FMSC Final
Baron is single, aged 55, and has an adjusted gross income in 2018 of $220,000. How much can he directly contribute to a Roth IRA in 2018?
$0 In 2018, only single individuals with adjusted gross incomes less than $120,000 may directly contribute to a Roth IRA.
Opening a 529 plan is most appropriate for
529 plan is an example of a college savings plan with the potential for tax-free growth. It is most beneficial for high-income people to fund a beneficiary's education at some point in the future.
Which of the following assets would be considered the MOST liquid?
A $20 bill
Sandy and Phil have the same income and base cost of living. But while Sandy tends to save, Phil ends each month with no more money than when he started. Perhaps Sandy feels a lower opportunity cost for saving because she is more oriented to
A person who is more future oriented is less likely to see saving money as a large opportunity cost.
Sophia is struggling to balance her bills and is considering canceling some of her insurance policies. Evaluate which of the following policies she might consider canceling first.
All these policies except the accident insurance cover a very severe risk. An injury that costs her up to $25,000 is relatively modest in severity and also not particularly likely. Among these choices, she should most consider canceling her accident insurance.
Which of the following is not a type of employer-sponsored defined contribution plan?
An IRA is a retirement savings account that is established outside of an employer.
Aheahe recently donated $20 million to a local children's non-profit hospital. Which of the following statements is correct concerning the gift?
Anyone who gives more than $17,000 (in 2023) to one person is obligated to file a gift tax return. Depending on the amount of cumulative taxable gifts, the gift giver may pay a gift tax. However, as a way to incentivize charitable giving, these rules do not apply if the gift is made to a charity.
Horace, an emergency-room surgeon, has an own occupation definition of long-term disability on his long-term disability insurance policy. If he is injured in a major car accident and loses his eyesight, which of the following is true?
Because Horace has an own occupation definition of long-term disability included in his insurance policy, he will be eligible to receive full long-term disability benefits. The reason is because he will no longer be able to do his same occupation as a surgeon. Even if he earns money doing another occupation, he will still qualify for long-term disability benefits. The amount he receives will depend on how much he had elected to purchase on his policy. It is typically recommended to purchase sufficient long-term disability insurance to cover 65% of your gross income.
Buck and Narong are each purchasing long-term care insurance. They're trying to balance the costs and benefits of a variety of riders. Based on the table below, who would benefit most from an inflation rider and a shorter elimination period? (buck is younger and has less savings)
Buck is younger and has fewer emergency savings. He would benefit most from an inflation rider (he's likely got a longer time to wait for coverage to start) and from a shorter elimination period (he'll need to cover less of his own care out of pocket).
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which accounts are deductible (traditional ira, roth, general account)
Contributions to a traditional IRA are deductible and reduce AGI on a dollar-for-dollar basis. Contributions to a Roth IRA or to a general investment account are not deductible.
Which of the following funds is likely to have the LOWEST management fee?
ETFs generally have lower fees than mutual funds, and passively managed funds have lower fees than actively managed funds.
Earnings from custodial IRA are
Earnings from custodial IRAs are tax deferred.
what is the elimination period?
Elimination period refers to the amount of time between the disability occurring and the insurance company paying the claim.
This year, Lemont never went to the doctor but still paid $3,000 for health expenses. This amount must be the sum of his
Even if Lemont never went to the doctor, he still had to pay premiums to keep his health insurance coverage active.
Safety-In-Numbers is an insurance company that has been struggling lately. They hire you as a consultant to help understand what's wrong. Which of the following could explain why the company is struggling?
Insurance companies make a profit when many people purchase policies and relatively few make claims. Moreover, insurance companies invest their customers' premiums to increase the available cash reserves, so if these investments perform poorly, then the insurance company will struggle to make a profit. A breakdown of any of these factors might explain why an insurance company is struggling.
Which of the following explains joint tenants with right of survivorship (JTWROS)?
Joint tenants with right of survivorship (JTWROS): You own the property equally with another person, and each of you has rights of survivorship. That is, when one owner dies, the other owner receives that person's interest in the property. The transfer is automatic.
Which of the following steps is not particularly important in help you reach your retirement goals?
Keys to Reaching Your Retirement Goals: Start saving early. Save at least 12% of your income. Automate your savings. Invest aggressively.
