Download Social Security, Medicare, and Retirement Planning and more Exams Nursing in PDF only on Docsity! CRPC EXAM PRACTICE EXAM ACTUAL EXAM QUESTIONS AND CORRECT DETAILED ANSWERS WITH RATIONALES (VERIFIED ANSWERS) |ALREADY GRADED A+ Cindy wants to have an annual retirement income of $50,000 protected against 3% inflation. Assuming an 8% after-tax rate of return and a retirement period of 25 years, how much money does Cindy need in order to provide the inflation-protected $50,000 at the beginning of each retirement year? Correct Answer BEG Mode # of Periods (1 P/YR in this example) C ALL 50000, PMT 4.8544, I/YR [(1.08 ÷ 1.03) - 1] × 100 = 4.8544 I/YR 25, N PV Solution: $749,812.61 Frank will retire in 14 years, and he needs to save an additional $380,000 to provide the retirement income that he wants. Assume that inflation is 4% and after-tax earnings are 10%. How much will Frank need to save at the end of each year to reach his goal? Correct Answer END Mode # of Periods (1 P/YR in this example) C ALL 380000, FV 10, I/YR 14, N PMT Solution: $13,583.56 (The answer is actually -$13,583.56, as this represents an outflow to savings.) Rationale: In this case, we do not need to make the inflation adjustment. This problem asks how much Frank needs to save at the end of each year, so the savings will be level. Remember, when the payment is level, the inflation adjustment is not called for. Inflation should have already been taken into account to calculate the need for an additional $380,000. Dan and Barbara have saved $850,000. Assume that inflation is 3% and after-tax earnings are 9%. Also assume that their retirement will last 26 years. How much annual retirement income, protected against inflation, can the $850,000 provide for 26 years with payments made at the beginning of each year? Correct Answer BEG Mode # of Periods (1 P/YR in this example) C ALL 850000, PV 5.8252, I/YR [(1.09 ÷ 1.03) - 1] × 100 = 5.8252 I/YR 26, N PMT Solution: $60,721.17 The Smiths are a 50-year-old couple with an annual retirement budget of $75,000 (in today's dollars). They want to plan for a retirement life expectancy of 25 years (starting at age 65), and assume a 3.5% average inflation rate and a 7% long-term rate of return. How much money will they need at age 65 to fund their retirement? Correct Answer Step #1: Find the inflated value of $75,000 in 15 years # of Periods (1 P/YR in this example) C ALL 75000, PV 3.5, I/YR 15, N 30000, PMT 4.8077, I/YR [(1.09 ÷ 1.04) - 1] x 100 = 4.8077 I/YR 7, N PV Solution: $183,211.73 Laurie and Sam Simpson are ready to retire. They want to receive the equivalent of $25,000 in today's dollars at the beginning of each year for the next 20 years. They assume that inflation will average 6% over the long run and that they can earn a 9% compound annual after-tax return on investments. What lump sum would Laurie and Sam need to have to fund this retirement benefit? Correct Answer BEG Mode 25000, PMT 20, N 2.8302, I/YR Solution: $388,537.73 (This answer is actually -$388,537.73 as it represents an outflow, or deposit to savings.) Joanna Kopps, age 45, wants to quit working in three years. In terms of today's dollars, she needs an additional $500,000 in three years to have sufficient funds to finance this objective. She assumes that inflation will average 3% over the long run and that she can earn a 9% compound annual after-tax return on investments. What serial payment should Joanna invest at the end of the first year? Correct Answer END Mode 500000, FV 5.8252, I/YR 3, N PMT = $157,324.20 Solution: $157,324.20 x 1.03 = $162,043.92 Identify three current trends in retirement planning. Correct Answer businesses today are less likely to offer defined benefit (DB) plans increased focus on planning for longevity expansion of employer sponsored financial wellness initiatives expansion of plan distribution options Discuss challenges associated with the shift from defined benefit to defined contribution plans. Correct Answer With defined contribution plans, risks are borne by plan participants/employees rather than by plan sponsors/employers (as with defined benefit plans). Many of these employees have little or no financial expertise. Identify the six steps of the retirement planning process. Correct Answer The six steps of the retirement planning process are as follows: establish and define the client-counselor relationship gather client data and determine goals and expectations determine the client's financial status by analyzing and evaluating develop and present the retirement plan implement the plan monitor the plan Identify and describe the three key components of a statement of financial position. Correct Answer The three key components of a statement of financial position are: Assets. Assets are what the client owns: cash, securities, property, and other resources. Liabilities. Liabilities are what the client owes: credit card debts, mortgages, auto note balances, etc. Net worth. Net worth is defined as assets minus liabilities. It represents what the client would have left over if he liquidated all assets at fair market value and used the proceeds to pay off all liabilities. Describe the cash flow statement and the equation that defines it. Correct Answer The cash flow statement is a financial statement that describes cash inflows (from salaries, investment returns, rents, etc.) and cash outflows (for living expenses, loan payments, savings, taxes, etc.). It is defined by the following equation: Cash inflows - Cash outflows = Net cash surplus (deficit) What two qualities should retirement goals have to make them useful in planning? Give examples. Correct Answer To be useful in planning, retirement goals should be specific and prioritized. A specific goal indicates an event, an amount, and/or a time. Example: "My goal is to retire in April 2025 with a nest egg sufficient to sustain a lifestyle similar to the one I now enjoy." When there are multiple goals, they must be prioritized: "Our first goal is to provide a fund to care for our disabled daughter. Our retirement goal will have second priority." What are "income replacement percentages"? Correct Answer Income replacement percentages (or "replacement ratios") are rough guides used in determining the amount of income needed in retirement, using pre-retirement income as a base. For example, most American retirees need 70% to 80% of pre- retirement income in order to maintain current living standards. Why should caution be used in applying income replacement percentages? Correct Answer Income replacement percentages are simply "rules of thumb." Because their retirement lifestyle goals differ greatly, no two clients will need the same percentage limit the acceptable securities to large company stocks and U.S. Treasury securities. The goals, time horizons, and constraints provide a basis for periodic review by the client and money manager. Why is a long-term perspective essential as an element of investment policy? Correct Answer U.S. financial markets and many markets overseas have a positive bias in favor of the investor. But this positive bias generally plays out over time. In the short term, the investments that produce sizable returns generally go hand-in-hand with price fluctuations. By taking a long-term view, however, these short-term fluctuations can be ignored. Why is it important that investment policy be clearly defined? Correct Answer A clear definition of the investment policy helps the planner avoid errors and reduces the chance of disputes between planner and client. An example of a clear definition would be any of the following: No securities or mutual funds with betas greater than 1.15 will be permitted in the portfolio. At a minimum, what five elements should every investment policy contain? Briefly explain or provide examples. Correct Answer A clear statement of the client's investment goals. Goals can be stated in relative terms (e.g., stock returns equal to the market as a whole, as measured against the S&P 500 index). A statement identifying the investment vehicles and investment strategies deemed suitable (and unsuitable) for the portfolio. Examples would include "all corporate fixed-income securities will be A-rated or better," and "no short selling will be allowed." A statement of the risk level acceptable to the client, as well as how risk will be managed or controlled (through diversification, rotation from long-term to short-term bonds under specified conditions, etc.). For example, "The portfolio will reduce risk by investing only in highly diversified stock and bond funds; further, interest rate risk will be limited by investing only in fixed-income securities with durations of five or less." A statement of how the client's assets should be roughly allocated among the suitable classes of investments and a statement of the philosophy under which they should be managed. Guidelines should be given to the planner as to how the funds should be invested and monitored. A provision for periodic review. The policy should stipulate that planner and client should meet periodically, such as semiannually, to review investment performance and discuss any changes in the client's situation that would call for a change in the portfolio or the investment policy itself; this may include general allocation guidelines. What are the advantages and disadvantages of common stocks, and why should stocks be an important element in most retirement portfolios? Correct Answer Common stocks have earned higher returns over time than other asset classes. Common stocks have outperformed nearly every asset class by a wide margin. In