Deck 14: Planning for Retirement

Question 1

A person who is self-employed on a part-time basis can qualify for a Keogh account.

Answer 1

True

Question 2

Many people tend to be too conservative when investing their retirement funds.

Answer 2

True

Question 3

Today, more than 50% of all wage earners and salaried workers are covered by some type of employer-sponsored retirement or profit-sharing plan.

Answer 3

True

Question 4

About 40% of people have not calculated how much they need to retire.

Question 5

The current trend in retirement plans is toward contributory plans.

Question 6

Profit-sharing plans enable employees to participate in the earnings of their employer.

Question 7

If Lisa, age 64, works part-time, she will be subject to an earnings test that limits the amount of income she can earn before she starts losing some of her Social Security benefits.

Question 8

In long-term retirement planning, you decide on the required level of retirement income and funds needed over a 3- to 5-year series of intervals.

Question 9

SEP plans are aimed at self-employed persons with no employees.

Question 10

It really makes little difference whether you start retirement savings at age 25 or at age 45.

Question 11

Self-employed workers pay twice as much for Social Security coverage compared to employed workers.

Question 12

Contributions to employer-sponsored profit-sharing retirement plans are invested only in securities issued by the employing firm itself.

Question 13

Traditional defined benefit plans are better suited than cash-balance plans for a mobile workforce.

Question 14

Employees of state and local governments cannot participate in the Social Security system.

Question 15

Matching contributions by employers are more common with 403(b) and 457 plans than with 401(k) plans.

Question 16

The first step in retirement planning is to set retirement goals.

Question 17

If a covered worker dies, the surviving spouse can receive full survivor's benefits from Social Security if he or she is at least 60 years of age or has a dependent and unmarried child of the deceased worker in his or her care.

Question 18

Workers who elect to retire early-at age 72-will receive reduced Social Security retirement benefits.

Question 19

The most popular type of supplemental retirement program is the 401(k) plan.

Question 20

In recent years, earned income has accounted for a growing amount of total retirement income.

Question 21

Harry starts receiving reduced retirement benefits at age 62. These benefits:

A) will increase when he reaches the "full retirement age."
B) are not subject to federal income taxes.
C) are deducted from the future benefits he will receive after age 67.
D) increase the tax deductions available to him.
E) will remain the same when he reaches the "full retirement age."

Question 22

An annual contribution of $3,000 to a retirement account that earns 6% will be worth approximately _____ in 20 years. (Round the answer to the nearest whole dollar.)

A) $60,120
B) $96,788
C) $100,000
D) $110,357
E) $192,624

Question 23

A major advantage of most types of annuities is that you cannot outlive your financial resources.

Question 24

A bailout provision allows you to withdraw your money without incurring any surrender fees if the rate of return on your annuity falls below a specified minimum level.

Question 25

There is no penalty for early withdrawal of an annuity.

Question 26

Younger persons are able to make larger contributions to traditional individual retirement accounts (IRAs) than persons 50 and over.

Question 27

It is possible to convert a traditional individual retirement account (IRA) to a Roth IRA.

Question 28

One of the biggest financial benefits of starting early to save for your retirement fund is related to:

A) the increased cost of living.
B) compound interest.
C) lower tax deductions.
D) inflation.
E) reduced expenses.

Question 29

Which of the following statements regarding Social Security benefits is true?

A) Social Security benefits are retirement benefits extended only to self-employed people.
B) In two-income families, both husband and wife may be eligible for full benefits.
C) Social Security benefits are available to military personnel only.
D) Social Security benefits may be reduced if the recipient is under age 55 and still gainfully employed.
E) To obtain Social Security benefits, you must participate in enough quarters.

Question 30

The cash benefits provided by Social Security come from:

A) voluntary contributions made by employees and employers.
B) payroll taxes paid by covered employees and their employers.
C) state and federal income taxes paid by employees and employers.
D) charitable contributions made by the federal government.
E) the U.S. Treasury.

Question 31

Single premium annuities result in a lump-sum payment of benefits.

Question 32

The Social Security tax rate for an employee remains in effect:

A) until the employee's expenses change.
B) until the cost of living increases.
C) permanently.
D) until the employee reaches a maximum wage base.
E) until the employee changes jobs.

Question 33

Which of the following is a requirement for nearly all workers today to qualify for full retirement benefits under the Social Security system?

A) The individual must be employed in a job covered by Social Security for at least 60 quarters, or 15 years, which need not be consecutive.
B) The individual must be employed in a job covered by Social Security for at least 50 quarters, or 12.5 years, which need not be consecutive.
C) The individual must be employed in a job covered by Social Security for at least 50 consecutive quarters, or 12.5 years.
D) The individual must be employed in a job covered by Social Security for at least 40 quarters, or 10 years, which need not be consecutive.
E) The individual must be employed in a job covered by Social Security for at least 40 consecutive quarters, or 10 years.

Question 34

A person born in 1960 or later has to be _____  years old to be able to retire with full Social Security benefits.

A) 59
B) 62
C) 64
D) 67
E) 72

Question 35

The best way to handle individual retirement account (IRA) rollovers is to arrange for the transfer of funds from one firm to another.