Russell has just learned that life expectancy is expected to increase substantially in the coming decades. Based on this knowledge, he's decided to purchase a long-term care insurance policy with a
Longer benefit period. A long-term care insurance policy with a longer benefit period can help protect against the "risk" of living longer.
Joy just received an email saying that her bank account has been compromised. A link in the email leads her to a website asking for her bank account number and password. This email is most likely an example of
Phishing schemes attempt to gain victims' user names and passwords from fraudulent emails and phone calls.
Kennedy's investment makes a 9.7% rate of return while the current inflation rate is 2.8%. What is Kennedy's real rate of return? Round to one decimal place.
Real rate of return = [(1 + nominal rate)/(1 + inflation rate)] − 1 = [(1 + .097)/(1 + .028)] − 1 = (1.097/1.028) − 1 = .067 x 100 = 6.7%.
Micah withdraws $50,000 from his regular IRA at the age of 68. He is in the 25% marginal tax bracket. How much money will he have remaining after paying taxes on the withdrawal?
Since Micah is in the 25% tax bracket, he will need to pay $12,500 in taxes and will keep the remaining $37,500. A simple formula that can be used is [PMT × (1 − tax rate)].$50,000 × (1 − 25%) = $37,500
Stanley is no longer able to feed himself but can otherwise perform all other activities of daily living (ADL). If he needs to hire someone to help him eat, will his long-term care insurance cover any associated expenses?
Stanley must be unable to perform at least two ADLs in order to receive long-term care benefits.
Which of the following represents ownership in a company?
Stock represents a pro-rated ownership in a company.
Stocks typically trade in a P/E range between 10 and 30. Growth-oriented investors purchase companies with relatively high P/E ratios.
Stocks typically trade in a P/E range between 10 and 30. Growth-oriented investors purchase companies with relatively high P/E ratios.
subjective risk
Subjective risk refers to your perception of the riskiness associated with a behavior or decision. If someone's subjective risk is too low, they might be ill-prepared for bad times.
Drake is 80 years old and has been retired for 15 years. His sole source of retirement income is the 4% distribution taken from his 401(k) retirement account. During the past 24 months, Drake's retirement portfolio has performed poorly, and he has experienced 2 years of negative returns. Which action should Drake take?
Take out a distribution smaller than 4%. Drake needs to take less money from his retirement account since he is experiencing poor investment performance. If he does not do this, he could run out of money before dying.
When Doug was single, he bought a house. Eventually, he married, and he and his spouse Judy lived in the house. Unfortunately, Doug was killed in a car accident, and Judy cannot afford the mortgage payments, which are in Doug's name. Now the lender is foreclosing on the house, which is forcing £Judy to move. Once Doug and Judy married, they should have titled the house as
Tenancy by entirety provides greater protection from creditors. For example, one spouse cannot be forced to sell his or her interest in the property to satisfy the creditors of the other spouse.
The current stock price for Amazon is $2,004.36 per share. When you checked the quote, you also noticed that the Bid was 1,100 × $2,008.5 and the Ask was 1,200 × $2,010. What is the spread for Amazon?
The difference between what the dealer bought the stock for and what the dealer sold the stock for is called the spread. $2,010 bid price − $2,008.5 ask price = $1.5
Which of the following situations is likely to result in the greatest increase in a person's purchasing power?
The highest real return is 5% (7% − 2%). Hence, it will provide the highest increase in purchase power.
The least amount that an U.S. savings bond can be purchased is
The least amount that a U.S. savings bond can be purchased is $25.
George is 73 years old and retired. He recently told that he needs to withdraw $15,000 from his 401(k) to meet his required minimum distribution. George does not feel like he needs the money, so he decides to postpone the withdrawal. Which of the following describes the taxable consequence of his decision?
There is a 50% tax on undistributed required minimum distributions amounts. George will owe $7,500 in taxes, which is 50% for $15,000.
dedicated savings account
it would act like a CD that takes additional deposits each month
If Emma buys a $100 I bond on January 1st of this year with fixed interest rate base of 1%, how much interest income will she be credited by December 31st?
there is not enough information to answer this question
Max has monetary assets that total $1,500 and monthly living expenses that total $2,000. His emergency fund ratio is
$1,500 monetary assets/$2,000 monthly living expenses = 0.75 emergency fund ratio.
