Deck 16: Retirement Planning

Question 1

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

A) It attempts to replace 42% of your average earnings.
B) Not all occupations are covered.
C) Some people's benefits may be taxed.
D) You may retire beginning at age 62 with reduced benefits.
E) all of the above

Answer 1

all of the above

Question 2

For most people, there is really no reason to save for retirement since Social Security will provide retirement benefits until you die.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

How does Uncle Sam determine our Social Security monthly retirement check for all practical purposes?

Question 5

Robin was born after 1960, therefore, the retirement age for her to receive full Social Security benefits is 65.

Question 6

To be eligible for Social Security benefits, you receive one credit for every $1,120 in wages that you earn, up to 4 credits per year. How many total credits do you need to qualify for benefits?

A) 4
B) 20
C) 30
D) 40

Question 7

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.

Question 8

An employee's Social Security contributions are invested in a general fund account and will be made available for the employee at retirement.

Question 9

The Federal Insurance Contributions Act isn't an investment, but rather a mandatory insurance plan that one pays into through salary deductions.

Question 10

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) death
B) disability
C) health problems
D) retirement
E) job loss

Question 11

How is the size of a person's Social Security retirement benefits determined?

A) It depends on the number of credits earned in a person's lifetime.
B) It depends on the average level of earning over a person's lifetime.
C) It depends on the number of years a person has paid Social Security taxes.
D) All of the above are correct.
E) Only B and C are correct.

Question 12

Explain why we do not invest in Social Security. What are the four basic benefits for those who are qualified?

Question 13

Under a funded pension plan, the employer makes regular contributions to a trustee who collects and invests the retirement funds.

Question 14

Social Security benefits are very nice to get and help many current retirees live above the poverty line. Why should someone who is 25 years old today not count on receiving the same type of Social Security benefits when they retire in 45 years from now?

Question 15

The system of Social Security is based on young working people paying taxes to support older retired people. The dependency ratio is the number of workers to retirees. Forty years ago it was 16 workers for every one retiree. What will happen to this ratio by the year 2048?

A) It will reverse so that there will be more retirees than workers.
B) It will increase, because there will be more young workers than retirees.
C) It will decline to 2 workers for every 1 retiree.
D) Nothing, since the ratio of young people to old people does not change.

Question 16

Which of the following benefits is not provided by Social Security?

A) death
B) disability
C) education
D) health
E) retirement

Question 17

Social Security is a plan where current workers' contributions pay for current retiree's benefits.

Question 18

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.

Question 19

Social Security is a health care, retirement, disability income, and life insurance plan.

Question 20

How will you access in an accurate manner the amount of your retirement income?

Question 21

One of the first steps in planning for your retirement is figuring out just what you want to do when you retire.

Question 22

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?

A) $21,991.14
B) $6,586.85
C) $5,904.84
D) $6,878.77
E) none of the above

Question 23

Which of the following is a problem associated with many defined-benefits programs?

A) lack of portability
B) failure to adjust for inflation once payments begin
C) many are unfunded
D) All of the above
E) A and C only

Question 24

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?

A) They will match.
B) They will be close.
C) They will not be close - income will be greater than needs.
D) They will not be close - needs will be greater than income.

Question 25

Your company pays retirement benefits to current retirees out of current earnings, on a pay-as-you-go basis. This is an example of a(n) ________.

A) unfunded pension plan
B) funded pension plan
C) cash balance plan
D) none of the above

Question 26

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.

Question 27

Many older companies have changed from a defined-benefit plan to a(n) ________, which is a retirement plan where workers are credited with a percentage of their pay each year, plus a predetermined rate of interest.

A) funded pension plan
B) cash balance plan
C) unfunded pension plan
D) percentage plus inflation plan
E) none of the above

Question 28

Under a defined benefit plan you receive a promised or "defined" benefit payout at retirement.

Question 29

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

Question 30

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

A) defined-benefit plan
B) noncontributory retirement plan
C) contributory retirement plan
D) portable
E) none of the above

Question 31

Why have many companies switched from traditional defined-benefits plans to cash-balance plans?

A) They want to shower their employees with money
B) Regulatory reform made it necessary.
C) They save money with them as a result of reduced future benefits for older workers.
D) All of the above are correct.
E) Only B and C are correct.

Question 32

Relate the pros and cons of defined-benefit plans.

