Personal Finance: Chapter 18

1. Defined-benefit plan 2. Defined-contribution plan

1.Employer bears investment risk. Defined-contribution plan 2. Employees bear investment risk.

Studies show that about 75% of workers expect to maintain at least the same standard of living during retirement as before retirement, but only Blank______ have saved for retirement.

20%

If you are born after 1928, you become eligible for Social Security retirement benefits if you have BLANK quarters of coverage.

40

With a(n) Blank______, your employer makes nontaxable contributions to the plan for your benefit and reduces your salary by the same amount.

401(k) plan

For a traditional IRA, you can contribute up to $6,000 per year if you are under age 50 and up to $7,000 if you are over age BLANK

50

Up to BLANK % of your Social Security benefits could be subject to federal income tax if your adjusted gross income exceeds a certain amount.

85

Which of the following are rules of the education IRA?

Accumulates earnings tax free.. Contributions do not reduce current taxes. You can contribute up to $2,000 per year per child under age 18.

Which of the following are rules of an SEP-IRA?

Contributions are tax deductible. Each employee sets up an IRA with a bank or brokerage house. It is an IRA funded by the employer.

Which of the following are the disadvantages of employee pension plans?

Cost-of-living increases may not be provided. There is no control over how the funds are invested. It may not be portable from job to job.

The education IRA is also called the

Coverdell education savings account

True or false: You should plan to spend 10 to 15 years in retirement.

False 16-30 years

Which of the following are true about the rules of a Roth IRA?

Five years after establishing the account, you can withdraw tax-free distributions if you are at least age 59.5. Earnings accumulate tax free. You can make contributions after age 70.5. Contributions are not tax deductible.

To avoid the mandatory 20% federal income withholding, rollover of a retirement account balance must be made directly to a(n):

IRA

Which of the following are the advantages of Social Security as a source of retirement income?

It is a forced savings program. The cost of the program are shared with the employer. It is portable from job to job.

Which of the following best describes how the annual increase in Social Security benefits works?

It is automatic based on the preceding year's increase in the cost of living.

Match the type of IRA with the feature. traditional IRA Roth IRA SEP-IRA

Limited eligibility for tax-deductible contribution with earnings accumulating on a tax-deferred basis. Contributions do not reduce current taxes, but earnings are tax free. An employer-sponsored plan with limited tax-deduction for contributions and earnings that accumulate on a tax-deferred basis.

The IRA that has contributions that are not tax deductible is a Blank

Roth IRA

If you take a lump-sum distribution from your IRA, how will the amount be treated for tax purposes?

The entire amount will be taxed as ordinary income.

Which of the following describes tax implications of withdrawing from an IRA before age 59.5?

The withdrawal will be taxed as ordinary income, and a 10% penalty will be applied.

True or false: When planning for a successful retirement savings plan, one must constantly focus on the plan and evaluate regularly.

True

Which of the following are rules of the traditional IRA?

You can contribute up to $6,000 to a traditional IRA if you are under age 50. Distributions are taxable. You can contribute up to $7,000 to a traditional IRA if you are over age 50. The contributions could be tax deductible.

The reduction in Social Security benefits that occur if you retire early (age 62) can best be summarized as which of the following?

a permanent reduction of five-ninths of 1% for each month you receive payments before age 65

The financial decisions related to housing as you try to maximize current income and prepare for retirement might include:

a smaller house is not only less expensive, but less costly to maintain than a larger home. selling your home and buying a smaller less-expensive home.

A defined-contribution retirement plan provides an individual BLANK for each participant

account

In a reverse annuity mortgage, the lender pays the homeowner a fixed amount per month, and the mortgage principal is repaid to the lender Blank______.

after the death of the homeowner.

Vesting means:

an employee's right to receive at least part of the benefits that have accrued under an employer pension plan.