Chey works for a company with a retirement plan that offers 100% matching up to an annual amount of $2,500. Chey contributes $2,000 to her retirement plan this year. How much will the employer match?
$2,000, since the employer matches Chey's contribution and it was less than $2,500.
Which of the following companies would be known as a growth stock during the time period described?
A growth stock has a high revenue growth rate and needs all its earnings to fuel that growth. Hence, it would not pay any dividends and would have a voracious appetite for additional capital. Income stocks are companies that typically are in mature industries and use cash flows to return cash to their shareholders via dividends. Income stocks generate stable cash flows that cannot be used for further investment in their mature business.
Pradeep is trying to find the best interest rates. When he compares U.S. savings bonds to savings accounts, he'll find savings bonds offer
A higher interest rate. The interest paid on U.S. savings bond is usually higher compared to savings rates paid by banks and credit unions but is not generally twice as high.
Gretta has some minor surgery scheduled in a few months. Before the surgery, she has decided to write a living will. Which of the following people would be acceptable as witnesses to sign the document?
A living will must be witnessed by someone who are not related to you or by anyone who stands to gain financially by your death. A witness cannot be someone who would need to pay your medical expenses, nor can a witness be your doctor.
In the past week, Barbara has become disabled and cannot work. She has a long-term disability policy with an elimination period of 12 months. How will this elimination period affect her coverage?
A long-term disability insurance policy's elimination period is the amount of time that must pass for someone who is disabled to start collecting benefits. Barbara will not receive any disability benefits for the next 12 months.
Mia's gross income is $50,000 per year. According to commonly recommended guidelines, how much long-term disability insurance coverage should she purchase?
A simple rule to help you determine how much disability insurance you need is to take your gross income and multiply it by 65%. $50,000 × 0.65 = $32,500
Which statement accurately matches each goal with the most appropriate account?
Among these options, checking accounts are best for paying bills, savings accounts for emergencies, and dedicated savings accounts for a home down payment fund.
Lance is planning to retire in 6 months. He usually saves 20% of his income for retirement, pays payroll taxes of 7.65%, spends 15% of his income on work-related expenses, and allocates 10% of his income on groceries. What would be considered an appropriate wage replacement ratio for Lance?
An appropriate wage replacement ratio for Lance is 57.35% (100 − 20 − 7.65 − 15). In retirement, Lance will no longer be saving for retirement, and he will no longer pay payroll taxes and have work-related expenses. Lance will still have to purchase groceries in retirement.
Solomon is 30-year-old thinking about his planned retirement at age 70. He has recently won a lottery of $100,000 and is trying to decide whether to save it now or spend it on vacations and fun things like a jet ski. If he decides to invest it at an average of 7.2%, predict how much the account will be worth by retirement?
At a 7.2% rate of return, his investment will double approximately every 10 years. Given that he has 40 years to go, he will experience four doubling periods. $100,000 × 24 = $100,000 × 2 × 2 × 2 × 2 = $1.6 million.
Kemi was very eager to own a home. She purchased a property she could barely afford and drained her entire emergency savings fund. Leoni, on the other hand, prefers to rent for her entire life. She plans on signing new annual leases for the rest of her life. Compare these two regarding their liquidity and inflation risks.
Because all of Kemi's money is in her house, she has no more liquid assets and therefore faces high liquidity risk. Leoni, on the other hand, is very susceptible to long-term rent inflation.
If severity of risk is low and the frequency of the risk event occurring is low, what should you do?
If severity of risk is low and the frequency of the risk event occurring is low, you should accept the risk.
Sarah and Joe were married for 15 years. During their marriage, Joe purchased a life insurance contract and named Sarah the beneficiary. Sarah and Joe got a divorce and now hate each other. Joe recently married Terry who is the love of his life, and he wishes to leave all his assets to her. Which of the following scenarios best describes what will happen to the life insurance benefits upon Joe's death?
Life insurance benefits will be distributed according to contract. Since Sarah is listed as the beneficiary, she will receive the benefits.
Which of the following lines correctly compares morale and moral hazards?
Morale hazards are generally legal, while moral hazards are generally illegal. Both tend to raise insurance costs. Morale hazards generally consistent of reckless or negligent behaviors, while moral hazards include lying and filing false claims.