addition, they offer the prospect of rising dividends over time. Their disadvantage to the investor is their volatility, which is also higher than most other asset classes. This volatility makes many clients reluctant to make large allocations to stocks; but the fact is that many of these same clients will be unable to accumulate sufficient retirement savings without the greater returns enjoyed by stocks over time. The two major risks for common stock are business risk and market risk. What are the advantages and disadvantages of fixed-income securities, and to what two sources of return do their owners look? Correct Answer The advantages of fixed-income securities are their fixed cash flow stream and return of principal if held to maturity, high certainty of return with high quality securities, and generally low price volatility. The big disadvantages are their low- to-moderate rate of return and their two major risks: exposure to inflation (purchasing power risk) due to the fixed dollar amount of their interest income and principal, and interest rate risk (as interest rates increase, bond prices decrease). One type of bond, the Treasury inflation-protected security (TIPS), pays a fixed rate of interest and has its principal increase with the Consumer Price Index, thereby providing a hedge against inflation. Bond investors look to two sources for these returns: periodic interest payments and capital gains. Those interest payments may be taxable or, if from municipal securities, tax- exempt. What are the advantages and disadvantages of cash equivalent investments for the retirement investor? Correct Answer Cash equivalent investments are short-term (maturities of one year or less) money market instruments that are highly liquid and have a high safety of principal. In exchange for this safety they generally offer low rates of return and thereby are subject to purchasing power risk. They do, however, provide a place for an emergency fund and a temporary parking place for retirement funds when other securities markets are in turmoil. They also have a diversification effect on a portfolio. What are the advantages and disadvantages of real estate for the retirement investor? Correct Answer In general, real estate has offered a respectable average rate of return. However, poor liquidity, high transaction costs, and tax- reporting responsibilities are major disadvantages. And real estate can become overvalued like any asset, leading to negative returns. For those who directly own property, few can afford to diversify across several properties and locations. Many of these disadvantages are addressed through REITs, which own various properties (for equity REITs), mortgages (for income REITs), or both (for hybrid REITs) and trade on organized exchanges and over the counter. One aspect of real estate that is applicable to retirees is the reverse In what manner does a portfolio of two perfectly negatively correlated stocks behave? Correct Answer When two securities within a portfolio are perfectly negatively correlated, they move in perfectly opposite directions, so the variability of one stock exactly offsets the variability of the other. Describe the purpose of asset allocation. Correct Answer The purpose of asset allocation is to apportion funds in a way that meets the client's investment goals and dampens the effects of periodic market fluctuations. A common concern of retirement investors is the volatility of security prices. Explain factors that can alleviate these concerns. Correct Answer Two common factors that can alleviate retirement investors' concerns with security price volatility are time and asset allocation. Longer investment horizons can manage greater volatility than short investment horizons. Asset allocation can select asset classes that are aligned with both the investor's investment horizon and his or her risk tolerance. What is longevity risk? Correct Answer Longevity risk is the risk that a retiree will outlive his or her financial resources. As such, it is a significant risk for a retiree. Explain the concept of correlation and how it relates to portfolio management. Correct Answer With respect to market securities, correlation describes the degree to which the returns of two securities move relative to each other. Perfectly positively correlated securities, measured as +1.0, move together in lockstep; perfectly negatively correlated securities, measured as - 1.0, move in opposite directions and to the same extent. In portfolio management, correlation is used to achieve effective diversification, with the goal of mixing together assets that are not highly correlated. The combination of different assets with lower correlations produces a portfolio with lower risk than would be obtained by an undiversified combination of assets. What is meant by the concept of strategic asset allocation? Correct Answer Strategic asset allocation attempts to identify the asset mix that will provide the optimal balance between expected risk and return for a long investment horizon. Once the asset mix is determined and the weights assigned, the portfolio manager tries to maintain that balance. With fluctuating asset prices, some asset classes will naturally do better than others, unbalancing the portfolio relative to the weights originally assigned to each asset category. For example, during a period of growing stock prices and rising interest rates, a portfolio that begins with 50% of the dollar value in stocks and 50% in bonds will quickly become unbalanced, with stock values dominating the portfolio. Thus, intervention (with the client's approval) becomes necessary to rebalance the mix to the original strategic balance. Explain the concept and practice of tactical asset allocation. Correct Answer Tactical asset allocation is an active approach that tries to position a portfolio into those assets, sectors, and individual securities showing the most promise of above-average gains. Changes are then made as the prospects for these assets, sectors, and securities change. Many approaches can be used in tactical asset allocation. It can use sector rotation and market timing approaches, or it can incorporate momentum investing, whereby money is moved from areas with below- average performance to areas that are performing above average. Tactical asset allocation may also be seen as the opposite of momentum investing, moving money away from the asset category that has been most successful to one that has been the least successful. The theory here is that the most successful asset class has either become fully valued or overvalued, and the least successful asset class has become undervalued. Naturally, caution is advised with any such simple strategy. Sector rotation (moving, for example, from financial services stocks to capital goods stocks or from large- cap stocks to small-cap stocks) and market timing are typical methods of implementing this approach to asset allocation. Explain the concept of core-satellite asset allocation. Correct Answer Core-satellite asset allocation combines strategic and tactical asset allocation by dividing a portfolio into two parts: (1) the core, which represents 70% to 80% of the portfolio and is invested often in index funds or broad-based exchange-traded funds (strategic asset allocation); and (2) the remaining part of the portfolio, the satellite portion, is used to try to take advantage of particular opportunities that add return and/or diversification to the portfolio (tactical asset allocation). target retirement funds Correct Answer Target retirement funds (sometimes called life-cycle funds) are mutual funds that are usually a fund of funds that allocate assets among stock, bond, and money market funds within the same fund family. The asset allocation is determined with a specific year of retirement in mind, such as 2030 balanced funds Correct Answer Balanced funds have a portfolio mix of bonds, preferred stocks, and common stocks with the dual investment objectives of current income and capital appreciation. As a general rule of thumb, these funds have an asset mix of about 60% stocks and 40% bonds. Balanced funds are considered "total return" funds, since they provide both current income and appreciation. managed accounts Correct Answer A managed account, commonly called a separate account or a privately managed account, is one that is managed by a professional money The dividend yield should be no less than two-thirds of the AAA bond yield. Avoid companies that are currently losing money or that have more than 60% debt-to-total-assets. List several characteristics of growth stocks Correct Answer In general, growth stocks have the following characteristics: high profit margins earnings-per-share growth of 15% or more sales and earnings highly independent of the general economy small dividends, if any (as all earnings are used to finance expansion) distinctive products or services above average price-to-earnings ratios (as much as two to four times that of S&P 500 stocks) high price-to-book-value ratios high betas high expectations for continued growth by the investment community What is the small-firm effect? Correct Answer The small-firm effect is a market anomaly that enables investors in small capitalized companies to reap returns greater than the associated risks explain. What types of clients are suitable for small-stock strategy investing? Correct Answer Small stocks are not for everyone, and certainly not for many retirees. They may be suitable, however, for clients with high risk tolerances, entrepreneurial instincts, and long investment