Personal Finance Yerkes Spring 2019 Unit 2

If you contributed $9,000 to your 401k and $6,000 to your Roth IRA (in 2019), how much could you contribute to a traditional IRA in 2019? (lecture notes from IRA rules/details) $6,000 $13,000 $0 Can't determine

$0

Internet Article from Nerd Wallet - If you saved for retirement based on the averages stated in the article... ...you can make up for low savings by investing more aggressively. ...you'd likely be behind for retirement - just like most Americans. ...you'd be on track for retirement! ...everyone needs to save about double the numbers referenced.

...you'd likely be behind for retirement - just like most Americans.

For an individual life insurance policy, underwriting is required... 1 at issue 2 at claim Both Niether

1 at issue

We discussed the difference between "the vehicle" and "the driver" when referring to investments. An example of a "vehicle" would be... A CD Company Stock 529 College Education account A Mutual Fund

529 College Education account

Social Security can be taken as early as age ____ or as late as age ____. 62, 65 62, 70 65, 67 60, 67

62, 70

Which one of these features of insurance helps reduce small claims (and extra claims administration cost) while also placing some financial responsibility on the insured? Co-Insurance Deductible Premium Subrogation

Deductible

True or False, Insurance contracts are an appropriate tool to cover pure (chance of loss, no loss) and speculative (chance of loss, no loss, chance of gain) risks.

False

True or False: Bond A from the US government (high credit worthiness, low default risk) Bond B from small foreign government ( low credit worthiness, higher default risk) If maturity was the same for both bonds, you'd expect to receive a higher coupon (yield) from Bond A from the US government.

False

True or False: A benefit of your 401k is that you likely have more access if an early withdrawal or distribution is needed (compared to an IRA).

False

True or False: Actively managed funds generally have lower expenses than passively managed funds.

False

True or False: All health insurance plans have co-pay amounts for different types of care.

False

True or False: An insurance policy that is a "named-peril" policy covers all perils except for those on the exclusion list.

False

True or False: Book: Siegel states that you should always fully insure and choose reasonably low deductibles for home and auto insurance.

False

True or False: By diversifying investments you can drastically reduce systematic risk in your portfolio.

False

True or False: If you believe taxes will be higher in retirement (overall or specifically for you) then a traditional IRA/401k would be more advantageous.

False

True or False: In health insurance, your deductible is "per event" so your deductible might reset multiple times a year if you have differing health issues.

False

True or False: It is realistic to go from "high spending years" in your 50s to retire in your early 60s on 30-50% of your pre-retirement expenses.

False

True or False: When looking at actively managed mutual funds, one of the best ways to pick the best fund is to look at last year's returns and see which funds had the highest return - then just pick the top one!

False

Lecture: Which "retirement stage" generally has the lowest annual expenditures for retirees? Late Middle Expenses don't change Early

Middle

If you put a protective case on your cell phone, you'd be... Mitigating risk by reducing the frequency of loss. Mitigating risk by reducing the severity of loss. Transferring the risk of loss. Avoiding the risk of loss

Mitigating risk by reducing the severity of loss.

Trying to reduce the frequency and severity of a risk would be examples of what risk management technique? Mitigation Retention Transfer Avoidance

Mitigation

Identity theft would most likely be uncovered by... Shredding your personal documents Keeping secure passwords and email Monitoring your credit score Not using credit cards on the internet

Monitoring your credit score

You might view an equity investment that has a historical return of 10% differently when you know that the ______________ asset comparison is 6% instead of 2%... Risk-free Correlation Diversification Allocation

Risk-free

Which of the following does NOT have a required minimum distribution rule after age 70.5 Pension Traditional 401k Traditional IRA Roth IRA

Roth IRA

In the MMM blog article this week, Mr. MM gives a different view (his personal opinion) on insurance. What best describes his view? 1. Insurance is important so its best to be fully covered in all major areas. 2. Never do any insurance. 3. Self-insure by having a healthy balance in your savings/investment account. 4. Only buy insurance if you think you are going to file a claim

Self-insure by having a healthy balance in your savings/investment account.

When comparing two similar investments and their rates of return, what might be something to consider when judging the risk of the investments? Standard Deviation of Risk Dividends Risk-free rate of return Geographic region of the company

Standard Deviation of Risk

If you are in an accident and submit an insurance claim which results in a settlement and payment, you can't also personally sue the individual. This illustrates what principle of insurance? Indemnity Exemption Exclusion Subrogation

Subrogation

Bond interest and interest from your bank account are.. 1. Taxed only when you take the distribution in cash (at ordinary income tax rates). 2. Taxed only when you take the distribution in cash (at long term capital gain tax rates). 3. Taxed yearly at long term capital gain tax rates. 4. Taxed yearly at ordinary income tax rates.