Lavender has a substantial amount of money in her 401k retirement plan. To have these funds go directly to the people she desires to receive the funds upon her death, she should
Name them as beneficiaries. A 401k is an employer-sponsored retirement plan. By identifying beneficiaries, Lavender will guide the distribution of her 401k retirement plan according to her desire.
Like many Americans, the following four people do not have any emergency fund. In the event of an emergency, which of the following people is in the most trouble?
Saul is in the most trouble. People with low credit scores will have a difficult time finding low-cost debt to help pay for expenses. People with higher monthly living expenses will have trouble paying their bills and may risk foreclosure or eviction. Also, self-employed people have fewer protections such as sick time, vacation days, and (in some cases) disability or medical insurance. Saul, of course, has all of these problems.
Tammy received a $100,000 gift from her sister. Tammy plans to invest the money in shares of a no-load mutual fund that has an annual management fee of 1.12%. Similar funds at other financial institutions charge a load of 5.75%. How much of the $100,000 would be invested in shares of the no-load mutual fund?
Since you plan to invest in a no-load mutual fund no upfront fees will be taken from your investment. Hence, 100% or $100,000 would be invested.
Which investor is probably the best protected with their investments?
Thomas, who has an S&P 500 Index ETF and a bond market ETF through an established brokerage firm with SIPC. Diversification through multiple asset classes offers the best protection from unsystematic risk. Keeping assets held at a financial firm with SIPC offers protection from the custodian failing.
Phil needs $500,000 in life insurance coverage for the next 20 years. While he is currently healthy, he is already in his 50s. Of the following, which is the most affordable life insurance option for him over the next 20 years?
With level term insurance, Phil can lock in low rates for the next 20 years. The three cash-value policies would be approximately 10 times as expensive as term insurance.
You've suffered a financial emergency and need to pull some money from your Roth IRA to cover everything. How long will you have to wait to get your money?
Withdrawals from a Roth IRA take about 2 or 3 days to process. Depending on your other financial resources, that delay may be a problem.
Last minute airline tickets cost how much more?
You should expect to pay 50% more for last-minute airline tickets for emergency travel.
Pamela has carefully invested in a few small tech companies in the United States, a large manufacturing company from France, and two shipping companies (one from Canada and one from Germany). She is now looking to diversify her portfolio. Of the following, which single stock would help her diversify the most?
A Chinese construction company is both located in a nation and operates in an industry where she does not already have investments. Therefore, this company would help Pamela diversify more than the other options.
Which of the following refers to the highest price a buyer will pay to purchase a specified number of shares of a stock at a specific time?
A bid price refers to the highest price a buyer will pay to purchase a specified number of shares of a stock at a specific time.
Sam, age 22, who lives in a rural area, has just graduated college and is buying his first car. He needs to obtain a Personal Automobile Policy (PAP). Which of the following is true?
Being male will cause Sam's premiums to be higher, buying a cheaper car will usually make the premiums lower, and living in the country usually makes the premiums lower. The fact that he is under the age of 25 will cause his premiums to be higher.
What is the person called who is tasked with the responsibility of carrying out a will's directions and disposing of the deceased's property called?
Executor is the person (e.g., relative or attorney) or institution (e.g., trust company) tasked with the responsibility of carrying out a will's directions and disposing of the deceased's property.
Kelsey recently won the lottery. She received $500,000 which she placed in a savings account. She plans to spend the money on social issues important to her, but should she die before she manages to accomplish this, she has listed her brother as the person who should receive any remaining funds. This is known as
For a savings account, payable on death is used to transfer cash to someone else.
Samantha, who is single, worked a part-time job for several months this year, earning $3,600 in wages. She also received $6,000 this year from her ex-husband in the form of child support. She is 36 years old. What is the most she will be allowed to contribute to her Roth IRA this year?
The amount allowed is the lower of $7,500 or her earned income. The $6,000 in child support does not count as earned income. Since $3,600 < $7,500, she can only contribute $3,600.
Harpo sells 100 shares of stock in General Electric via a stockbroker. The last quote was $30.01 last trade, $29.98 bid and $30,00 ask. What price would she receive?
The bid price ($29.98) is the highest price a buyer will pay to purchase the stock, and the ask price ($30.00) is the lowest price at which a seller will sell the stock. The last trade is inconsequential to future orders, but reflects the market value of the shares.