horizons. ladder strategy Correct Answer The ladder strategy, also known as the staggered maturity strategy, spreads equal amounts of the bond holdings along different maturities; this strategy avoids large commitments at one maturity, and is intended to help offset interest rate risk. barbell strategy Correct Answer The barbell strategy splits the bond portion of the portfolio between a short-term bond series and a long-term bond series; both ends then stagger maturities similar to the ladder approach. The essence of this strategy is to blend short-term and long-term bonds to provide an overall income stream that is acceptable to the client. Calculate the value of a bond with a 7% coupon that is maturing in 20 years and has a par value of $1,000 and a YTM of 9%. Correct Answer Using an HP-10BII+ financial calculator and setting it to 2 P/YR, the keystrokes are: 20 SHIFT[n] 9[i] 35[PMT] 1000[FV] [PV] DISPLAY: -815.98 (ignore the - sign)If the calculator is set at 1 P/YR, then input i as 4.5, and n as 40. Calculate the value of a zero coupon bond maturing in 20 years, with a par value of $1,000 and with a YTM of 9%. Correct Answer Using an HP-10BII+ financial calculator and setting it to 2 P/YR, the keystrokes are: 20 SHIFT [n] 9[i] 1000[FV] [PV] DISPLAY: -171.93 (ignore the - sign) No PMT is entered since it is a zero coupon bond. If the calculator is set at 1 P/YR, then input i as 4.5, and n as 40. Note: Most bonds pay interest semiannually. However, zero coupon bonds are sold at a discount relative to their face value and do not make periodic interest payments; instead, a buyer receives the face value of the bond when it is redeemed on a specified maturity date. To calculate the value of a zero coupon bond, we have assumed for purposes of this example that it pays interest semiannually. By doing this, we will be able to compare its value with the value of most other types of bonds. % of workers who feel confident with what they have for retirment Correct Answer 21% % of workers ages 55+ with less then 25K saved Correct Answer 33% Original intention of Social Security related to retirement Correct Answer Meant to be an income floor, not a retirement plan Current trends in retirement planning Correct Answer 1. More employers offering enrollment & qualified default investment alternatives in 401K plans 2. Declined in DBP's 3. Longevity(people living longer) 4. Expansion in distribution options (annuities, 401K's) 5. Expansion in employer sponsored financial wellness initiatives 6 Steps of Retirement Plan Process Correct Answer Establish relationship Gather data and goals Analyze data Develop and present plan Implement recommendations Monitor plan EGAD I Made it Step 1 of retirement planning: Establish Relationship Correct Answer - Reach agreement with client on what you will do, what they will do, and how - Disclose conflicts of interest, compensation agreements, how much you get paid for specific products - Length of relationship, even if it is indefinite - Get enough info for investment policy statement - Provide foundation as to what you can use within a portfolio to help client reach their goals Essential Elements of Investment Policy Correct Answer - Contains clear statement of client investment goals - Identify (un)suitable investments and vehicles - Identify risk tolerance - Identify desired assest allocation - Include provision for periodic review Advantages and Disadvantages of Cash Equivalents and examples of Correct Answer Advantages - low risk, good liquidity, good for short term goals Disadvantages - low returns, inflation risk Examples - CD's, Banker Acceptances, T-Bills Advantages and Disadvantages of Equity Correct Answer Advantages - growth, can pay income/dividends, outpaces inflation Disadvantages - riskier then cash, can lose principal Advantages and Disadvantages of Fixed Income Correct Answer Advantages - Low Risk, Steady to potential income Disadvantages - Reinvestment risk, Call Risk, Interest rate Risk, Credit Risk, Purchasing Power Risk Advantages and Disadvantages of Real Estate Correct Answer Advantages - Tax Benefits, Inflation Hedge, Leverage, Mortgage interest is tac deductible Disadvantages - Illiquidity, Have to manage, High Minimum Investment, High Transaction Costs, Immobility of asset, Economic Tax Risk Two types or Risk Correct Answer Systematic and Unsystematic Examples of Systematic Risk Correct Answer Purchasing Power Reinvestment Rate Interest Rate Market Exchange Examples of Unsystematic Risk Correct Answer Business Financial Political Purchasing Power Risk Correct Answer Inflation risk Reinvestment Risk Correct Answer the risk that market interest rates may have decreased at the time payments from an investment are received. Interest Rate Risk Correct Answer Caused by fluctuations in the general level of interest rates Market Risks Correct Answer Most apparent systematic risk, caused from tangible and intangible risk Exchange Rate Risk Correct Answer Caused by changes in relative value of foreign currency compared to value of home currency Business Risk Correct Answer Specific to nature of individual business How to eliminate business risk with stock Correct Answer Own 15+ stocks in different sectors Financial Risk Correct Answer Associated with the use of debt in the financing of a firm or property Political Risk Correct Answer Associated with investing in foreign countries Standard Deviation Correct Answer common statistical measure of total risk that measures the dispersion of all sample data points (returns) around the average of the points (average returns), measures total return w/ all possible risks Volatility/Standard Deviation relationship Correct Answer Higher the volatility, higher the standard deviation Levels of Standard Deviation Correct Answer 1 Level = 68% 2 Levels = 95% 3 Levels = 99% Example: If investment mean return is 10%, and standard deviations are 15%, what are the possible returns at each level of Standard Deviation Correct Answer 1 SD: -%5 - 25% 2 SD: -20% - 40% 3 SD: -35% - 55% Beta Correct Answer it is a measure of a security's systematic risk—risk that cannot be diversified. The beta coefficient is a measure of the volatility of an individual asset relative to the volatility of an appropriate benchmark index. Beta < 1 Correct Answer stocks less volatile Beta > 1 Correct Answer stocks more volatile Example: What would be approximate price movement of $A if beta is .85 and comparable bench mark return is 15%? Correct Answer 12.75% market fluctuations, these percentages change outside a certain range, the portfolio is rebalanced back to the target allocation. Tactical Asset Allocation Correct Answer Calls for periodic revision of the asset mix, moving funds from assets that appear to be overvalued to assets that appear undervalued. Tactical asset allocation is an active, market-timing strategy that responds to changing capital market conditions. What changes allocation in strategic assets Correct Answer Major life events Types of stock investment strategies Correct Answer Buy & Hold Sector Rotation Contranian Strategy Value, Growth, & Small Stock investing Dollar Cost Averaging Low P/E Strategy Buy and Hold Strategy Correct Answer A passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market most strategies are compared to this Sector Rotation Correct Answer timing strategy that shifts portfolio assets from one sector of the economy to another in anticipation of broad-based economic developments. Contranian Strategy Correct Answer buying securities that are out of favor and selling those that have become popular Value, growth, & small stock investing Correct Answer looking for stocks whose current prices reflect low expectations of their future performance, seeks out undervalued stocks, and looks for appreciation dollar cost averaging Correct Answer Consistently investing a fixed dollar amount over a regular period of time Low P/E strategy Correct Answer The strategy of buying stocks with low price-to-earnings ratios. In general, low P/E ratios are associated with Correct Answer stocks of companies that are out of favor, are having some business or financial problems, and/or have low expectations of earnings growth. Bond Investment Strategies Correct Answer Laddering Barbell Bond Laddering Correct Answer spreads equal amounts of the bond holdings along different maturities. For example, for a $100,000 bond portfolio, $10,000 is invested in 1- year maturities, $10,000 in 2-year maturities, etc. Bond Barbell Correct Answer The barbell strategy splits the bond portion of the portfolio between short-term and long-term bonds. Both ends then stagger maturities similar to the ladder approach. Example of Bond barbell strategy Correct Answer a $1 million portfolio could allocate $100,000 in one-, two-, three-, four-, and five-year maturities. As the one-year bonds mature, the proceeds are reinvested in five-year bonds, thereby maintaining that maturity structure. On the other end, $100,000 could be invested in 16-, 17-, 18-, 19-, and 20-year maturities. After one year, when the 16- year bonds become 15-year bonds, they are sold and reinvested in 20-year bonds, again maintaining that maturity structure. Elements of bond calculations Correct Answer Face value = $1000 Semi annual compounding Coupon interest converted to semi annual, and entered as a payment 2 compounding periods PV is negative FV is positive Example: Client owns bond w/ face value of $1000 & 7% coupon rate. Interest is paid semi-annually, and bond matures in 9 years. Similar bonds have YTM of 12%. What is the current price of the bond? Correct Answer