Retirement Planning Basics
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What is the first step in the 7 Steps to fund Retirement needs?

  • Calculate how much you will need to cover shortfall
  • Set Goals (correct)
  • Determine how much you will save annually
  • Estimate Income at Retirement

    • What is the main purpose of a tax-deferred retirement account?

  • To grow investments without immediate tax impact (correct)
  • To provide immediate tax benefits on withdrawals
  • To limit contribution amounts severely
  • To allow annual tax deductions for contributions

    • Which of the following is NOT a characteristic of Saving on a Non-Tax-Deferred Account?

  • Contributions grow tax-free until retirement (correct)
  • Dividends are taxed at the time of receipt
  • Capital gains are taxed in the year they are earned
  • Earnings are taxed when withdrawn

    • What is the hardest step in the retirement planning process?

    <p>Put the plan in play and save</p> Signup and view all the answers

    Which of the following plans is considered an employer-sponsored retirement plan?

    <p>401(k)</p> Signup and view all the answers

    What contribution limit was set for 401(k) and 403(b) plans in 2021?

    <p>$19,500</p> Signup and view all the answers

    What type of plan is a Cash Balance Plan classified under?

    <p>Defined Benefits Plan</p> Signup and view all the answers

    Which of the following tools can help in online retirement planning?

    <p>Vanguard Retirement</p> Signup and view all the answers

    At what age can you begin to withdraw from your IRA account without incurring a 10% penalty?

    <p>Age 59</p> Signup and view all the answers

    What percentage of retirement income comes from Social Security according to the provided content?

    <p>33.2%</p> Signup and view all the answers

    What is the function of probate in estate planning?

    <p>To oversee the distribution of assets according to a will</p> Signup and view all the answers

    What is the catch-up contribution limit for individuals aged 50 and above in 2021?

    <p>$6,000 for IRAs</p> Signup and view all the answers

    Who are typically considered heirs in terms of estate planning?

    <p>Close family members</p> Signup and view all the answers

    What happens if an individual does not have a will at the time of death?

    <p>State law distributes the assets</p> Signup and view all the answers

    Which of the following statements about early retirement age is accurate?

    <p>You can collect full Social Security benefits at age 62.</p> Signup and view all the answers

    What is the role of a will in estate planning?

    <p>To outline wishes for asset distribution</p> Signup and view all the answers

    What is the primary focus of a liquid fund?

    <p>Investing in short-term, high-quality debt instruments</p> Signup and view all the answers

    Which of the following is a benefit of being rated above credit level 700?

    <p>Access to better loan terms</p> Signup and view all the answers

    Which step is NOT part of the estate planning process?

    <p>Calculating net expenses post-death</p> Signup and view all the answers

    What characterizes a bequest in a will?

    <p>A specified gift of property or assets</p> Signup and view all the answers

    What is a primary disadvantage of probate?

    <p>Involves high costs and delays</p> Signup and view all the answers

    What is the purpose of a codicil?

    <p>To make changes or additions to an existing will</p> Signup and view all the answers

    What does a trust primarily do?

    <p>Hold and manage an asset for another person</p> Signup and view all the answers

    Which of the following is NOT a common clause included in a will?

    <p>Annual income statement clause</p> Signup and view all the answers

    What is a primary characteristic of an irrevocable living trust?

    <p>You relinquish control of the assets placed in the trust.</p> Signup and view all the answers

    Which of the following is NOT a preventive measure against identity theft?

    <p>Carrying sensitive information like SCN.</p> Signup and view all the answers

    Who is eligible to apply for Direct PLUS Loans?

    <p>Both graduate students and parents of dependent undergraduate students</p> Signup and view all the answers

    What is a key benefit of open credit, such as credit cards?

    <p>You can make charges up to a certain limit and pay a minimum amount each month.</p> Signup and view all the answers

    What type of trust becomes effective after a person dies?

    <p>Testamentary Trust</p> Signup and view all the answers

    What is the main purpose of Direct Consolidation Loans?

    <p>To combine multiple federal student loans into one single loan</p> Signup and view all the answers

    What occurs during forbearance of a loan?

    <p>Payments can be delayed while interest continues to accrue</p> Signup and view all the answers

    Which clause in a loan agreement allows a lender to demand full repayment under certain conditions?

    <p>Acceleration clause</p> Signup and view all the answers

    Which of the following statements is true regarding consumer loans?

    <p>They can finance personal expenses and major purchases.</p> Signup and view all the answers

    Which repayment plan is NOT listed among the repayment methods?

    <p>Flat repayment plan</p> Signup and view all the answers

    Which of the following describes an installment purchase contract?

    <p>The buyer must make regular payments before ownership transfers.</p> Signup and view all the answers

    Which of the following statements about private loans is accurate?

    <p>They should only be considered after all federal financial aid is exhausted</p> Signup and view all the answers

    What does a home equity loan require as collateral?

    <p>Equity in your home.</p> Signup and view all the answers

    What is the primary function of collateral in a collateral loan?

    <p>To secure the loan in case of default</p> Signup and view all the answers

    How is the state interest rate calculated?