Taxed yearly at ordinary income tax rates.

Which of the following is not a measure we use to describe equities (stocks)? Sector of the Market Term (# of years) Geographic Region Size of Company

Term (# of years)

If your willingness to tolerate risk is high (you are comfortable with risk) but your time frame (ability) to handle risk is very low (such as saving for a down payment on a house 18 months from now); you should probably... You could go either way. There isn't enough information to make an informed decision. Invest conservatively Invest aggressively

Invest conservatively

True or False: For a disability policy, "any occupation" is a "better" definition of disability than "own occupation."

True

True or False: Having lots of different stocks in your portfolio can minimize risk while still achieving a meaningful rate of return.

True

True or False: If you have to go through your primary care doctor in order to receive a referral to an in-network specialist, you likely have an HMO insurance plan.

True

True or False: The "double edge sword of retirement" (as described in class) is the fact that every year early you plan to retire is one less year to save and one more year to spend.

True

True or False: The best strategy for reducing market timing risk is to "dollar cost average" your contributions in to the investments.

True

True or False: The main benefit to an employer 401k (compared to an IRA) would be the "company match" or profit sharing contribution.

True

True or False: You could have a "good quality" investment (such as a high performing stock) but it may be the "wrong" choice for your personal portfolio due to suitability (such as time frame or liquidity needs).

True

True or false: Life insurance death proceeds are generally income tax free.

True

We sometimes categorize an equity based on its "sector..." All of the following except __________ are examples of different sectors. domestic healthcare industrial utilities

domestic

Assume I bought a stock for $15/share and it paid NO dividends. If I still held the stock 5 years later and it was worth $20/share I'd... have $5/share of unrealized long term gain have paid ordinary income tax yearly on the gain. have $5/share of unrealized short term gain have $5/share of realized long term gain

have $5/share of unrealized long term gain

Based on class lecture, we discuss that Social Security provides _____ income in retirement and it is _____________ to count on it as an income source. minimal (0-10%), crazy most (80-100%), important some (20-60%), reasonable.

some (20-60%), reasonable.

Assume you've already met your deductible and your OoPM (out of pocket maximum) is $2,000 higher than your deductible, and your co-insurance is 30%. You get a bill for $4,000 from a medical provider - how much do you have to pay? $0 $2,400 $2,000 $1,200

$1,200

The market is open from 9:00-4:30 EST. You want to buy a specific ETF. The opening price is $10.00, the closing price is $12.00. When you purchased it at 10:45am the price was currently $11.30. What price is your actual buying price for this investment? Can't determine based on the information given. $10.00 $11.30 $12.00

$11.30

If you had an accident and became disabled for 24 months (before returning to work); how much would your long term disability contract pay out (given the following terms)? $3,000/mo benefit 6 month elimination period 10yr benefit period $36,000 $72,000 $18,000 $54,000

$54,000

If you have homeowner's insurance with Structure Coverage of $200,000 (Part A); if your detached garage burnt down and it cost $50,000, how much would your home owner's insurance cover? $50,000 $30,000 $0 $20,000

$20,000

If you get into a car accident and are sued by the 2 people in the other car, what would be the maximum payment if your liability coverage was listed as $100,000/$300,000/$50,000? $300,000 $200,000 $50,000 $100,000

$200,000

If you are married and both about to claim social security at FRA (full retirement age) - answer the following question... If your benefit is scheduled to be $900/mo and your spouses' benefit is scheduled to be $2,100/mo, how much TOTAL monthly benefit will you claim given benefit claim rules and spousal benefit rules? $2,100 $3,900 $3,150 $3,000

$3,150

Lecture/Blog: MMM. If you expect social security to provide $1,500/mo and your living expenses going into retirement are expected to be $3,000/mo total; how much do you need to have saved based on "the 4% rule" math? $900,000 $37,500 $450,000 $75,000

$450,000

Your first year of employment you make $50,000 and you contributed 10% to your 401k and your employer matched 50% of the first 6%. You terminate employment the next day and you were NOT vested (0%) in the plan - how much is your account worth? $3,000 $8,000 $0 $5,000