Periods= 2 Pmt = $35 I/YR = 12% N = 9 *shift* N PV = -729.31 Social Security Correct Answer Insurance program that you pay premiums into through payroll taxes set up in 1935 Original Social Security Tax Correct Answer 2%, 1% from employee and 1% from employer Original things Social Security covered vs what it covers now Correct Answer Originally provides old age benefits, now provides survivor benefits and disability benefits as well Current Social Security Tax and Breakdown Correct Answer 7.65% OSDI = 6.2% Medicare/Medicaid = 1.45% OSDI breakdown % Correct Answer Retirement = 5.7% FRA range Correct Answer 65-67 % additionally earned if you delay Social Security Correct Answer 8%/year Earliest SS can start being claimed Correct Answer Age 62 65 year old male has 50% chance of reaching age Correct Answer 83 65 year old female has 50% chance of reaching age Correct Answer 86 65 year old couple has 50% chance of reaching age Correct Answer 90 65 year old male has 25% of reaching age Correct Answer 89 65 year old female has 25% of reaching age Correct Answer 92 65 year old couple has 25% of reaching age Correct Answer 94 Calculate breakeven if client has 2 SS options: Option 1 - Take $1000/month now Option 2 - Wait one year and take $1083/month Correct Answer BE = (Forfeiting amount/additional gained for waiting)/12 $12000/$83 = 144.578/12 = 12 years If you think you'll live less then 12 years, take the money When a spouse dies, the other spouse Correct Answer Gets the greater of their own SS benefits or their spouse If you decide to start taking SS between 62 and FRA, your payments will be Correct Answer reduced one dollar for every two dollars you earn above $17040 If you decide to start taking SS at FRA, your payments will be Correct Answer reduced one dollar in benefits for every three dollars of earnings above $45,360 If you decide to start taking SS after FRA, how does your income affect SS payments Correct Answer There is no effect If you start taking SS at age 62, and your earnings are $41,680 and your SS benefits are $19,665, how much will your SS be reduced? Correct Answer $41680 - $17640 (earnings limit) = $24,040 $24,040/2 = $12,020 Net SS benefits = $19,665 - $12020 = $7645 Social Security Benefits is taxed based on your Correct Answer Provisional Income Provisional Income Formula for SS Correct Answer AGI + Non- taxable Interest + 1/2 SS Benefits What are the singe filing tax rules for SS and Provisional Income Correct Answer <$25,000 no tax $25K - $34K, 50% tax 34K+, 85% tax What are the joint filing tax rules for SS and Provisional Income Correct Answer <$32,000 no tax $32K - $44K, 50% tax $44K+, 85% tax Rules for person to start taking SS based off spouse income Correct Answer Must be 62, and spouse must have started taking SS Example: Husband files at 62, when PIA is $1000, paying him $750 each month. How much would spouse get if she filed under spouse SS as well? Correct Answer $500 (half of spouse PIA) How does a restricted application for SS work? Correct Answer This strategy provides an opportunity for the higher-earning spouse (Spouse 1) to file a restricted application for spousal benefits at full retirement age based on Spouse 2's earnings record. Spouse 2 would need to file for individual benefits in order to trigger Spouse 1's spousal benefit. Spouse 1's benefit would continue to grow at 8% of PIA per year until age 70, at which point this person would switch to collecting an individual benefit. At this point Spouse 2 would have the option of switching to a spousal benefit if higher than Spouse 2's own. Cut off date for restricted application Correct Answer 12/31/2015 Collect SS on deceased spouse requirements Correct Answer Must be married for at least 9 months What surviving spouse will receive if they file on deceased spouse SS Correct Answer Full PIA of deceased spouse or their own SS, whichever is greater If decedent was getting $2400, and surviving spouse is getting $1000, what will the surviving spouse start taking Correct Answer $1400 Earliest a surviving spouse can start collect social security Correct Answer 60, at a reduced amount $5905.20 -> $5910 Roth IRA characteristics Correct Answer Contributions after tax Earnings are after tax Withdrawals are tax free if done correctly (59.5, 5 years) 6K max contribution Money must be from earned income or alimony before 2019 No age limit on contributions No date RMD's must begin by Does not matter if you are participating in DCP/DBP Roth Contribution phaseout range: Single Correct Answer $122k - $137k Roth Contribution phaseout range: Married, joint Correct Answer $193K - $203K Traits of someone suitable for Roth IRA Correct Answer Modest Income Years until Retirement Believes tax rates will increase or will move to higher tax bracket Wants to avoid RMD Saving for a home Wants to pass tax free assets to genes Roth Conversion Reasons Correct Answer Income tax @ conversion, but no 10% tax penalty Make low income now, expect future tax increase Improve tax diversification of portfolio Roth Conversion Formula Correct Answer After tax contributions/Total amount Roth Conversion Calculation: Client has 2 IRA's. IRA 1 has $50k in it, $10k of it after tax dollars. IRA 2 has $110k, none of which is after tax dollars Correct Answer $10k/$160k = .0625 $50k x .0625 = $3125 $50k - $3125 = $46875 taxed Characteristics of annuities Correct Answer Unique since investment & insurance product Only product that can guarantee income for life Insurance company takes risk if client outlives amount they put into product Have many different accumulation & distribution phases No taxation on earnings Fixed annuity & equity characteristics Correct Answer Equity annuities are tied to how the market performs, but is not directly related Are type of a fixed annuity Fixed payments, fixed withdrawals, earns interest, guaranteed income Variable Annuities Correct Answer Invest amounts in sub accounts that are like mutual funds Allows you to gain a greater returns based on how sub account does Can also have riders that guarantee the minimum payments, regardless how the sub account performs Taxation of Variable Annuities Correct Answer Grows on tax- deferred basis When withdrawn, gains are withdrawn first and taxed as ordinary income, contributions are withdrawn and then are tax free Longevity Annuities Correct Answer provide protection against the risk of depleting your financial assets at an advanced age Can set aside $130k from 401k Mutual Funds Correct Answer Investment that pools money from many investors to invest & achieve objective of fund Characteristics of Term Insurance Correct Answer Pay for a period of time, if you die during that time you get paid No cash value, nothing after period ends Lowest cost form Characteristics of Whole Life Correct Answer guaranteed premium cash value grows tax deferred death benefit always loans available Characteristics of Universal Life Correct Answer Premium is flexible between minimum and maximum amount Death benefit can be raised or reduced Cash value growth is flexible Variable Life Correct Answer guaranteed premium cash value invested in market to try and achieve higher returns death benefit always loans available Variable Universal Life Correct Answer - Death Benefit is Variable & Adjustable - Two death benefit options - Premium is Flexible - Cash Value is variable, and no Guarantee - investment options - partial surrenders Health Savings Account (HSA) Correct Answer This is a complex self-insurance strategy, which allows for tax-deferred investments into special accounts that can be used to pay the deductible in high-deductible insurance policies. What happens if HSA funds are not used by 65 Correct Answer can be withdrawn to fund retirement and other non-health needs. HSA combines Correct Answer high deductible health plan w/ savings account that is tax advantaged Characteristics of HSA Correct Answer tax deductible contributions, tax-deferred growth, and tax free distributions Must have high deductible plan to open Once you exceed a certain threshold, you can make investment decisions like stocks & bonds One time rollover allowed from IRA, up to annual limit Types of POA Correct Answer General Durable Springing Durable General POA Correct Answer Covers you while healthy, not when incapacitated Durable POA Correct Answer Covers you until you die, even if incapacitated Springing Durable POA Correct Answer only becomes effective upon incapacitation Conservator Correct Answer court appointed fiduciary responsible for managing property & financial affairs of legally incapacitated or mentally incapacitated person (if no POA) Living Will Correct Answer states what health care measures should or should not be taken in terminal situations if the person is incompetent to make such decisions at that time. Living wills only address terminal situations. Medical Proxy Correct Answer revocable written document in which the principal authorizes a named person to make health care decisions on the principal's behalf in the event of their own incapacity (applies to non-life ending medical decisions) Medicare Correct Answer A Social Security benefit available to persons age 65 or over who are eligible for Social Security retirement benefits. It provides medical expense coverage, including hospital and supplementary medical insurance. How is medicare funded Correct Answer Taken out of paycheck as a part of FICA Sign up period for Medicare Correct Answer 3 months before & after the month you turn 65 Month you retire & following 7 months after What happens if you wait past 65 to sign up for Medicare Correct Answer