Meghan is helping her parents understand a life insurance policy they bought 15 years ago. Neither of them can remember what kind of policy they bought, but they do have a document that outlines the policy's provisions. Complicating matters, they know they cannot afford to make next month's premium payment and are worried they will lose their policy. Based on the table below, what kind of policy do they have, and can they skip a month's payment?
Universal life insurance is a cash-value policy. Its cash value and death benefit are not guaranteed because of the policy's inherent flexibility. For example, within limits policy owners may skip premiums.
You expect Social Security will replace 20% of your income. Your average annual career income is $100,000. Since you plan to travel more frequently throughout your retirement years, you think you will need an 80% wage replacement rate in retirement. Even though a 4% withdrawal rate from your portfolio is a common guideline, you intend to withdraw 5% from your retirement savings annually. Approximately how much money will you need to have saved in today's dollars at retirement?
You expect that you will need 80% of your average income in retirement. Since Social Security will replace 20% of your income, you will only be responsible for 60% (80% − 20%). Given that you have an average career income of $100,000, you will be responsible for replacing $60,000 (60% × $100,000).Step 2: Use the following formula.𝐿𝑢𝑚𝑝 𝑠𝑢𝑚 𝑎𝑡 𝑟𝑒𝑡𝑖𝑟𝑒𝑚𝑒𝑛𝑡 =𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦 𝑛𝑒𝑒𝑑𝑒𝑑 𝑎𝑡 𝑟𝑒𝑡𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑤𝑖𝑡ℎ𝑑𝑟𝑎wa𝑙 𝑟𝑎𝑡𝑒Lump sum at retirement =Amount of money needed at retirementwithdrawal rate60,000/0.05 = $1,200,000
Apple, Inc. generated sales of $10 million. Its expenses totaled $6 million. Apple pays out all its Net Income as dividends. If you own 1% of Apple's stock and Apple has 20,000,000 shares of stock outstanding, what is your share of Apple's dividends in dollars?
$10,000,000 gross sales - $6,000,000 expenses = $4,000,000 net profit$4,000,000 net profit ÷ 20,000,000 total shares = $0.20 dividend per share20,000,000 total shares * 0.01 (1% of shares) = 200,000 shares owned200,000 shares owned * $0.20 dividend per share = $40,000 dividend
Malik has a health insurance plan with the following features: a $1,500 deductible, a $100 co-pay before deductible, and 20% coinsurance after deductible. If he goes to the doctor 5 times this year and the total charge was $500 per visit, what is his out-of-pocket cost?
$500. He will only owe five co-pays of $100 each (i.e., $500). He has not yet hit his deductible.
Ursula owns 100 shares of stock in Apple, Inc. Today shares of Apple are selling for $212.82. Apple recently paid an annual dividend of $9.58. What is Apple's dividend yield?
$9.58 annual dividend ÷ $212.52 current price per share = 0.045 or 4.5% dividend yield
Dexter is 17 years old and wants to purchase a car with the money he earned from his part-time job. He went to the bank to try and obtain a loan, but the bank would not loan him the money without an adult signing on the loan, as well. One valid reason an adult had to sign on the loan is
A minor is generally exempt from binding clauses in contracts, which means that anyone who has yet to reach the age of majority (18 years in most cases) can change his or her mind on a transaction or trade after the deal is done. Since Dexter is a minor, the bank would have to let him out of the loan if he changes his mind.
Liam is planning for the transfer of his assets upon his death. He would like to have the balance in his savings account transferred to his nephew. A straightforward way to accomplish this is to create a
A payable-on-death (POD) title is used on a bank account to transfer cash and assets to someone else.
Todd and Melvin are comparing their life insurance needs. Todd earns $60,000, has a stay-at-home spouse, two young children, and a $400,000 mortgage. Melvin, in contrast, earns $150,000 and has a spouse who earns $80,000 with no children nor mortgage. Compare their life insurance needs according to a complex needs analysis and the income multiplier method.
According to a complex needs analysis, Todd's life insurance needs will consider care for his children, his outstanding mortgage, and future income for his spouse. In contrast, a complex needs analysis may suggest Melvin doesn't need any life insurance. According to the income multiplier method, Todd will need $600,000 of coverage ($60,000 times 10) while Melvin will need $1.5 million ($150,000 times 10).
