Deck 14: Planning for Retirement

Question 1

In the year 2027, a person will have to be a minimum of _____ years to be able to retire with full social benefits.

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

Answer 1

D

Question 2

Social Security benefits (cash benefits)are funded by:

A)voluntary contributions from the government, employers, and self-employed people.
B)compulsory contributions from employees, employers, and self-employed people.
C)state and income taxes.
D)charitable contributions from the federal government.
E)federal income taxes.

Answer 2

B

Question 3

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

Answer 3

True

Question 4

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 5

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 6

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

Question 7

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

Question 8

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

Question 9

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 to the nearest whole dollar.)

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

Question 10

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

Question 11

The third step in retirement planning is to formulate an investment program.

Question 12

Your Social Security contribution depends on your current income and retirement income goal.

Question 13

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 14

Profit-sharing plans allow flexible employer contributions to the plans.

Question 15

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 16

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

Question 17

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

Question 18

An annual contribution of $3,000 to a retirement account that earns 6% will be worth approximately _____ in 20 years. (Use the table of future value annuity factors or a financial calculator. Round to the nearest whole dollar.)

A)$60,000
B)$96,780
C)$100,000
D)$110,360
E)$192,600

Question 19

The purpose of the Social Security Act of 1935 was to create a basic program to:

A)ensure retirement income equal to 75% of preretirement income.
B)pay for retirees'  health care costs.
C)replace defunct pension fund plans.
D)provide a basic and adequate income to eligible retirees.
E)levy a tax on the retirement funds of federal civilian employees.

Question 20

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)For the average wage earner, Social Security benefits match a percentage of the income earned in the year before retirement.
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 21

In the case of a refund annuity:

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 price of the annuity is paid back.
E)the insurance company guarantees the annuitant a stated amount of monthly income for life.

Question 22

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 23

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 24

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 basis.
E)until the employee changes jobs.

Question 25

Which of the following is a requirement for an individual 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 26

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 27

Lois, 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 28

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 29

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

A)increase when he reaches the normal 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)remain the same when he reaches the normal retirement age.

Question 30

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 31

In order to avoid penalties, a person who is not gainfully employed must typically start taking minimum distributions from Keogh retirement accounts by age:

A)50.
B)59½.
C)65.
D)70½.
E)75.

Question 32

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 33

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 for a certain period.
C)refund annuity.
D)annuity certain.
E)temporary life annuity.

Question 34

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 35

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 36

One way to pay the premiums for annuities is with a:

A)refundable premium.
B)premium in future.
C)premium in installments.
D)guaranteed premium.
E)lateral premium.

Question 37

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 38

If you withdraw funds from a Keogh pension 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 39

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 a qualified plan 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 40

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 41

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 plan.
C)SEP plan.
D)profit-sharing plan.
E)Keogh plan.

Question 42

Contributions are made in after-tax dollars to:

A)traditional 401(k)plans.
B)traditional IRA plans.
C)SEP plans.
D)Roth 401(k)plans.
E)403(b)plans.

Question 43

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.)

Question 44

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.)