$5,000

Fraudulent purchases on your credit card are limited to expose you to $_____ per charge. Varies depending on credit card company $200 $0 $50

$50

As discussed in class, Roth IRAs have some unique access provisions. If you contributed $5,000/yr for 10yrs and the account (with interest) was valued at $70,000; how much could you access penalty tax free and federal/state tax free if you are 45 years of age? $0 $70,000 $50,000 $20,000

$50,000

If a disability policy pays out $2,000/mo maximum, has a 5yr benefit period, and a 90 day elimination period; how much would be paid out if a person was injured and stopped working for 7 months? (and then returned to work $0 $12,000 $8,000 $14,00

$8,000

The market is open from 9:00-4:30 EST. You want to buy a specific Mutual Fund. The opening price is $8.00, the closing price is $9.00. When you purchased it at 10:45am the price was currently $9.05. What price is your actual buying price for this investment? $9.05 $9.00 $8.00 Can't determine

$9.00

Wearing a seatbelt when you drive would... Reduce the severity of the risk Avoid the risk Reduce the frequency the risk Transfer the risk

Reduce the severity of the risk

A pension would have which of the following characteristics? 1.Fixed monthly income in retirement 2.Flexibility for larger purchases 3. Set formula to determine payments 4. Investment options 5. Ability to leave to heirs 1, 3 2, 4, 5 1, 2, 3 All of the above

1, 3

Which of the following types of life insurance would be most appropriate to cover your family specifically for the mortgage debt on your home. A 30 year level term policy. A whole life policy. A universal life policy. None of the above would be appropriate.

A 30 year level term policy.

Which of the following best describes an "index mutual fund" (or an index ETF)? A pooled investment fund that is actively managed by a professional with the goal of outperforming its related index. A way of categorizing the names of companies in a pooled investment. A group of stocks in a pooled investment that directly matches a benchmark index in its composition. The top 500 US domestic companies.

A group of stocks in a pooled investment that directly matches a benchmark index in its composition.

If you gave Ford Motor Company $1,000 and they promised to pay you income of 5% each year and give you your $1,000 back in November 2038, you'd have purchased: A short term government bond Company stock A long term corporate domestic bond A mid term corporate international bond

A long term corporate domestic bond

Which of the following would be an example of unsystematic risk? Interest rates rise domestically which affects ABC Company's future borrowing capabilities. Recent tax law changes affecting all US companies positively change the way ABC Company's current cash flow. Based on some negative political world news, the market drops affecting ABC Company's stock price. ABC Company has negative cash flow and defaults on some notes.

ABC Company has negative cash flow and defaults on some notes.

Which of the following is NOT an advantage of a 401k? (compared to an IRA) Higher contribution limits. No income limitations Potential ability to take a loan against the account. Access to different platforms and selection of funds.

Access to different platforms and selection of funds.

Insurance contracts are unequal in exchange and based on chance of risk. What is this called? Aleatory Contract Principle of Indemnity Principle of Subrogation Unilateral Contract

Aleatory Contract

The percentage of your portfolio in equities/fixed income (or stocks/bonds) is known as your... Asset Allocation Risk Tolerance Asset Classes Diversification

Asset Allocation

Based on "rule of thumb" advice in one of the you tube videos and personal advice provided in the lecture, which of the following order typically makes the most sense for making retirement contributions: A. Contribute to Roth IRA B. Contribute to 401k up to company match C. Contribute to 401k above company match. A, B, C B, A, C B, C, A

B, A, C

Rebalancing your portfolio automatically forces you to... Buy low, sell high Neither of these. Sell low, buy high

Buy low, sell high

In home insurance, which detail prevents a consumer from under-insuring their property (and expecting the insurance company to fully cover a smaller claim)... Indemnity Co-Insurance Clause Deductible Subrogation

Co-Insurance Clause

If you make $100,000 and put $10,000 in your retirement account and only claim $90,000 for income that year you could determine that you've... Contributed $10,000 to a Roth 401k Contributed $10,000 to a traditional 401k Can't determine based on info provided.