    <p>Principal times interest rate times time</p> Signup and view all the answers

    Which of the following represents an inexpensive source of loans?

    <p>Home equity loans</p> Signup and view all the answers

    What is the purpose of the Debt Resolution Rule?

    <p>To ensure debts are repaid every four years, excluding certain types</p> Signup and view all the answers

    What is a characteristic of a Direct Unsubsidized Loan?

    <p>Interest accrues from the day the loan is received</p> Signup and view all the answers

    What is the formula for calculating the debt limit ratio?

    <p>Total monthly non-mortgage debt payments divided by total monthly take-home pay</p> Signup and view all the answers

    Which type of loan is classified as the most expensive source?

    <p>Finance companies</p> Signup and view all the answers

    What is a common strategy recommended if someone cannot pay their bills?

    <p>Budget to ensure more money comes in</p> Signup and view all the answers

    Study Notes

    Retirement Planning

    • Pension: Retirement plan providing regular income payments after work, funded by contributions from employee, employer, or both. Defined-benefit plans pre-determine payout amounts based on factors like years of service and salary history.
    • Social Security: Primary retirement income source for many seniors. FICA taxes pay for today's retirees' benefits, not saved for future use. Eligibility depends on 40 credits.
    • Retirement Benefits: Formula replaces 42% of average earnings, based on the number of earnings years and average earnings level, adjusted for inflation. Full benefits at retirement age 62. Increasing benefits possible by delaying retirement.
    • Disability and Survivor Benefits: Social Security provides coverage for those unable to work due to impairments for at least a year. Monthly survivor benefits are provided when the breadwinner dies, including a one-time death benefit.
    • Employer Funded Pensions: Traditional defined benefit pension plans are less common today as companies may not provide the same level of support for retirement.

    Funding Status

    • Funding Pension Plan: Contributions come from the employer, employee, or both. Funds grow over time to support retirement payments.
    • Unfunded Pension Plan: Employer does not set aside funds in advance, using current income to pay for future benefits.

    Tax-Deferred Retirement Account

    • Retirement account delaying tax payments on earnings until withdrawal. Traditional IRAs and 401(k) plans are examples.

    Saving on a Non-Tax-Deferred Account

    • Earnings (interest, dividends, capital gains) are taxed in the year they're earned. Regular savings accounts and brokerage accounts follow this method.

    Retirement Plans for Self-Employed/Small Businesses

    • Various plans including Keogh, SEP-IRA, SIMPLE IRA, and others.

    Individual Retirement Arrangements (IRAs)

    • Traditional IRA: Contributions may or may not be tax-deductible, depending on income and whether the individual is covered by a company retirement plan. Distributions are taxed in retirement.
    • Roth IRA: Contributions are not tax deductible, made from after-tax income. Money grows tax-free and withdrawals are free. Choosing a Roth IRA is preferable to a traditional IRA if you can pay taxes now.
    • Coverdell Education Savings Account: Similar to Roth IRA, specifically targeted for educational expenses.

    Estate Planning

    • Estate Planning: Planning for what happens to wealth and dependents after death, involving determining estate value, selecting heirs, anticipating estate costs, and implementing estate planning tools.
    • Probate: Legal process for distributing assets after death, overseeing distribution based on the will or state law.
    • Will: Legal document outlining how assets are to be distributed posthumously to heirs.
    • Heirs: Individuals entitled to inherit from a deceased person.
    • Liquid Fund: Mutual fund primarily investing in short-term, high quality debt instruments.

    Possible Complications/Features

    • Inflation significantly impacts retirement planning, impacting the amount needed to maintain a comfortable lifestyle.
    • Investment strategies should factor in expected longevity.

    Retirement Age and Benefits

    • Reaching specific ages unlocks certain benefits, such as early retirement ages, social security, and Medicare eligibility.
    • Social Security benefits can grow if one waits to claim them.

    Annuity or Lifetime Payments

    • Single Life Annuity: Payouts are typically taxed as normal income while you live. A disadvantage is the inability to make withdrawals during emergencies.
    • Joint and Survivor Annuity: Benefit continues for a surviving spouse until both parties die, providing income security.
    • Lump Sum Payment: Payout option for a single amount used to cover large expenses. A disadvantage is that if money is spent quickly, it might run out or be difficult to manage.

    Credit Cards

    • Types of credit cards: premium, affinity, secured cards, travel, single-purpose cards, and traditional charge accounts.
    • Variables affect credit cards: interest rates, grace periods, teaser rates, annual fees, and credit limits.

    Student and Consumer Loans

    • Consumer loans: borrowed for personal/household expenses.
    • Four types include single-payment/balloon, bridge/interim, secured, and unsecured installment.
    • Factors impacting loan decisions include creditworthiness, length of term, debt limits, type of repayment, and other costs.

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    Accumulating Wealth & Debt Exam Guide PDF

    Description

    This quiz covers essential concepts related to retirement planning, including pension plans, social security benefits, and disability coverage. Understand how these components work together to secure financial stability in your retirement years. Test your knowledge on employer-funded pensions and the calculations behind retirement benefits.

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