Module 12 Questions and Answers

Suppose that you have estimated​ that, to provide for your retirement​ income, you will need​ $2,250,000 on deposit in your retirement account when you retire. You believe that you will earn an average of​ 11% on your retirement investments until you retire in 35 years. What must your annual deposits be to accumulate this​ total?

$6,586.85 FV= $2,250,000 I/Y= 11% N= 35 years PV= 0 PMT=?

To be eligible for Social Security​ benefits, you receive one credit for every​ $1,200 in wages that you​ earn, up to 4 credits per year. How many total credits do you need to qualify for​ benefits?

40

A(n) ________ is a tax-deferred retirement plan that is essentially the same as a​ 401(k) plan, except that it is aimed at employees of schools and charitable organizations.

403(b)

Social Security is a mandatory insurance program that provides a base level of protection for all of the following occurrences except one. Choose that one A. Job loss B. Disability C. Health problems D. Retirement E. Death

A. Job Loss

Rihab just got a new job and wants to roll over her retirement account from her previous job at a large corporation into an IRA. Which of the following is true​? A. Rihab should speak to a financial planner to learn make sure she follows the rollover rules to avoid taxes. B. Doing this avoids the​ 10% early distribution penalty. C. Both A and B D. Neither A nor B

C. Both A and B

When is rolling your lumpminus sum retirement benefits into an IRA a good financial​ decision? A. If you have taken a new job B. If you​ don't need the funds immediately C. If you have retired early D. All of the above are correct. E. Only A and C are correct.

D. All of the above are correct

Retirement income comes from which of the following​ sources? A. Pensions B. Social Security C. Asset income D. Earnings E. All of the above

E. All of the above

T or F: As a young consumer you would be wise to be very cautious with your investing and avoid investing in stocks.

False

T or F: By​ law, everyone must contribute the maximum amount into their​ 401(k) plans at work.

False

T or F: Most employees in the United States today are covered by an employer funded defined-benefit plan.

False

Why have employers switched to defined-contribution plans instead of defined-benefits plans for most companies?

They remove the financial risk for future pension costs away from the company and pass it on to the employee

Like many Americans you know that you must plan your retirement funds carefully because there may be a discrepancy between the funds that you will need to survive on during retirement and the income that you will have available during retirement. What will likely be the relationship between fund needs and income available during retirement for MOST​ Americans?

They will not be close - needs will be greater than income

T or F: Social Security is a plan where current workers' contributions pay for current retiree's benefits

True

T or F:With a lump-sum distribution of your retirement​ benefits, you must pay all of the income taxes on the entire amount up front.

True

T or F: Under the annuity for life policy your payments will continue to your beneficiaries upon your passing up until a specified time.

True also called an annuity for a "certain period"

When an employer makes pension fund contributions directly to a trustee who holds and invests those​ funds, the plan is said to be​ a(n)

funded pension plan

Relative to insurance, when a payout arrangement is made in which one receives all benefits in a single payment, this is called a

lump-sum option

If your pension fund contained a provision that allowed employees who were leaving the company to retain and transfer any pension benefits earned to another pension​ plan, it would be said to have

portability

You have determined that you will need to accumulate​ $1,000,000 in your retirement account in order to cover your inflation-adjusted shortfall. Which of the following is closest to the amount of money you would need to put into a tax-deferred retirement account every year if you plan on retiring in 40​ years? Assume an​ 8% average return on this​ account, and that it is empty today.

$3,860 FV= 1,000,000 I/Y= 8% N= 40 years PV=0 PMT=?

Which of the following benefits is not provided by social security? A. Disability B. Retirement C. Education D. Health E. Death

C. education

T or F: With a Roth​ IRA, after five years you can make withdrawals before age 59​ 1/2 without a penalty but you must pay taxes on the withdrawals.

False

T or F: With a traditional IRA and a Roth​ IRA, you can make withdrawals at any time with no penalties.

