Personal Finance- Chapter 19
individuals must earn
40 credits to qualify for social security
Ezra works for a firm that offers a 100% match up to 3% of his salary on retirement contributions. How much will Ezra accumulate in 20 years if he contributes 3% of his salary of $102,000 per year assuming his account earns a 7% annual return?
Amount contributed = 102,000*3% = 3,060 Contributed by employer = $3,060 Total amount per year = $6,120 Amount accumulated in 20 years Amount*[{(1+Interest Rate)n-1}/Interest Rate] = 6,120*[{(1.07)^20-1}/0.07] = $250892.4
Thomas earns $49,500 per year. What retirement plan Thomas should consider under the following circumstances? a. He works for a large private firm. b. He works at a university. c. He owns a small firm with employees.
He works for a large private firm. Which is the best selection? Thomas should consider the 401(k) plan. He works at a university. Which is the best selection? Thomas should consider the 403(b) plan. he owns a small firm with employees. Which is the best selection? Thomas should consider the Simplified Employee Pension Plan (SEP) or the Savings Incentive Match Plan for Employees plan (SIMPLE).
How does a Roth 401(k) differ from a traditional 401(k)?
Income contributed to a Roth 401(k) is taxed at the contributor's marginal tax rate at the time of the contribution. The advantage of a Roth 401(k) is that funds are not taxed when withdrawn from the account, as they are when withdrawn from a traditional 401(k) account. In essence, the Roth 401(k) plan allows contributors to avoid paying taxes on the interest or capital gains generated by the account.
Which of the following characteristics is unique to a 401(k) plan?
It is a defined-contribution plan established by non profit organizations for their employees.
Discuss health care concerns in retirement
Many people fail to consider the cost of health care in retirement. Medicare is available at age 65 but it does not cover all costs. Over many years of retirement, these costs are significant. Assuming that a couple will live to their mid-80s, they might pay a total of $250,000 or more for health insurance premiums and other health care expenses during retirement.
Which of the following is not true of profit-sharing and employee stock ownership (ESOP) plans?
The employer can contribute a portfolio of diversified stock to the employee's retirement account.
Factors you should consider when deciding how to invest in your defined-contribution retirement fund include:
The length of time prior to when you intend to retire is important since the longer your time horizon the more risk you can take. As you approach your retirement date you can begin switching your investments to bonds or income stocks that will give you greater preservation of capital. You should also consider your individual tolerance for risk.
Lisa and Mark married at age 20. Each year until their 35th birthdays, they put $3,200 into their traditional IRAs. By age 35, they had bought a home and started a family. Although they continued to make contributions to their employer-sponsored retirement plans, they made no more contributions to their IRAs. If they receive an average annual return of 6%, how much will they have in their IRAs by age 65? What was their total investment?
USE FINANCIAL CALC If they receive an average annual return of 6%, the amount they will have in their IRAs by age 65 is 6= I 15=N 0=PV 3200=PMT CPT=FV =74,483 total investment was $48000= 3200 x 15
Why is it important to take advantage of an employer match?
You should always take advantage of the employer match since it will give you an immediate 100% return on your matched contributions.
social security is
a federal program that taxes individuals while they are working and provides them income during retirement
An employer match is:
a retirement match, offered by some employers, to give you incentive to begin saving for retirement. Typical matches 100% of 3% to 5% of your annual salary.