you need a letter of credible coverage to give to SS Administration (many penalties if you do not do this) How does a benefit period work for Medicare Correct Answer If you go into the hospital for something and you do not come in for 60 days after that, your benefit period ends. if you come in on day 61 for something else, a new benefit period starts and you have to pay a new deductible and new co-insurance kicks in Max number of deductibles you can pay in a year with Medicare Correct Answer 5 Deductible Correct Answer Amount you must pay before you begin receiving any benefits from Medicare/insurance company Co-insurance Correct Answer A percentage of the expenses that is paid by the insurance company once the deductible has been met for covered services Medicare Part A covers Correct Answer inpatient hospital care skilled nursing care (non-custodial) hospice care home health care Blood Medicare Part B covers Correct Answer physician and outpatient expenses deemed "medically necessary," such as: - durable medical equipment - lab tests - x-rays -mental health - some home health care - Preventive care Medicare Part D covers Correct Answer Prescription drugs Medicare Supplements Correct Answer 10 different plans designed to cover gaps caused by having original medicare and part D When it comes to Part D, insurance companies selling the same supplement all Correct Answer have the same plan, the only thing that varies is the premium you pay 5 year look back period as it applies to medicaid Correct Answer Prevents someone from giving away all assets in the last 5 years to qualify for Medicaid long-term care insurance Correct Answer Provides coverage for various custodial care expenses in the event the insured person becomes incapacitated as defined in the policy. How to qualify for LTC Correct Answer Must not be able to do 2/6 activities of daily living 6 activities of daily living Correct Answer Transferring Incontinence Toileting Bathing Dressing Feeding Self Types of LTC ranked from best to worst Correct Answer Nursing Home Assisted Living Home Care Adult Day Care Options for covering costs of LTC Correct Answer Self-Insurance (pay yourself) Life Insurance (riders can pay) Annuities (riders can pay) LTC Insurance Reverse Mortgage Medicaid Top concerns of those considering retirement Correct Answer Outliving one's resources Having to work in retirement Being able to afford health care Being able to cover LTC needs Staying productive & engaged Top reasons people retire later Correct Answer 58% making up for financial loss Top reasons people retire earlier Correct Answer 23% health, 22% laid off/downsized What typically happens to DBP's for those that retire early Correct Answer Benefits are typically reduced What typically happens to DCP's for those that retire early Correct Answer Fewer contributions & fewer years of growth What typically happens to Social Security for those that retire early Correct Answer Reduction of benefits before FRA Early withdrawal penalty exceptions for all retirement plans Correct Answer Death or disability Substantially equal periodic payments Medical expenses above 10% AGI Early withdrawal penalty exceptions for IRA's Correct Answer First time home purchase up to $10k Health Insurance premiums while unemployed Early withdrawal penalty exceptions for employer plans Correct Answer Separation from service after age 55 QDRO Getting excess contributions back Small company stock plan has dividends Early Retirement Incentives Correct Answer Some employers want to encourage older employees to retire earlier because it costs more to employ them then younger workers Examples of Early Retirement Incentive Packages Correct Answer Cash/Severance Benefits Continued health plan coverage Early access to distributions from retirement plans Enhanced pension benefits Access to company fitness center, pre-retirement counseling, and tax counseling Factors in determining if early retirement incentive is a good deal Correct Answer Calculate PV of benefits gained How will it affect social security payments State of job market Value placed on leisure time Golden Parachute Correct Answer a clause inserted in the contract of employment of a senior employee that details a lucrative financial package payable if the employee is dismissed Downside of Golden Parachute Correct Answer Employee may not perform well in order to collect on the golden parachute clause Taxation of Golden Parachute Clause Correct Answer If deal is in excess of 3x base comp, it will be subject to excise tax of 20% Factors that affect decision to delay past FRA Correct Answer Economic Conditions Need to maintain health care benefits Lack of savings & presence of debt Anxiety about having too much free time Enjoy work & want to stay active Example: Client has $100k on 12/31/2019, $25k of which is non- deductible. If client takes $10k distribution, how much is taxable? Correct Answer $25,000/$100,000 = .25 $10,000 x .25 = $2500 $2500 is tax free $7500 is taxable Types of rollovers available for IRA Correct Answer 1. Conduit 2. Direct 3. Indirect Conduit Rollover Correct Answer An unofficial term for an IRA used to "park" a distribution from one qualified plan until it can be rolled over to another qualified plan. With a conduit IRA, the forward-averaging potential of the distribution can be preserved. Direct Rollover Correct Answer A tax-free transfer of cash or other property between two qualified plans or IRAs, where the transferred cash or property never passes through the hands of the owner. Indirect Rollover Correct Answer A transfer of cash or other property between qualified plans or IRAs in which the owner takes temporary receipt of the funds. Must be done in 60 days Examples of rollover ineligibility Correct Answer Non-taxable portion of distribution Part of series of substantially equal periodic payments RMD Corrective distributions Loans Hardship withdrawals 72(t) Correct Answer -Substantially equal periodic payments after separation from service 1. paid not less frequently than annually 2. based upon the life expectancy of the recipient w/ a reasonable rate of interest 3. if applicable, based upon reasonable mortality assumptions Only exception of changing 72(t) payment method Correct Answer Only exception is a one time election to switch from the annuity/amortization method to the RMD method. This will reduce 72t payout amounts. No penalty for making this switch. 72(t) payment changes are only allowed under two conditions Correct Answer paid without changing the amount for the longer of: -5 years -payee reaches 59.5 If payment amount of 72(t) changes without meeting requirements Correct Answer the 10% penalty will be retroactively charged against all past distributions Requirements for distribution from a Roth IRA to be qualified Correct Answer Must meet 5 year holding period AND (any of the following): - owner is 59.5 - to a bene after death of owner - disability - first time home buyer expenses up to $10k When must distribution of Roth IRA's being to beneficiaries Correct Answer Year after the year of death Ordering rules for Roth IRA funds Correct Answer 1st: Annual Contributions 2nd: Conversions 3rd: Earnings RMD Calculation Formula Correct Answer Balance in plan on 12/31 of prior year/Life Expectancy based off uniform table RMD's must be taken by Correct Answer By April 1st of the year following the year of attaining age 70.5 With RMD's, if spouse is 10 years younger, use Correct Answer Joint Life Table Example: Client turns 70 in February, has 100k in IRA, life expectancy trigger is 27.4, calculate RMD Correct Answer $3650 How different retirement plan distributions work with aggregation Correct Answer IRA's - aggregated together 403B - aggregated together 401k - not aggregated Survivor RMD Options for Spouse Correct Answer - Take distributions when decedent would have been 70.5 - Roll into own plan and take when 70.5 - Distribute under 5 year rule - Lump sum Survivor RMD options for non spouse Correct Answer - Move into inherited IRA & take distribution by 12/31 of year following original owner death - Distribute under 5 year rule - Lump sum (no 10% penalty) Survivor RMD for death after distributions Correct Answer - Roll into own RMD & take based off own age - Transfer to inherited Example: Clients married, filing jointly, $300k taxable, $100k taxed as LTCG. What is the tax breakdown? Correct Answer $200k taxed as ordinary income $100k taxed at 15% (all falls between range) Example: Clients married, filing jointly, $600k taxable income, $400k LTCG, what is the tax break down? Correct Answer $200k ordinary income $288,850 taxed at 15% $200k taxed at 20% Calculating tax when both STCG and LTCG are present Correct Answer (Long Term Capital Gain - Long Term Capital Loss) - (Long Term Capital Loss - Short Term Capital Loss) Cost Basis and Tax Implications on Deductible IRA Correct Answer Cost Basis = 0 Entire distribution taxable Cost Basis and Tax Implications on Non-Deductible IRA Correct Answer Part after tax dollars, Part taxable, Part return of capital Backdoor Roth IRA Correct Answer Contribute to individual trad IRA, and then convert to a Roth IRA Who is a backdoor IRA used for? Correct Answer People who's taxable income is too high to contribute to a Roth Taxation method of Lump Sum Distribution from Annuity Correct Answer LIFO (earrings first, then principal) Taxation method of Annuitization Distribution from Annuity Correct Answer Pro-Rata Section 121 Exclusion Correct Answer If a residence has been owned and used by the taxpayer as the principal residence for at least two years