Question 33

Because inflation makes goods and services cost more over time, one would be wise to always control for inflation when planning one's retirement.

Question 34

Today, the typical American worker will receive a defined-benefit retirement plan from their employer.

Question 35

Defined-benefit pension plans are generally ________ and they lack ________.

A) contributory; divesting
B) noncontributory; divesting
C) contributory; portability
D) noncontributory; portability
E) vested; portability

Question 36

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) ________.

A) defined-contribution plan
B) funded pension plan
C) unfunded pension plan
D) cash balance plan
E) none of the above

Question 37

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 ________.

A) transference
B) releasability
C) transportance
D) portability
E) none of the above

Question 38

Frank is considering a new job. However he is concerned about his pension fund. He knows that ________ which is the requirement that he must work for his firm for a specified period of time prior to gaining ownership of the retirement contributions made by his employer has to be met first.

A) tenuring
B) certifying
C) vesting
D) validating
E) none of the above

Question 39

With a ________, you, and usually your employer, pay funds into your retirement plan.

A) deducted-benefit plan
B) noncontributory retirement plan
C) contributory retirement plan
D) none of the above

Question 40

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.

A) $1,458
B) $3,860
C) $5,957
D) $8,444

Question 41

Relate the 7 steps to funding your retirement needs. What is the hardest part?

Question 42

A(n)________ is a pension plan in which you and your employer or your employer alone contribute funds directly to a retirement account set aside specifically for you.

A) defined-benefit plan
B) cash balance plan
C) defined-contribution plan
D) percentage plus inflation plan
E) none of the above

Question 43

By law, everyone must contribute the maximum amount into their 401(k) plans at work.

Question 44

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

A) They remove the financial risk for future pension costs away from the company and pass it on to the employee.
B) The employer doesn't want to do any bookkeeping for the retirement plan.
C) Employers care deeply about what employees eventually receive from their plan.
D) All of the above are correct.
E) Only A and B are correct.

Question 45

According to the author, 401(K) plans are actually do it yourself variation of a profit-sharing/thrift plan.

Question 46

What investment goals should a person have when determining where to put their 401k monies in their account?

Question 47

Under a defined-contribution plan, your employer alone or you and your employer together contribute directly to an individual account set aside specifically for you.

Question 48

You are participating in a pension plan where the company's contributions vary from year to year, depending on the firm's performance. This is an example of a(n) ________.

A) variable contribution plan
B) earnings establishment plan
C) performance retirement plan
D) profit-sharing plan
E) none of the above

Question 49

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.

A) 404(a)
B) 402(b)
C) 403(b)
D) 007(a)
E) none of the above

Question 50

Brian works for Walmart. Walmart contributes company stock into his retirement account instead of cash. This is called a(n) ________.

A) ESOP
B) thrift
C) EFLP
D) stock-contribution plan
E) none of the above

Question 51

Burt Reynolds has changed jobs. His last retirement plan's contributions depended on how well the company performed and he shared in the earnings. His present employer allows him ownership in the firm, although this is the riskiest plan. Burt's former plan was a(n) ________ and his current plan is a(n) ________.

A) ESOP; money purchase plan
B) profit-sharing plan; ESOP
C) ESOP; 401(k)
D) profit-sharing plan; thrift and savings plan
E) ESOP; profit sharing plan

Question 52

Discuss the basic considerations when facing retirement.

Question 53

Why does a tax-deferred retirement account accumulate more money than a taxable account, assuming the same amount is contributed every year and the accounts earn the same return every year?

A) There are different investment options available for tax-deferred accounts.
B) You can take bigger risks with assets that generate higher returns in a tax-deferred account.
C) With tax-deferred accounts, there are no income or capital gains tax liabilities on account activity.
D) All of the above are correct
E) Only A and B are correct.

Question 54

A 401(k) plan is a tax-deferred retirement plan in which both the employee's contributions to the plan and the earnings on those contributions are tax deductible, with all the taxes being deferred until retirement withdrawals are made.

Question 55

401(k) and 403(b) plans are the most common retirement plans these days. What are the big advantages to employees with these plans?

A) You don't pay taxes on money contributed to 401(k) plans.
B) Earnings on your retirement account are tax deferred.
C) Many firms contribute an employer match, which represents a 100% risk-free return to the employee.
D) All of the above are correct
E) Only A and C are correct.

