​ bonds?

Interest Income and Capital Gains​ (selling them at a price higher than you purchased​ them)

Dr. Keown gave you great advice about investing in mutual funds. What was his key​ point?

Invest in mutual funds that have low expense ratios.

Which of the following is a good reason to consolidate your student loans before your grace period​ expires?

It allows you to write one​ check/month instead of several checks for all of your individua student loans. B. It can give you a lower monthly payment​ (due to a longer payback​ period) than you would have under the standard​ 10-year payback period. C. It allows you to stretch your repayment period from 10 years up to​ 20-25 years. D. All of the above***

The​ grossest-sounding piece of investment advice that Doc White has given you this semester​ is, "take advantage of​ DRIPs." How does a DRIP impact your​ investments?

It provides you with stock dividends in place of cash dividends.

Aretha owns a​ 10-year corporate bond from Disney. It has a coupon rate​ (interest rate) of​ 6% APY. Interest rates in the US are starting to decrease due to fears about the economy. What should happen to the value​ (price) of​ Aretha's bond?

It should increase as interest rates decrease

Stock prices tend to be much more variable than bond​ prices, but not all stocks are risky. Which of the following stocks​ (as classified by the Morningstar​ Box) will be the least risky to​ own?

Large Cap Value

What distinguishes a secured loan from an unsecured​ loan?

Lenders try to reduce they risk they face by requiring some type of collateral for a secured​ loan, whereas the lender has no collateral on an unsecured loan.

When we talked about asset allocation for your retirement investments Doc threw out some generally accepted guidelines on what percent of your funds should be invested in international​ funds, real estate​ funds, and precious metals. Which of the following reflects​ Doc's guidelines?

Maximum of​ 10% international,​ 10% real​ estate, and​ 3% precious metals

Which of the following is a great resource for doing research on individual stocks or mutual​ funds?

Morningstar.com

You can easily diversify your investment portfolio by investing in which of the following​ assets?

Passively-managed stock and bond index mutual funds

The main​ thing(s) that Doc White wants you to know about retirement planning​ is/are:

Start investing for retirement as soon as you are able​ - make it a​ priority! B. Roth IRAs are great for younger people​ (students!) and those who are currently in lower tax brackets. C. Participate in your​ employer's 401(k) plan as soon as you are​ eligible! D. ​Don't withdraw money from your retirement accounts before age 59​ 1/2, unless it is an emergency. E. To allocate your retirement​ investments, the​ "100 - Your​ Age" rule is a good starting​ point, then adjust it for your situation. F. All of the above are good things to​ know!***

There are two​ (2) main types of​ IRAs: Traditional and Roth. Why does Doc White recommend that you invest in a Roth IRA at your age​ (age 20-35)?

The earnings on the Roth IRA will be tax free when you withdraw them during your retirement​ years, giving you roughly 40 years of​ tax-free growth.

True or False. If you are uncertain about how you should invest the money in your retirement​ account, you should ALWAYS ask for help from someone who is qualified to help you. Do NOT rely on your HR​ (Human Resources) department for advice on how to invest your money.

True

True or false. Doc White says that your age should be a good estimate of what percentage of your retirement investments you should have in​ "fixed income​ investments", such as​ bonds, CDs, and bond mutual funds. Most US investors should invest in bond mutual funds instead of individual bonds so that they get better diversification and higher earnings.

True

The standard repayment period for student loans is 10 years. ​ However, there are a lot of other options available to most students. Which of the following is a true statement about student loan​ repayment?

You need to participate in the Pay As You Earn plan or the​ income-based repayment plans to qualify for the Public Loan Forgiveness Plan. B. Graduated payments allow you to make lower payments when you first graduate but the amount of the payments will increase every 2 years over a​ 10-year period. C. You must have some of your​ "grace period" remaining to qualify for the student loan consolidation program. D. The​ income-based repayment plans require to you have​ "financial hardship" to​ qualify, but they allow you to stretch your payments over a longer time period​ (over 20​ years). E. All of the above are true statements about student loans ***

You are about to sign a loan to buy your first car. As you are reading the loan contract​ (as Uncle Al strongly​ recommends) you see the​ phrase, "all interest is calculated using a discount interest rate of​ 8%." What does this phrase mean to​ you?

You should run​ away, screaming​ "no, no,​ I'll never take out a discount interest​ loan!"

There are 2 main types of student loans​ - subsidized and unsubsidized. What is the primary difference between subsidized and unsubsidized student​ loans?

You​ don't have to make interest payments on subsidized loans while you are at least a​ half-time student; if you​ don't make interest payments on your unsubsidized loans while you are in school the total interest that you incur will be added to the amount of your student loans once you graduate.

Doc White has preached about changing the percentage of stocks and bonds in your retirement account as you get older. You​ know, using that old​ "100 - Your​ Age" Rule as you get older. This strategy is​ called:

reallocating your portfolio.