Finance Chapter 13 Quiz

Annuities and Pension Plans

• Annuitization: The process of converting a lump sum of money into a stream of income, typically through an annuity product.
• Fixed Annuities: Insurance contracts providing guaranteed payments at a fixed rate for a specified period or the annuitant's lifetime.
• Variable Annuities: Investment products where payments vary based on the performance of selected investments, typically mutual funds.
• Tax-Deferred Annuities: Annuities that allow earnings to grow without immediate tax liabilities until withdrawals begin.

Retirement Plan Types

• Defined Benefit Plans: Employer-sponsored retirement plans that promise a specified monthly benefit at retirement based on salary and years of service.
• Defined Contribution Plans: Retirement savings plans where contributions are defined, but the payout at retirement depends on investment performance (e.g., 401(k)).
• Qualified Plans: Retirement plans that meet IRS requirements for tax benefits; contributions are tax-deductible and investment grows tax-deferred.
• Nonqualified Plans: Employer-sponsored plans that do not meet IRS requirements. They offer less regulatory scrutiny but come with less tax advantage.

Risks and Considerations

• Health Risk: The potential for increased healthcare costs due to chronic illnesses or severe health conditions affecting retirement savings.
• Longevity Risk: The risk of outliving one's savings; as life expectancy increases, ensuring sufficient funds for retirement becomes critical.
• Withdrawal Risk: The danger of withdrawing funds from retirement accounts at an unsustainable rate, leading to potential depletion of savings.

Housing and Compensation Strategies

• Reverse Mortgage: A financial product allowing homeowners, usually seniors, to convert part of their home equity into cash, repaid when the homeowner moves or dies.
• Compensation: Refers to wages or salary paid to employees, which may include benefits like retirement plans that help in wealth accumulation.
• Vesting: The process by which an employee earns the right to keep employer-contributed funds in a retirement plan, usually after a certain period of service.

Test your knowledge on key concepts in Finance Chapter 13, covering topics such as annuitization, defined benefit and contribution plans, and various types of annuities. This quiz will help reinforce your understanding of retirement planning, tax implications, and risk management associated with pensions and annuities.