Nancy and Al have been planning their retirement since they married in their early 20s. In their mid-40s and with two children in college, they are finding it harder to save and fear they will fall short of the savings needed to reach their retirement goals. Nancy's rich Uncle Charlie assures her she has nothing to worry about. "You are my favorite niece and because you are so good to me, I am leaving my entire estate to you," he said. Nancy and Al begin devoting considerable time and energy to making Uncle Charlie's golden years as enjoyable as possible. Factoring in their anticipated inheritance, Nancy and Al look forward to a comfortable retirement. Ten years later, Uncle Charlie passes away. At the reading of his will, Nancy is surprised to learn that Uncle Charlie made the same comment to her four cousins. As the will is read, all five of the cousins are horrified to find that Uncle Charlie left his entire estate, valued at over $2 million, to a home for stray cats. a. Fully discuss your views on the ethics of Uncle Charlie's actions. b. Looking at Nancy and Al's experience, what lessons about retirement planning can be learned?
a. Uncle Charlie deceived Nancy and Al but he may also have had dementia. b. Looking at Nancy and Al's experience, what lessons about retirement planning can be learned? When planning for retirement, you should only factor in those elements over which you have at least some control.
if an employee is fully vested
all money reserved for the employee each year will be maintained in the retirement account
a variable annuity
allows the investor to choose among various investment vehicles with various returns
Which of the following is a correct consideration when planning for retirement?
assessing your retirement contributions based on your personal needs, assessing your retirement contributions based on the number of years you will live in retirement
social security benefits
can be taxed for retirees with high income
if an employee is vested he
can claim a portion of the retirement money that has been reserved for him.
an annuity is a
financial contract that provides annual payments for a specified period or for the annuitant's life
the main disadvantages of annuities is the
high fees associated with them charged by the financial institution that sells and manages them
which of the following is not a component of an effective strategy for retirement planning investing
investing all your disposable income in a traditional savings account
social security is a source of income during retirement. usually is
is not enough to live on comfortably
Which of the following is a characteristic unique to a traditional IRA?
it saves on taxes in the year of investment
retirement accounts are beneficial than other investments that could be used for retirement because
of the tax benefits
Some employers are switching to this type of plan because they:
place more responsibility on the employee to contribute the money and decide how it is invested.
A defined-contribution plan:
specifies the guidelines under which you and/or your employer can contribute to your retirement account.
In need of extra cash, Troy and Lilly decide to withdraw $7,300 from their traditional IRA. They are both 40 years old. They are in a 24% marginal tax bracket. What will be the tax consequences of this withdrawal? (Note: Assume a penalty of 10% of the withdrawn funds.)
tax consequences= (amount of withdrawal x marginal tax rate)+ (amount of withdrawal x penalty tax rate)
one concern about the future of social security is
that the program will not be able to support retirees in the future
A defined-benefit plan guarantees
the employee a specific amount of income when he retires.
A benefit of a defined-contribution plan is that:
the money contributed by the employer is like extra compensation to the employee.
one factor that will not affect the amount of funds available to you at retirement is
the number of jobs you have worked
the amount of income that you receive from social security when you retire is dependent on
the number of years in which you earned income and your average level of income
It is important to begin retirement planning while you are young because:
the power of the time value of money allows you to accumulate far larger sums of money if you begin while you are young. Postponing saving and investing for retirement for just a few years significantly increases the size of the contributions needed to accumulate the same amount that you can amass with smaller contributions over longer time periods.
Barry has just become eligible for his employer-sponsored retirement plan. Barry is 35 and plans to retire at 65. Barry calculates that he can contribute $2,900 per year to his plan. Barry's employer will match this amount. If Barry can earn a return of 9% on his investment, how much will he have at retirement?
use financial calculator 9 =I 30=N 0=PV 5,800=PMT CPT=FV Solution $790,584
Which of the following is not a key retirement planning decision an individual must make?
whether you should finance your mortgage, where you will retire
in an employee sponsored retirement plan
you and/or your employer contribute money to a retirement account each pay period
your retirement age impacts the amount of social security benefits you will receive because
you can receive Social Security benefits starting at age 62 but the benefits will be reduced for every month that is prior to full retirement age. You only receive full benefits if you wait until you turn 67 for those born after 1960. Postponing retirement until your 70th birthday will increase your retirement benefits even more.
benefits can be received when
you retire. you survive the breadwinner of the household. you become disabled. All of the above.