A(n) BLANK is a contract that provides an income for a certain number of years or for life.

annuity

Your first step in retirement planning is to analyze your current BLANK and liabilities

assets

According to the text, 75% of workers expect to live as well as, if not better than, they do now when they retire, but only 20% have Blank______.

begun to save

When you find a retirement city that appeals to you, you should visit the area during various times during the year to experience the year-round

climate

A spousal IRA lets you BLANK up to the same amount as a traditional IRA for your spouse if you file a joint tax return.

contribute

According to the Securities and Exchange Commission, the easiest ways to boost your retirement savings are to take advantage of your employer's matching some or all of your Blank______ to the retirement plan, focus on low fees and expenses, and save by regular, automatic deductions from your paycheck.

contributions

Fill in the blank question. The 403(b) and 401(k) accounts are examples of employee retirement _________ -contribution plans.

defined

Which plan's retirement payments are determined by the employer?

defined-benefit plan

Which plan's retirement payments are dependent on investment returns?

defined-contribution plan

Social Security provides more benefits than just retirement protection, including survivors' benefits and benefits to BLANK persons

disabled

Social Security provides more benefits than just retirement protection, including survivors' benefits and benefits to BLANK persons.

disabled

The use of an emergency fund during retirement is for BLANK situations that arise

emergency

Retirement planning involves both BLANK and financial components.

emotional

An employer pension plan usually involves contributions by you and your

employer

Some pension plans allow portability, which enables you to carry earned benefits from one Blank______ plan to another's.

employers

The very first steps of retirement planning include:

evaluating your planned retirement income. analyzing your current assets and liabilities. estimating your spending needs and adjusting for inflation.

The minimum required distribution is based on life expectancy BLANK produced by the IRS.

factor

True or false: A person must work 20 years to be eligible for Social Security retirement benefits.

false

True or false: A plan that specifies the benefits the employee will receive at the normal retirement age is called a defined-contribution plan.

false

True or false: During retirement, Social Security payments are tax free.

false

True or false: It is mandatory to start saving a large amount very early because retirement will be expensive.

false

True or false: One of the reasons that Social Security is expected to have problems in the future is the shorter life expectancy of Americans.

false

rue or false: An Individual Retirement Account (IRA) is an account where the employer deposits money for each individual employee.

false

Which of the following are reasons why many believe that the Social Security system will have financial problems in the years to come?

flood of baby boomers retiring more workers retiring early longer life expectancies less workers supporting retirees

If you work for a nonprofit or the government, you can take advantage of tax-sheltered plans, such as Section 457 and 403(b) plans, which lower your taxable BLANK by the amount of your annual contribution.

income

The first step in stretching your retirement earnings is make sure you are receiving all the BLANK you are entitled to.

income

During retirement BLANK will probably cause your cost of living to increase.

inflation

During retirement, BLANK will probably cause your cost of living to increase.

inflation

With a Roth IRA, contributions are not tax deductible, but BLANK accumulate tax free.

interest

The amount of your required minimum distribution from your BLANK retirement plan (starting at age 70.5) is based on your expectancy at the time of the distribution.

life

Which of the following investments are prohibited from being held in an IRA?

life insurance securities bought on margin collectibles precious metals

The potential BLANK due to inflation is what makes planning ahead so important.

loss of buying power

Upon retirement, you might consider selling your house and buying a smaller, more easily maintained house to decrease your

maintenance costs

Expenses that may increase as a result of retirement include recreation, health insurance, and BLANK care

medical

Which of the following expenses will probably be incurred during retirement?

medical expenses

A defined-contribution plan in which your employer promises to set aside a certain amount for you each year is called a:

money-purchase pension plan.

Financial planning for retirement involves assessing your post retirement BLANK and income and plugging any BLANK you find.

needs gaps

A spousal IRA lets you contribute up to the same amount as you can to your own IRA for your Blank______ spouse if you file a joint tax return.

nonworking

Housing needs often change as people grow

older

Sources of retirement income include Social Security, other public BLANK plans, employer pension plans, personal retirement plans, and BLANK

pension annuities

It is quite possible that Social Security and private BLANK may not be enough to support your desired standard of living during retirement and that BLANK will diminish your purchasing power.

pensions, inflation

Which of the following types of people should be investing in an annuity?

people who have fully funded all other retirement options and still have retirement income needs

Emotional planning for retirement involves identifying your BLANK goals and setting out to BLANK those goals.

personal meet

Financial planning for retirement involves assessing your post-retirement needs and income and:

plugging any gaps you find.