Question 36

Which of the following is the principal source of income for the average retiree?

A) Earnings from income-producing assets (such as stocks and bonds)
B) Earnings from full- or part-time jobs
C) Pension plans
D) Social Security
E) Annuities

Question 37

You would most likely purchase an annuity from a bank.

Question 38

Gordon and Lisa estimate that they will need $1,875,000 in 40 years for their retirement fund. If they can earn 8% annually on their funds, how much do they need to save annually? (Round the answer to the nearest whole dollar.)

A) $7,238
B) $7,987
C) $8,103
D) $9,234
E) $9,875

Question 39

Retirement planning starts with:

A) determining the size of the required nest egg.
B) considering the longevity of the retiree.
C) defining the investment program.
D) determining the interest on income-earning assets.
E) setting retirement goals.

Question 40

Planning for retirement over a series of short-run time frames requires:

A) stating your retirement income objectives as a percentage of your present earnings.
B) the retiree to wait until age 50 to start planning.
C) annual savings of at least $100,000.
D) investment of retirement funds in more risky investments.
E) estimating the inflation factor by reducing inflation projections.

Question 41

Jacque Solis, a 38-year-old, is leaving her current job and would like to take a long vacation before a new job. She has $62,000 in an individual retirement account (IRA) that she would like to live on during this period. If she is in a 25% marginal tax bracket, how much will she have left after paying taxes and penalties?

A) $40,300
B) $43,500
C) $37,700
D) $29,000
E) $14,500

Question 42

Marcia works for Telephonic Industries and participates in its supplemental retirement plan. Last year, the firm did not earn a profit. Therefore, it did not contribute to the supplemental retirement plan. This plan is a(n):

A) defined benefit plan.
B) noncontributory pension plan.
C) thrift and savings plan.
D) profit-sharing plan.
E) Keogh plan.

Question 43

Bill has worked for Excellent Corp. for 4 years. During this period, Excellent Corp. has contributed $25,000 to his retirement plan. Assuming the company uses graded vesting, how much will Bill be able to roll into an individual retirement account (IRA) if he leaves Excellent Corp. at the end of 4 years?

A) $0
B) $5,000
C) $10,000
D) $15,000
E) $20,000

Question 44

The period during which premiums are paid for the purchase of an annuity is called the:

A) installment period.
B) accumulation period.
C) survivor period.
D) distribution period.
E) contract period.

Question 45

The average level of Social Security benefits for retirees aged 67 and above is adjusted upward each year with subsequent increases in the:

A) retirees' income.
B) number of dependents.
C) quality of life.
D) cost of living.
E) preretirement cost of living.

Question 46

Marie, a 67-year-old, is receiving Social Security benefits. She received $25,000 in interest and dividends this year. Her Social Security benefits are:

A) subject to an earnings test.
B) reduced to half because of these earnings.
C) not reduced because of these earnings.
D) reduced by the federal tax paid on her interest income.
E) reduced by a penalty.

Question 47

Lillian has a defined benefit plan that promises an annual retirement benefit based on 2% of her final 3-year average annual salary for each year of service. At retirement, Lillian has 15 years of service and had an average salary of $80,000 over the last 3 years. What is the amount of her annual benefit?

A) $65,000
B) $50,500
C) $35,400
D) $24,000
E) $0

Question 48

Jamie has worked for ABC Printing for 5 years. During this period, ABC Printing has contributed $25,000 to her noncontributory retirement plan. Assuming ABC uses cliff vesting, the longest period allowed, how much will Jamie be able to roll into an individual retirement account (IRA) if she leaves ABC Printing?

A) $0
B) $5,000
C) $10,000
D) $20,000
E) $25,000

Question 49

If an annuity plan is designed so that the monthly payment is adjusted by the actual investment experience of the insurer, it is a(n):

A) guaranteed-minimum annuity.
B) equity annuity.
C) variable annuity.
D) uncertain annuity.
E) temporary annuity.

Question 50

The Employee Retirement Income Security Act (ERISA) was established to provide:

A) funding for retirement plans.
B) the ability to retain the same retirement insurance when employees change employers.
C) mandatory retirement plans for self-employed individuals.
D) protection to employees participating in private employer retirement plans.
E) individual trust funds for employees retiring from jobs in the federal government.

Question 51

Which of the following statements regarding individual retirement accounts (IRAs) is true?

A) Traditional IRAs can be opened by anyone with a modified adjusted gross income (MAGI) of more than $50,000.
B) A 10% tax penalty applies to any funds withdrawn from a traditional IRA before 70½.
C) Withdrawals from Roth IRAs are tax free, so long as the account has been open for 5 years and the individual is past the age of 59½.
D) It is not possible to convert a traditional IRA to a Roth IRA.
E) Contributions made to traditional IRAs are made with after-tax dollars.

Question 52

Henry has a defined benefit plan that promises an annual retirement benefit based on 2% of his final 5-year average annual salary for each year of service. At retirement, Henry has 21 years of service and had an average salary of $95,000 over the last 5 years. His annual benefit will be:

A) $95,000.
B) $60,500.
C) $49,875.
D) $39,900.
E) $15,200.