False

T or F: for most people, there is really no reason to save for retirement since Social Security will provide retirement benefits until you die

False

T or F: Contributions to Roth IRA are tax deductible

False contribute to after tax income

T or F: Contributions to a traditional IRA are always tax deductible

False eligibility based on income and employer available retirement plans

T or F: Your decision on what type of annuity to purchase will have a dramatic impact on the monthly payments you will receive upon retirement

True

A​ ________ is defined by the fact that your employer provides all the funds for the retirement​ plan, without any contribution from you.

noncontributory retirement plan

T or F: Under a single life annuity, you receive a set monthly payment for the rest of your life

True

T or F: With an IRA your investment choices include stocks, bonds, mutual funds, CDs, and real estate

True

T or F: You should take advantage of any matching your company is willing to do for your 401(k)

True

T or F: Under a funded pension plan, the employer makes regular contributions to a trustee who collects and invests the retirement funds

True

Why might one want to select the lump-sum payment option for​ one's retirement​ funds? A. You can invest the funds and perhaps earn a higher return. B. Having access to the funds provides money for emergencies. C. Taking the lump-sum can be a hedge against inflation. D. The lump-sum option provides greater flexibility than other options. E. All of the above

E. All of the above

Social Security is a system where current​ workers' pay taxes that are used to pay current​ retirees' benefits. How is Social Security​ funded? A. Income taxes by all Americans B. Payroll taxes on employees up to a salary cap C. Payroll taxes on employers up to a salary cap D. All of the above are correct. E. Only B and C are correct.

E. Only B and C are correct

T or F: Annuity payments will adjust for inflation over the years of retirement

False

T or F: One of the best things about retirement is that retirees don't have to pay income taxes once they retire

False

T or F: The main advantage of the Roth IRA over the traditional IRA is the employer matching funds.

False

T or F: Through the single life annuity, once you reach the age of 100 the annuity payments cease

False

T or F: Today, the typical American worker will receive a defined- benefit retirement plan from their employer

False

T or F: Under a definedminus contribution ​plan, your employer alone or you and your employer together contribute directly to an individual account set aside specifically for you.

True

T or F: 2 of the most important considerations when saving for retirement is the time you have to save and the return you earn on your savings

True

T or F: A 401 (K) plan is a tax-deferred retirement savings plan in which employees of private corporations may contribute a portion of their wages up to a maximum amount set by law

True

T or F: A person may have more than one qualified retirement plan open at the same time

True

T or F: According to the Employee Benefit Research​ Institute, oneminus third of U.S. households between the ages of 30 and 59​ won't have enough money for​ retirement, even if they work until​ they're 70.

True

T or F: Anyone can open up an IRA account but not everyone may get tax advantages from it because there are income limitations

True

T or F: Because inflation makes goods and services cost more over time, one would be wise to always plan for inflation when planning one's retirement

True

T or F: Consistently saving a little money for retirement when you are in your twenties is much better than saving a lot more money when you are in your fifties.

True

T or F: For low income senior households Social Security is a very important financial asset.

True

T or F: If all contributions to your IRA are tax deductible, then all withdrawals from your IRA will be taxed, unless you're just moving your money into another IRA

True

T or F: It is a good idea to start saving for retirement as early as possible to take advantage of compounding returns on your savings.

True

T or F: One of the advantages to a traditional IRA is that it allows you to make a penaltyminus free withdrawal to purchase your first home.

True

T or F: One of the drawbacks to defined-benefit plans are their lack of​ portability, meaning that if you leave the company the value of the pension is not likely to go with you.

True

T or F: Social Security is a health care, retirement, disability income, and life insurance plan

True

T or F: The big disadvantage with a definedminus contribution plan is that you​ don't know in advance exactly how much money you can plan on for retirement income.

True

T or F: The size of your social security benefits are determined by your number of years of earnings, your average level of earnings, and an adjustment for inflation

True

T or F: To avoid paying income taxes on your lumpminus sum ​distribution, you could roll it over into a qualified IRA.

True

T or F: Under a defined benefit plan you receive a promised or "defined" benefit payout at retirement

True