A feature called plan BLANK allows you to carry earned benefits from one employer's pension plan to another when you change jobs. This is a one-word answer.

portability

Two strategies with regards to life insurance that may be employed to make retirement affordable involve drawing on the cash value and reducing the BLANK payments by reducing the BLANK value

premium face

Reducing the face value of your life insurance will reduce your

premiums

If you pay off your mortgage before retirement, you won't have that expense when you retire, but housing costs such as BLANK taxes and BLANK could be higher as a result of inflation.

property insurance

With a money- BLANK pension plan, the employer promises to set aside a certain amount of money for you each year.

purchase

The expenses that may increase as a result of retirement include:

recreation medical costs health insurance

In a stock bonus plan, your employer's contribution is used to buy stock in your company, which is held until you BLANK

retire

Also called an equity conversion, a BLANK annuity mortgage involves using the home as collateral to buy an annuity for the borrower from a life insurance company that will provide current income.

reverse

The IRA that has contributions that are not tax deductible is a

roth ira

From the list below, select those investments that can be held in an IRA.

savings accounts bonds U.S. minted gold and silver coins real estate certificates of deposit annuities stocks

An SEP-IRA is the simplest type of retirement plan if you are fully or partially Blank______.

self-employed

Emotional planning for retirement involves:

setting personal goals and setting out to meet those goals.

To stay within your income, you may also need to make some changes in your BLANK plans.

spending

With a BLANK bonus plan, your employer's contribution is used to buy shares of your employer's stock, which is held in BLANK until you retire.

stock trust

Ways retirees can uncover hidden costs before moving include:

talk to retirees and other local residents. call the local chamber of commerce. contact the province's tax department.

One of the biggest traps to avoid when considering retirement housing is to avoid hidden

taxes

A rollover IRA is a(n) ______ IRA that accepts distributions from a retirement plan or from another ________.

traditional ira

According to the text, the expenses that may be lower or eliminated during retirement include (found in discussion of retirement living expenses):

transportation expenses. federal income taxes. clothing.

True or false: A Roth IRA may be better for you than a traditional IRA depending on your anticipated tax bracket.

true

True or false: Retirement planning includes two components: emotional and financial.

true

True or false: Social Security provides income for retirement, disability, and survivors.

true

True or false: Sources of income for many retirees are Social Security, other public pension plans, employer pension plans, personal retirement plans, and annuities.

true

True or false: The contributions and earnings of an employer-sponsored pension plan accumulate tax free until you withdraw them.

true

True or false: The use of an emergency fund during retirement is for unexpected situations that arise.

true

True or false: Typical retiree housing considerations include cost of maintenance, taxes, transportation, and proximity to shopping and entertainment.

true

True or false: Under a defined-benefit plan, the plan's actuary determines the annual employer contribution.

true

True or false: When researching a retirement location, factors such as year-round climate, available transportation, and taxes should be considered to determine what you will give up and what you will gain.

true

An IRA entails the establishment of a BLANK account.

trust

Private pensions BLANK, so you should ask questions about your employer's plan.

vary

Your right to at least part of the benefits accrued under a pension plan is called

vesting

The two most important initial questions to ask about a private pension plan are:

what will be the benefits? when do I become eligible for pension benefits?

A Roth IRA may be better for you than a traditional IRA if you are saving for your first home or retirement at age 59.5, as the BLANK can be made tax free and without penalty.

withdrawals

To get the benefits of the power of compounding, you should begin saving for retirement while you are still BLANK

young

The increase in Social Security benefits if you retire at an age greater than 65 can best be summarized as:

your benefit will increase by a quarter of 1% for each month past age 65 that you delay retirement up to age 70.