Question 56

Tran is employed at a company that annually contributes anywhere from 2% up to 12% of his salary into his retirement plan, depending on how good the company's financials were that year. This type of contribution plan is a(n) ________ plan.

A) 401(k)
B) ESOP
C) profit-sharing
D) performance

Question 57

You should take advantage of any matching your company is willing to do for your 401(k).

Question 58

A(n) ________ retirement plan is one in which the company will contribute shares of company stock into the employee's account in place of a cash contribution. The employee does well if the company stock appreciates in value, but can suffer dramatically if the stock depreciates in value.

A) 401(k) stock account
B) 403(b) stock account
C) ESOP
D) stock repurchase plan

Question 59

The big disadvantage with a defined-contribution plan is that you don't know in advance exactly how much money you can plan on for retirement income.

Question 60

The only difference between a defined-benefit plan and a defined-contribution retirement plan is the tax deduction for the defined-contribution plan.

Question 61

If you are self-employed or work for a small business which of the following retirement plans would you be most likely to have?

A) 403(b)
B) 401(k)
C) thrift and savings plan
D) Keogh plan
E) none of the above

Question 62

Of the tax-favored retirement plans for the self-employed and small business employee, one is limited to $49,000 of annual contributions per person. It is the ________ plan.

A) Keogh
B) SEP-IRA
C) SIMPLE
D) 401(k)
E) thrift

Question 63

Are retirement plans different for the self-employed and employees of small businesses? Do you have to work full-time to qualify for one?

Question 64

What does the term 'self directed' mean concerning retirement accounts?

Question 65

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.

Question 66

What are the advantages and disadvantages of a defined-contribution plan like a 401k?

Question 67

Compare and contrast the defined-contribution plans.

Question 68

Anyone can open up an IRA account but not everyone may get tax-advantages from it because there are income limitations.

Question 69

Valerie works as a free-lance artist. Her financial advisor suggested she establish a Keogh plan for her retirement. Is this an appropriate suggestion for her?

A) Yes
B) No

Question 70

Alex works for a company with a 401(k) plan. He currently earns $80,000 in gross salary and contributes 8% of his gross salary into his 401(k) account. If his marginal tax rate is 33%, how much income tax liability is he saving by participating in his 401(k)?

A) $6,400
B) $2,112
C) $6,000
D) $16,800

Question 71

What are the advantages to a SIMPLE plan for retirement for the small business owners?

A) The plan is very easy to set up.
B) The plan works well for small business owners with 100 employees or less.
C) The small business owner has some flexibility in determining how much to contribute to the plan.
D) All of the above are correct.
E) Only A and B are correct.

Question 72

Which of the following retirement plans is designed for small businesses?

A) SIMPLE plans
B) SEP-IRA plans
C) ESOP
D) All of the above.
E) Only A and B.

Question 73

Erica works for a company with a 401(k) plan. The company matches at $0.50 on the dollar the first 6% of the employee's salary contributed to the 401(k). If Erica earns $90,000 and contributes 12% of her salary, how much will the employer match be in dollars for the year?

A) $1,400
B) $2,700
C) $3,500
D) $6,200

Question 74

The difference between a Money Purchase Plan and a Profit Sharing plan is that ________.

A) With the Profit Sharing Plan the employee is guaranteed to see profits in their retirement funds
B) With the Money Purchase Plan the contributions are required regardless of how the firm performs
C) Profit Sharing Plans constantly outperform Money Purchase Plans
D) All of the above are correct.
E) Both A and C are correct.

Question 75

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

Question 76

Contributions to a traditional IRA are always tax deductible.

Question 77

Jahwana works for a large corporation with a 401(k) retirement plan. The company matches dollar for dollar the first 5% of the employee's salary contributed to the 401(k). Jahwana currently earns $40,000 in gross salary and she currently contributes 15% of her salary into her 401(k). How much money in dollars is the total contribution to her account every year?

A) $2,000
B) $4,000
C) $6,000
D) $8,000

Question 78

Individual retirement arrangements (IRAs) are personal savings accounts that give you tax advantages for saving for retirement.

Question 79

The Keogh plan is a retirement plan for individuals who work for large multinational corporations.

Question 80

What are the disadvantages of an ESOP retirement plan?

A) Your retirement account is not diversified.
B) The return on your account is subject to the success of the company.
C) If the company files for bankruptcy, the stock in your account could become worthless.
D) All of the above are correct.
E) Only A and C are correct.