Contributed $10,000 to a traditional 401k

Which of the following aspects of retirement planning will you have the least control over? Expenses Asset Allocation Inflation Retirement date

Inflation

Lecture: Which risk corresponds with the following statement: "I'm worried in retirement that groceries and gas will cost more than they do now..." Market Volatility Risk Withdrawal Risk Inflation Risk Longevity Risk

Inflation Risk

Reading through the book this week, you might notice that Siegel is somewhat opinionated on investment advice (he had a bad experience investing - refer back to P51). Based on the reading this week (and last week), and what you've learned in class, what would you say both Siegel and I (through lecturing) agree on? Active managers and having an advisor always adds value and produces positive returns. Keep it simple - investing can be really complex... A good way to start might be a couple/few index (passive) funds. It is important to time the stock market. Keep your funds in cash and when the market drops, buy in! There is great value in both active and passive management and based on your situation you may want to pay for an advisor.

Keep it simple - investing can be really complex... A good way to start might be a couple/few index (passive) funds.

White Paper on retirement planning (and class lecture): According to the paper, if you are a married there is a 50% chance that if married, one of the two will live beyond the age of 94. Which risk does this highlight (discussed in lecture)? Inflation Health Longevity Market

Longevity

Insurance is a transfer technique best for... Low Frequency, Low Severity Risks Low Frequency, High Severity Risks High Frequency, High Severity Risks High Frequency, Low Severity Risks

Low Frequency, High Severity Risks

Lecture: Social Security typically "replaces" more pre-retirement income (as a percentage) for... High Income Earners Lower Income Earners Benefit is the same for everyone Middler Income Earners

Lower Income Earners

BOOK: Siegel. Siegel believes you are best off to... 1. Not have an advisor and just invest in actively managed funds 2. Not have an advisor and just invest in a few index funds 3. Have an advisor and invest in actively managed mutual funds 4. Have an advisor and invest in a few index funds

Not have an advisor and just invest in a few index funds

Blog MMM. In the satirical article, Early Retirement is an Impossible Dream, which of the following is keeping the average American back from achieving financial freedom? Low rates of return and risky investment markets. lack of personal education material available to make informed decisions. Personal responsibility and a lack of spirit. Government policies and looming Social Security concerns

Personal responsibility and a lack of spirit.

Blog MMM: The Shockingly Simple Math Behind Early Retirement. Which of these is the most important factor in being able to retire early? Increase your income. Reduce your spending rate. Increase your rate of return.

Reduce your spending rate.

Which part of the auto insurance policy is "compulsory" in most states? Part A Part B Part C Part D

Part A

Scenario: I can get a new bond from a company with a 10yr maturity and and a 5% yield (for par value) or I can buy an existing bond (from the same company) with a 10yr maturity and a 4% yield... Would I pay the same, more, or less for the existing bond (compared to the new bond)... and what risk does this represent when investing in fixed income? 1. Pay more for the existing bond, illustrates "credit/default risk" of fixed income. 2. Pay more for the existing bond, illustrates "interest rate risk" of fixed income. 3. Pay less for the existing bond, illustrates "interest rate risk" of fixed income. 4. Pay less for the existing bond, illustrates "credit/default risk" of fixed income.

Pay less for the existing bond, illustrates "interest rate risk" of fixed income.

Two investments that perform similarly to each other, even though one may be more/less risky than the other, would be said to be _____________? (Another way of saying this is that when one is up, the other is up, when one is down, the other is down; in similar fashion...) Positively Correlated Negatively Correlated Diverse No Correlation

Positively Correlated

Which of the following MUST be provided to consumers who purchase mutual funds and ETFs so they can find out details and make informed decisions... Prospectus Company financial information Website access Index Comparison

Prospectus

If you are a victim of identity theft, going to www.identitytheft.gov will... 1. Provide you with personal action steps in dealing with identity theft yourself. 2. Provide referrals to 3rd party companies who will handle your identity theft case. 3. Take on your case and reimburse you fully so you don't have to deal with the details.

Provide you with personal action steps in dealing with identity theft yourself.

Capital gain tax rates only apply to... Realized, long term gains Unrealized, long term gains Realized, short term gains Unrealized, short term gains

Realized, long term gains

Pick all that apply: Which of the following would be a "hazard" when describing risk? Heart attack Smoking Cigarettes House Fire Flooding Driving excessively fast Traffic Accident

Smoking Cigarettes Driving excessively fast

Lecture/Blog: MMM. MMM describes "the shockingly simple math behind early retirement" and we discussed in class some of the same principles. While some of these principles about "savings rate" may be true, which one is the MOST IMPORTANT? Spend less during your working years so you are used to lower expenses in retirement. You'll need to make a competitive rate of return in the market. You'll need low cost index funds in order to retire. Have more money saved for retirement.

Spend less during your working years so you are used to lower expenses in retirement.