during the five-year period ending on the date of sale, up to $250,000 of realized gain is excluded from gross income. For a married couple filing a joint return, the $250,000 is increased to $500,000 if either spouse satisfies the ownership requirement and both spouses satisfy the use requirement. Section 121 Exclusion Qualifications Correct Answer - Have to own and live in residence for 2 of the last 5 years - Principal residence for 2 of prior 5 years - Can only be used once every 2 years - Partial exclusion if you have to move for new job, medical, or other unforeseen reason (1/4 of amount) Widows and Section 121 Exclusion Correct Answer Widows can use full $500k exclusion amount if sold within 2 years of spouse death Life Insurance is purchased with Correct Answer after tax dollars tax diversification Correct Answer creating a balanced portfolio of taxable, tax-deferred, and tax-free assets Best way to utilize taxable and tax deferred investment vehicles Correct Answer Let tax-deferred grow as long as possible, and use more tax immediate vehicles if you can What are the objectives of estate planning Correct Answer - Provide for financial needs of survivors - Proper distribution of assets at death - Protection of assets from the claims of creditors - Avoids probate - Provide for possible incapacity - Minimize death taxes - Provide for orderly transfer of a business - Determine guardianship of children Gross Estate Correct Answer All the assets owned at death, is starting point for calculating estate tax Gross estate includes Correct Answer - all property in the probate estate - property over which decedent held general power of appointment at death - face amount of life insurance owned on the deceased's life - replacement cost of insurance owned on other's lives - half of any property owned jointly between spouses - full value of property owned jointly between nonspouses, except to the extent the executor can show the contribution made by the surviving parties. Two methods of distribution for estate distribution Correct Answer - Probate - Outside the probate process Estate distribution process of wills Correct Answer Probate process Estate distribution process with no will Correct Answer Intestate Will Correct Answer A written document that transfers a decedent's probate property at death Codicil Correct Answer Change to a will Will Substitute Correct Answer Legal arrangements that avoid probate by allowing the transfer of estate assets without intervention of a probate court Applicable Exclusion Amount Correct Answer The dollar value of taxable transferred property on which federal gift or estate tax does not have to be paid out of pocket because of the gift and estate tax applicable credit amounts. Applicable Exclusion Amount in dollars Correct Answer $11.4 million Gift Correct Answer A completed lifetime transfer of property for less than full consideration (example: selling 10k car for 1k to friend) Example: if you forgive a friends $100k debt, what amount is excluded and what amount is not? Correct Answer $15,000 excluded $85,000 taxable gift applied to portion of Applicable Credit Amount Transfers that are exempt to gift tax are Correct Answer Someone else's medical bills or tuition bills Gift Splitting Correct Answer Allows the spouse of a donor to be treated as the donor of half the property given. If the gift was of a present interest, both spouses will be entitled to take an annual exclusion, thus reducing or eliminating any gift tax due. Gift Splitting Limitation Correct Answer If you give 30k as a couple and split it, all gifts for the rest of the year must be done the same way taxation of gifts between spouses Correct Answer Unlimited amount excluded from tax Benefits of lifetime gifts Correct Answer - Annual Exclusion - Can pay medical bills & tuition - Remove appreciated assets from estate - Move tax income generated by assets from higher tax bracket owner to lower tax bracket owner - No actual tax unless cumulative gifts exceed gift tax applicable exclusion amount Benefits of transfers at death Correct Answer - Property receives a step up in basis - Possible tax law changes may make future transfers more favorable - Tax Circumstances of donor/donee may change - Avoid out-of-pocket tax payment while living if gift tax applicable exclusion amount is exceeded Trust Correct Answer A form of property ownership in which the legal title is held by a trustee for the benefit of one or more beneficial owners. Revocable Trust Correct Answer A trust in which the terms may be altered or the trust revoked after creation. Irrevocable Trust Correct Answer A trust that the grantor cannot unilaterally revoke Once assets go into a revocable trust Correct Answer Grantor can't make any changes & assets are out of grantor estate Roles of trusts in Estate Planning Correct Answer - Can provide for management of property - Accumulate income for later distribution to a bene - Protect assets from creditors - Establish income & remainder beneficiaries - Provide income, gift, & estate tax savings - Avoid probate/ensure privacy Trusts are handled Correct Answer privately, not publicly like probate process If you know you are going to have to pay estate tax, set up Correct Answer irrevocable life insurance trust to pay off estate tax upon death Pershing 2014 study found that Correct Answer clients are more concerned about trust then advisors SE 2007 study found Correct Answer confusion on the standard of advisors Edelman Trust Barometer Correct Answer measures trust in certain industries, and the financial services industry is at the bottom Federal regulations are a Correct Answer lagging indicator Eligibility of ERISA Correct Answer after age 21 and one year of service, you are eligible to be in employee retirement plan Coverage and Protection of Assets under ERISA Correct Answer Protection - segregate assets Coverage - employees of every level must be covered ERISA Vesting Correct Answer capped at 7 years, commonly 3 years or less ERISA Reporting and Disclosure Correct Answer requires documentation & disclosure to those participating in a retirement trust ERISA & Fiduciary Correct Answer Anyone giving advice to plan sponsor or participant must be giving best advice for participants Client Relationship Form Proposal Correct Answer Adviser summarizes how they do business Dual Headed Role Correct Answer Someone who primarily sells one product such as life insurance can call themself an adviser Best Interest Proposal Correct Answer tied to fiduciary standard, waters it down a bit Since Fed is dragging their feet on fiduciary legislation, Correct Answer Some states are pursuing their own action Limitations on disclosures Correct Answer Too many disclosures can confuse clients and make them unfairly trust you more Research on transparency shows Correct Answer clients need to be fully educated on what is being disclosed All of the following cities must be met to satisfy fiduciary duty: Correct Answer Duty of Loyalty Duty of Care Duty to Disclose Duty to Diagnose Duty to Consult Duty to Keep Current Duty of Loyalty Correct Answer The obligation to look first to the client's best interest and requires that the client's interests be put ahead of one's own, and that all actions be made solely for the benefit of the client. Duty of Care Correct Answer The duty of care requires the fiduciary to have the competency to give fiduciary advice. This requires a certain level of knowledge and skill to know what is in the best interest of someone setting up a retirement plan or in the best interest of a retirement plan participant. Duty to Disclose Correct Answer disclose all material facts and all conflicts of interest is dealt with extensively in government regulation and professional codes of conduct. Duty to Diagnose Correct Answer The obligations to "know your customer" and to investigate the suitability of any products recommended as investments Duty to Consult Correct Answer Obligation to bring in someone from the outside who has better knowledge of a subject then you, such as an estate attorney for estate planning The Duty to Keep Current Correct Answer Duty to stay current and up to date on all changes in the industry Uniform Prudent Investor Act Five Fundamental Criteria Correct Answer - applies to any investment as part of total portfolio - Trade off in investing (risk/reward balance) - Trustee can invest in anything that is appropriate in achieving risk/return - Requirement to diversify - Delegation of trust admin functions Fiduciary requirements of plan under ERISA Correct Answer - Plan must offer broad range of investments - Fees must be reasonable - Proper disclosures must be made Red flags when it comes to unreasonable fees are Correct Answer - Performance rewards - High fees - Use of proprietary funds - Using higher fee fund class when lower is available) Under new CFP Baord of Standards, who and who is not held to fiduciary standard? Correct Answer - anyone giving financial advice is held to fiduciary standards people - if client believes they re being given financial planning advice, CFP considers them to be held to fiduciary standard -just recommending stocks are not CFP Board of standards looks at Correct Answer - degree to which multiple financial planning subjects are involved - comprehensiveness of data gathering - Breadth & depth of recommendations 7 Principles of CFP Correct Answer - Integrity - Objectivity - Competence - Fairness - Confidentiality - Professionalism - Diligence Best practices of CFP Correct Answer - Focus on advice not sales - Look out for best interest of client - Provide full & adequate disclosure - Clearly written contract - Demand & Use Transparent Products - Work w/ firm to ensure compliance - Constantly "sharpen saw" Examples of systematic risk can best be remembered using the acronym Correct Answer Prime: Purchasing power risk Reinvestment risk fixed annuities in retirees' portfolios as a substitute for at least part of their bond allocation Past studies have indicated that a _________ rate of withdrawal is one that is likely to provide a stream of cash flow that would last at least 30 years based on either a 50%/50% or a 75%/25% allocation to stocks/bonds. Correct Answer 4% T Bills Corp Bonds Large company stocks A. 80% 10% 10% B. 20% 30% 50% C. 10% 25% 65% Return 3.5% 5.7% 9.8% Calculate Expected Return on each Correct Answer Portfolio A = 0.80 (3.5) + 0.10 (5.7) + 0.10 (9.8) = 4.35% Portfolio B = 0.20 (3.5) + 0.30 (5.7) + 0.50 (9.8) = 7.31% Portfolio C = 0.10 (3.5) + 0.25 (5.7) + 0.65 (9.8) = 8.15% The cardinal rule of asset allocation is to never have Correct Answer so much money in one asset that, if it collapses, it will change the individual's life style. A general guideline used by many investment advisers for asset allocation is Correct Answer not to have more than 10% of your portfolio in any one stock, including your company's stock. As the years of retirement come and go and the retiree's investment time horizon and risk tolerance decreases Correct Answer the concern about price volatility becomes more valid. Target Retirement Funds Correct Answer aims for a specific target date at which the investor will retireand gradually adjusts its mix of stocks, bonds, and cash equivalents to become more conservative over time. Target Retirement Funds are popular because Correct Answer make investing for retirement easy by making the asset allocation decisions, periodically rebalance the portfolio, adjust the portfolio as the target retirement date approaches. As a planned course of action, retirement planning strategy is dependent upon three key elements: Correct Answer an identifiable goal a method to attain that goal the competencies and resources to sustain the strategy Which of the following are correct statements about income replacement percentages? I. Income replacement percentages are typically much higher for those with higher preretirement incomes. II. Income replacement percentages vary between low-income and high-income retirees. III. Income replacement ratios should not be used as the only basis for planning. IV. Income replacement ratios are useful for younger clients as a guide to their long-range planning and investing. Correct Answer II, III, IV The inverse of option I is true—those with a lower preretirement income typically need a much higher income replacement percentage in retirement. (LO 1-4) If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their retirement date in 25 years (rather than an amount that grows with inflation each year), what level annual end-of-year savings amount will they need to deposit each year, assuming their savings earn 7% annually? Correct Answer $31,621 Set calculator "End" and "1 P/Yr" Inputs: FV = 2000000, i = 7, N = 25, PV = 0, then Pmt = $31,621 Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per month at the beginning of each month. Over the 12 remaining years of their preretirement period, they expect to generate an average annual after-tax investment return of 8%; during their 25-year retirement period, they want to assume a 6% annual after-tax investment return compounded monthly.What is the lump sum needed at the beginning of retirement to fund this income stream? Correct Answer The monthly retirement income need is not specified as "today's dollars," and no inflation rate specified; therefore, it is assumed that the $2,500 net monthly income need represents retirement dollars, and the retirement period income stream is level. To calculate the lump sum needed at the beginning of retirement, discount the stream of monthly income payments at the investment return rate: 10BII+ PVAD calculation: Set calculator on BEG and 12 periods per year, then input the following:2,500 [PMT]25 [SHIFT] [N]6 [I/YR]0 [FV]Solve for PV = $389,957 Assume a client and investment professional have worked together for several years. Recently, the client's personal and financial circumstances have changed. According to the course materials, what is the next asset management step that the investment professional should take? Correct Answer Gather Data By delaying three years, Susan is forfeiting $500 x 36 payments or $18,000 of benefits. She would then gain $120 per month going forward: $18,000/$120 = 150 months, or 12.5 years. If she thinks she is going to live beyond 12.5 years, it would pay to delay benefits by three years. Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per month. Because he has filed at age 62, his payment will be reduced by 25% to $1,125. His wife Linda, age 67, would like to begin spousal benefits. Her monthly income would be Correct Answer $750 Because Linda has attained FRA, she would be eligible for 50% of Sam's full PIA, or $750.00. If a security has an average return of 14.2% and a standard deviation of 8.4, calculate the returns of the first level of Standard Deviation Correct Answer 5.8 and 22.6 68% of the time Your client has established a balanced portfolio with various amounts allocated to different asset classes, and periodically she rebalances the portfolio to keep the same approximate percentages in the different asset classes. Her approach is Correct Answer Strategic Harry, who is 34 years old, contributed $2,000 to a Roth IRA six years ago. By this year, the investments in his account had grown to $3,785. Finding himself in a financial bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal? Correct Answer Strategic Norman and Brenda Walker are married taxpayers filing jointly. They are both 44 years old. Norman earned $132 this year, and Brenda earned $100,000. Brenda is an active participant in the qualified plan offered by her employer, and she contributed $1,500 to her IRA for this tax year. How much, if any, can be contributed to a spousal IRA and deducted for Norman for 2019? Correct Answer $6000 The maximum deductible contribution to a spousal IRA for Norman is $6,000. The deductible amount phases out at AGI of $193,000-$203,000 (for 2019) for Norman, who is the nonactive participant spouse. James and Doris Stewart, both age 40, will contribute a total of $12,000 to their IRAs for this tax year. They both work outside the home, and they file a joint tax return. James is a teacher at the local high school and contributes to a TSA. Doris's employer has no retirement plan. Their adjusted gross earnings for this year will be $111,000. What amount, if any, can they deduct for their IRA contributions? Correct Answer $9600 Doris is entitled to deduct the full $6,000 spousal IRA amount and James is in the phaseout range for active spouses: $123,000 - $111,000 = $12,000; $12,000 ÷ $20,000 phaseout range = 0.6; 0.6 × $6,000 = $3,600; $3,600 + $6,000 = $9,600. Notice that the Stewarts are in the phaseout range for active participants. Also, one of the spouses is not an active participant in a qualified retirement plan. Thus, the nonparticipant spouse can do the full amount and the active participant can do something. Thus, $6,000 is too small. Also, $12,000 is too large because at least some of the active participant's ability is phased out. Charlie Clemons contributed $2,000 to Roth IRA 1 last year, when he was age 24, and $2,000 to Roth IRA 2 this year. Two years from now, Roth IRA 1 will have a balance of $2,650, and Roth IRA 2 will have a balance of $2,590, and Charlie will close Roth IRA 1, receiving the balance of $2,650. Which one of the following statements best describes his tax and penalty status for that year? Correct Answer He will pay neither taxes nor a penalty The distribution is not qualified because Charlie is under age 59½, not disabled, not dead, or not making a first time home purchase and he is withdrawing the money before the waiting period of five tax years. Withdrawals within five years are not prohibited, but taxation will generally occur and penalties may apply in some cases. None of this withdrawal, however, is included in Charlie's taxable income because the $2,650 sum is less than the aggregate total of his contributions ($4,000). No penalty applies since the withdrawal is not taxable. The "required beginning date" (RBD) for IRA distributions is Correct Answer April 1 of the year following the year in which age 70.5 was attained Over a period of 10 years, Mark Edmunds contributed a total of $20,000 to a nondeductible IRA. The current value of Mark's IRA is $40,000, and Mark, who is now age 45, has decided to use all of his IRA assets for the down payment on a second home. Assuming Mark's marginal tax bracket is 35%, how much does he owe in taxes? Correct Answer $9000 Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% × $20,000 tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to income tax or the early withdrawal penalty. Richard Harper, age 45, and his wife Betty, age 44, plan to contribute a total of $12,000 to their IRAs for this tax year. They both work outside the home, and they file a joint income tax return. Richard is a teacher at the local high school and participates in a 403(b) plan. Betty's employer does not provide a retirement plan. They expect that their adjusted gross income for withdraw once they are required to make withdrawals. This year, Charles turned age 70 on January 2 and Lucy turned age 70 on