Question 53

A person who is not gainfully employed must start withdrawing funds from his or her Keogh retirement account by age:

A) 50.
B) 59½.
C) 65.
D) 70½.
E) 75.

Question 54

Which of the following statements regarding a refund annuity is true?

A) The monthly income provided by the policy varies as a function of the insurer's actual investment experience.
B) The insurance company agrees to pay a guaranteed rate of interest on the insured's money.
C) A specified monthly income is provided for a stated number of years without consideration of any life contingency.
D) If the annuitant dies, the designated beneficiary receives monthly payments until the total purchase price of the annuity is paid back.
E) The insurance company guarantees the annuitant a stated amount of monthly income for life.

Question 55

The employer retirement plan that is intended to promote employee productivity and allows the employer to vary the amount of annual contributions is a:

A) qualified defined contribution plan.
B) thrift and savings plan.
C) profit-sharing plan.
D) 401(k) plan.
E) 403(b) plan.

Question 56

If you withdraw funds from a Keogh plan before age 59½, you will have to pay a _____ federal income tax penalty.

A) 5%
B) 10%
C) 15%
D) 20%
E) 25%

Question 57

Marshall will need $1,250,000 in his retirement fund in 40 years at the time of his retirement. If Marshall can earn 8% annually over this period, how much does Marshall need to save annually to meet that goal? (Show all work. Round the answer to the nearest dollar.)

Question 58

Melissa's retirement plan is described in her employee handbook as follows:
Noncontributory
Cliff vesting (100%) after 3 years of full-time employment
Monthly retirement benefits based on average salary over the last 3 years of employment and the total number of years worked for the company
Which of the following statements about this retirement plan is true?

A) Melissa will have to pay money into the plan.
B) If Melissa leaves this company before working full time for 3 years, she will not receive any benefits.
C) Melissa will have to make investment decisions regarding her retirement plan.
D) Melissa's retirement plan is a defined contribution plan.
E) For Melissa, vesting takes place gradually over the first 3 years of employment.

Question 59

In which of the following procedures does vesting take place gradually over the first 6 years of employment?

A) Cliff vesting
B) Contributory vesting
C) Self-directed schedule
D) Graded schedule
E) Maximum vesting

Question 60

You will receive the largest monthly payment under an annuity contract when the annuity disbursement option is the:

A) life annuity with no refund.
B) life annuity, period certain.
C) refund annuity.
D) annuity certain.
E) temporary life annuity.

Question 61

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
With an individual retirement account (IRA), the [ account owner | institution ] is the trustee.

Question 62

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
[ SEP | Keogh ] plans are easier to administer.

Question 63

Danielle puts 8% of her paycheck in a 401(k) plan administered by her employer. Danielle earns $55,000 per year and is in the 28% tax category. What annual tax savings does she get from her contribution? If her employer matches contributions on the first 5% of her salary dollar for dollar and the next 3% with 50 cents for every dollar, how much will her employer put into her account this year? (Show all work.)

Question 64

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Under a defined contribution plan, an employee [ is | is not ] able to estimate what his pension payment would be upon retirement.

Question 65

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
For most people, participation in the Social Security system is [ voluntary | mandatory ].

Question 66

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The Social Security tax rate is paid [ up to a taxable maximum | on all earnings ].

Question 67

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Dan and Betty, both in their early 30s, want to withdraw $9,000 from their individual retirement account (IRA) to put toward the purchase of their first home. They [ will | will not ] have to pay a penalty.

Question 68

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The period during which annuity payments are made to an annuitant is called the [ distribution | accumulation ] period.

Question 69

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The employee is subject to the investment risk in a defined [ contribution | benefit ] plan.

Question 70

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The initial estimates of retirement expenses and income should be done in [ today's | future ] dollars.

Question 71

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Vested rights are [ forfeitable | nonforfeitable ] rights to receive some benefits in a pension plan.

Question 72

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
A cash-balance plan [ does | does not ] guarantee a benefit payout at retirement.

Question 73

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The most common investment amount of a single premium annuity contract is [ $5,000 | $10,000 ].

Question 74

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
With a life annuity, period certain, a payment will be made for a stated period of time [ only to the annuitant if he or she lives | to someone else if the annuitant dies ].

Question 75

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Social Security alone [ will | will not ] provide a comfortable standard of living at retirement.

Question 76

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
With a guaranteed-minimum annuity, the benefits [ are limited to the annuitant only | extend to named beneficiaries ].

Question 77

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
If Melissa converts her traditional individual retirement account (IRA) to a Roth IRA, she [ will | will not ] have to pay taxes on any earnings and pretax contributions.

Question 78

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
You can offset the effects of earning a lower rate of return on your money by [ increasing the amount you invest each year  | shortening the period over which you build up your retirement account ].

Question 79

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
[ 401(k) | 403(b) ] plans would be available for employees of a public school or university.

Question 80

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
All earnings generated in an employee's account accumulate on a [ tax-free | tax-deferred ] basis in a Roth 401(k) plan.