Antwan rents an apartment that has a fair market value of $175,000. He also owns a car worth $25,000, furniture worth $10,000, clothing with a $3,000 replacement value, and about $5,000 of other personal belongings. When deciding on a renter's insurance policy, which of the following policy maximums is most appropriate?
Antwan should purchase enough coverage for his furniture ($10,000), clothing ($3,000), and personal belongings ($5,000) for a total of $18,000. His car ($25,000) will be covered by his automobile insurance, while the apartment ($175,000) will be covered by a policy owned by the landlord.
Tracy is reading her monthly statement from her broker. Of the following, which piece of information should she expect to find on this statement?
Brokerage statements include account balances, asset allocation information, a summary of account activity, and other information relevant to the investments held with the broker.
This morning you purchased 100 shares of a company that trades on the Canadian Stock Exchange for $39 Canadian. At the time of the purchase, 1 Canadian dollar bought $0.75 U.S. dollars. However, by the end of the day, 1 Canadian dollar bought $0.77 U.S. dollars and the value of the stock was still $39 Canadian. This is an example of
Currency exchange rate risk occurs when the value of one currency gains or loses values relative to another currency.
Darius and Julian have both had $5,000 in medical bills this year. Now, flu season has hit; they're both sick and each is considering going to the hospital. Based on the following information about their health insurance plans, how much will each pay out-of-pocket for a $1,000 hospital visit?
Darius has hit his annual out-of-pocket maximum and will pay $0. Julian, on the other hand, has not yet hit his annual out-of-pocket maximum. He will pay a co-pay of $100, as well as, 20% of the remaining $900 equal to $180. Therefore, Julian's total out-of-pocket cost is $280.
stolen from house or from bank
Dimitri will not receive anything from the FDIC because his cash was at home. Andre and Rafael are protected up to $250,000 per account.
Trent and Joe, both in their 20s, have finished building an emergency fund and are ready to invest for the first time. Focusing their investment contributions on which of the following assets is most likely to result in them having a high net worth when they retire in 50 years?
Diversified stock funds. While U.S. savings bonds generally outperform savings accounts and CDs, they return much less than the average return of stocks. Stocks are generally recognized as a better option for long-term wealth accumulation.
Which line in the table correctly compares the tax treatment of dividends received in a general investment account, a Roth IRA, and a Traditional IRA?
Dividends are taxed when received in a general investment account. A benefit of a Roth or traditional IRA is that no tax is due when a dividend is received. Because qualified distributions from Roth IRAs are never taxed, these dividends are received tax-free. In contrast, traditional IRA qualified distributions are eventually subject to tax. Therefore, taxes on dividends are deferred.
Richie bought her house in 2006 before the financial crisis began in 2007. The house cost $400,000. Richie financed 90% of the purchase price. Due to the financial crisis, the company she worked for went out of business, so she lost her job. She could no longer afford to pay her mortgage, and to make things even worse, the value of her house dropped to below the balance she still owed on her mortgage. Since she could no longer make the mortgage payment, the bank seized her house and sold it for less than what she owed on the mortgage. As a result, Richie had to pay the difference. The situation Richie faced was a(n)
Foreclosure. When individuals go through foreclosure, they lose their home to the lender (often a bank) and any equity in the home and they continue to pay the difference between what was owed and the eventual selling price the bank is able to receive for the property.
most in saving and brokerage account
If all three have identical incomes and family support, Li Wei must have saved the most and, therefore, had the greatest opportunity costs. Without knowing their monthly living expenses, you cannot make statements about their emergency fund ratios.
Susana opened an UTMA account for the benefit of her daughter Michelle. Three years later, Michelle was injured in a fire and Susana pulled $10,000 from the UTMA account for medical expenses. The consequence of this withdrawal is
If a custodian uses money from an UTMA account for the benefit of the beneficiary, there is no penalty. Taxes would have been paid previously, when earnings were received.
Brianna opened an UTMA account for the benefit of her daughter Imani. Three years later, Brianna's art studio was damaged in a fire and she pulled $10,000 from the UTMA account for repairs. The consequence of this withdrawal is
If a custodian were to steal money from an account or make hasty decisions concerning the assets, the custodian could be held liable. They could even face legal consequences.
Emir is a "do-it-yourself" kind of person. He keeps a set of tools handy, regularly maintains and repairs his home, and keeps a separate fund for emergencies (just in case he can't "do it himself"). All of these practices are examples of
Making repairs and keeping an emergency fund are examples of self-insurance, also known as accepting risk.