March 4. What is the required minimum distribution for each? (Assume the IRS RMD Joint Life Table expected return for two individuals age 70 is 20.6, and when both are age 71, it is 19.8. The Uniform Table factor is 27.4 at age 70 and 26.5 at age 71.) Correct Answer $3650 $100,000 ÷ 27.4 = $3,649.64 which rounds up to $3,650. (The first distribution year results in the same amount for each.) Medicare Part A patient must pay for all costs Correct Answer of a hospital stay beyond 150 days Which one of the following U.S. citizens is currently eligible for Medicare coverage at no cost? A. self employed truck drive age 66 B. professional independent corporate director, age 57 C. Federal gov employee hired 1989, age 64 Correct Answer self employed truck drive age 66 The truck driver is in a covered occupation (covered by Social Security) and is over age 65. Thus, he or she would receive benefits if fully insured. Answer b. is incorrect because although this individual is in a covered occupation for Social Security purposes, he or she must be age 65 to be eligible for Medicare benefits. Answer c. is wrong because although this person is employed in a covered occupation, he or she must be age 65. Which of the following statements accurately describe basic provisions of Medicare Part B? I. Coverage includes benefits for physicians' services. II. Individuals who are eligible for Part A are automatically eligible for Part B. III. Coverage includes benefits for inpatient hospital services. IV. Participants pay a monthly premium. Correct Answer I, II, IV Medicare Part B includes coverage for physicians' services; Part A covers hospital charges. Part A is provided to eligible individuals at no charge, but participants must pay a premium for Part B. Individuals who are eligible for Part A are automatically eligible for Part B, and receive it if they pay the related premium. On December 31 of last year (year 1), Samuel Herman had $360,000 in his IRA (a five-year CD earning 6.5%). He has named Tully Herman, his wife, as beneficiary. In year 2, Samuel turned 70 on October 17, and Tully turned 55 on January 8. Assume that it is now year 4 and that Samuel dies on April 15. Tully wants you to determine her distribution alternatives. Correct Answer Tully may roll the entire amount into an IRA in her name and defer RMD's until age 70.5 Tully is not required to take a lump-sum distribution, receive all distributions by the end of the fifth year following Samuel's death, or even continue distributions—although these are all options available to her. As a spouse, she would have the option to roll over the remaining balance to an IRA in her name and defer RMD until she reaches age 70½. Michael Bowden has asked you what sources exist for long-term care insurance. What generally are considered potential sources for the funds to cover at least some of the cost of long-term custodial care? Correct Answer Medicare, Medicaid, Group long- term care insurance offered through employers Jennifer recently separated from service with Acme Inc. at age 52, and rolled her qualified plan lump sum into a new IRA. She had been a plan participant for 12 years. This year, she began working for a new employer that provides a profit sharing plan for employees. Jennifer will be eligible to participate in her new employer's profit sharing plan in June of next year. Which one of the following statements describes an option that will be to Jennifer's benefit? Correct Answer Jennifer should use the direct rollover to roll the entire IRA over into her new employer's qualified profit sharing plan in accordance with tax requirements and plan provisions if the plan allows her to do so and allows for loans. If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Having the money in a qualified plan could also provide her more flexibility than an IRA when she begins to receive distributions. Forward-averaging treatment is not available on any distribution from an IRA. Jennifer would not qualify for capital gains treatment since all distributions from IRAs and qualified plans are taxed as ordinary income. Taking a current distribution from the IRA would result in a current tax liability. What are two examples of potential problem with a golden parachute? Correct Answer Employee may purposely perform bad to collect package and any excess payment would be nondeductible by the payor and subject to an excise tax by the employee. Which of the following are correct statements about survivor benefits from a qualified retirement plan? I. Profit sharing plans that accept direct transfers from pension plans are not required to provide a QJSA. II. The qualified joint and survivor annuity (QJSA) may be waived if the spouse gives written consent to the effect of the election and the naming of another beneficiary. Many retirees have difficulty dealing with Bengen's original safe initial withdrawal rate because Correct Answer it does not represent a lot of income. The biggest problem most people have with a 4% initial withdrawal rate is that it doesn't normally represent a lot of income. For example, it takes $300,000 of capital to produce $1,000/month. The Simpsons need to save an additional $300,000 (in retirement year 1 dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and want to assume a 5% long- term inflation rate. Their preference is to allocate a level annual savings amount to build this fund. What level annual end-of-year savings amount will the Simpsons need to deposit at the end of each year during their 20-year preretirement period? Correct Answer $7,318 In the level payment calculation, inflation is irrelevant. Calculator inputs are: $300,000 [FV], 20 [N], 7 [I/YR]; solve for [PMT] (with calculator set for end-of-year payments) = $7,318. A nonworking, 45-year-old divorced person who receives taxable alimony may contribute to an IRA Correct Answer the lesser of $6,000 or 100% of any taxable alimony received. Maxine Prentice is 36 years old. She entered the workforce two years ago and has been continuously employed since then. What benefits would Maxine be entitled to under OASDI-HI? Correct Answer survivor's benefit for Maxine's dependent child and lump- sum death benefit for Maxine's spouse or child With eight quarters of continuous coverage, Maxine would be currently insured, but she would not be fully insured. The test for being currently insured is earning six of the last 13 credits (a.k.a. quarters). She has eight of the last 13. To be fully insured, she would need one credit per year since age 21. She is 36, so she needs 15 credits to be fully insured, but she only has eight credits. Options I and II are available to a currently insured worker. Options III and IV are only available to a fully insured worker. Regarding non-periodic distributions from an annuity contract prior to the annuity start date, how do taxes work Correct Answer A nonperiodic distribution is taxed first as a taxable interest payment until the interest/earnings are completely exhausted and then as a tax-free return of principal. A nonperiodic distribution (withdrawal) from an annuity is not prorated equally between a tax-free return of principal and a taxable interest payment; it is first considered a taxable interest payment and then a tax-free return of principal (LIFO). How to calculate the exclusion ratio for a fixed annuity? Correct Answer Investment in the annuity contract/total expected return. How to calculate the exclusion ratio for a variable annuity? Correct Answer investment in the contract/number of expected payments. What is the tax treatment for a shareholder participating in a common stock's dividend reinvestment program? Correct Answer The shareholder is treated as if he or she received a cash dividend equal to the fair market value of the shares purchased under the plan. The dividend paid from the stock is simply used to purchase more shares of stock. The shareholder is treated as if he or she received a dividend of cash equal to the fair market value of the shares purchased under the plan. The fair market value of the shares purchased is generally taxed at a 15% or 20% LTCG rate. Qualified dividends tax treatment Correct Answer 0%, 15%, 20% Type of ownership only spouses can participate in: Correct Answer tenancy by the entirety and community property A lump sum payment of the proceeds of a life insurance policy that is made to the beneficiary upon the insured's death tax treatment Correct Answer is generally exempt from income taxation. Estate planning generally focuses on Correct Answer the conservation and distribution of the client's estate during life and at death and requires consideration of both tax and non-tax implications of estate planning transactions. In a community property state, when are earnings considered community property? Correct Answer earnings from a job subsequent to the date of marriage will be considered community property. John and Nancy, married taxpayers filing jointly, have $600,000 of taxable income, including $14,000 of qualified dividends. What tax rates apply to the qualified dividends? Correct Answer 20% Qualified dividends (and net long-term capital gains) that are part of taxable income greater than $488,850 (for 2019) are taxed at 20%. Qualified dividends are subject to a 15% tax rate when they fall into taxable income between $78, 750 and $488,850. Qualified dividends (and net long-term capital gains) that are part of taxable income under $78,850 (for 2019) are taxed at 0%. These figures are all for the married filing jointly filing status. You will not need to memorize these taxable income breakpoints. A