After a meeting with her financial advisor, Mary Kelly learned her risk-management strategies are totally off. Which of the following changes would be advisable according to the risk matrix?
Mary Kelly should stop accepting and start transferring her risk of cancer. Cancer treatment is extremely expensive, and she would need health insurance to meet these costs. If she tries to accept this risk by funding her treatment with her savings, she would quickly be bankrupt.
Which of the following factors is important when you're attempting to decide upon your long-term asset allocation?
Risk tolerance. The asset allocation that works best for you at any given point in your lifetime financial journey will depend largely on your time horizon and your ability to tolerate risk.
While hosting a dinner party, one of Opal's guests tripped down the stairs and was seriously injured. The guest is now suing Opal for the cost of her $75,000 medical bills. Ignoring any deductible and assuming Opal has standard insurance coverages, which of the following is correct in this situation?
Standard liability coverage for homeowner's insurance is $100,000. Her insurer will likely pay the entire amount.
The earliest age someone may claim a Social Security retirement benefit is
The earliest someone can claim Social Security retirement is 62. However, these benefits are reduced.
Portia has monthly living expenses of $1,000. According to the emergency fund formula, her emergency fund should be
The emergency fund formula says Portia should cover between 3 and 6 months of her living expenses. $1,000 monthly living expenses × 3 to 6 months = $1,000 × 3 = $3,000; $1,000 × 6 = $6,000. Therefore, Portia's emergency fund should be from $3,000 to $6,000.
Which of the following lines correctly compares an HSA with an FSA?
The entire balance of a health savings account may be rolled over each year. In contrast, only $500 of the balance in a flex spending account may be rolled over.
It's open enrollment for employee benefits, and Erika is trying to pick a health insurance plan. She thinks a health savings account is a good fit for her financial goals. To be eligible for a health savings account, she must also select a health insurance plan with a high
The use of HSAs is limited to those with high deductible health plans and certain marketplace plans.
Armon is 72 years old and does not want to take distributions from his retirement account since he is financially independent. His required minimum distribution is $2,300 per month. If he fails to take the monthly distributions next year, what is the amount of tax he will pay on the undistributed minimum distributions?
There is a 50% tax on undistributed minimum distributions. Therefore, Armon would owe ($2,300 × 12 months) × 50% = $13,800.
Which of the following people would be the MOST likely to have an employer-sponsored retirement plan?
Those working part time, as an independent contractor, or for a small employer are less likely to have an employer-sponsored plan.
Which of the following people would qualify for the Retirement Saver's credit?
To be eligible for the Retirement Saver's credit, you must be older than 18 years of age, have an adjusted gross income of less than $36,500 (in 2023), and not be a full-time student to qualify for the Retirement Saver's credit.
Jayesh makes $100,000 a year as a high-rise repairman (a high-risk job). Moreover, he and his family suffer from a variety of major health issues. According to the guidelines from the text, how much should Jayesh expect to pay for annual long-term disability insurance premiums?
To calculate the coverage needed take Jayesh's salary of $100,000 × 0.65 (65%) = $65,000. The annual cost would be 4% of that ($65,000 × 0.04 = $2,600).
Micala is debating between two long-term care insurance policies. Policy A has a 90-day elimination period and annual premiums of $2,500. Policy B has a 180-day elimination period and annual premiums of $2,000. Micala expects the daily cost of long-term care to be $195. If she currently has no emergency savings, which policy do you recommend and why?
While it's true that Policy B's lower premiums will help Micala grow her emergency fund, it will take over 30 years of saving to offset the $17,550 difference in coverage. Given her lack of any emergency fund, she is better served taking the more expensive Policy A.
Rudy and Ozlem want a cash-value life insurance policy. They are extremely risk averse and dislike volatility in their returns. Which of the following policies might be most aligned with their priorities?
Whole life insurance earns a fixed rate of return.
You expect Social Security will replace 30% of your income. Your average annual career income is $60,000. Since you plan to travel more frequently throughout your retirement years, you think you will need an 85% wage replacement rate. What percent of your income will you be responsible to replace?
With a wage replacement rate of 85%, you expect your expenses to decrease by 15% in retirement. Since social security will replace 30% of your income, you will be responsible for the remaining 55% (85% − 30% = 55%).
