Retirement Planning Basics
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Questions and Answers

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  • Earnings are taxed when withdrawn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 (A)</p> Signup and view all the answers

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

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

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

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

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

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

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

<p>Vanguard Retirement (B)</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 (A)</p> Signup and view all the answers

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

<p>33.2% (D)</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 (D)</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 (B)</p> Signup and view all the answers

Who are typically considered heirs in terms of estate planning?

<p>Close family members (B)</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 (C)</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. (C)</p> Signup and view all the answers

What is the role of a will in estate planning?

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

Which step is NOT part of the estate planning process?

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

What characterizes a bequest in a will?

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

What is a primary disadvantage of probate?

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

What is the purpose of a codicil?

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

What does a trust primarily do?

<p>Hold and manage an asset for another person (B)</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 (B)</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. (C)</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. (A)</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 (C)</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. (D)</p> Signup and view all the answers

What type of trust becomes effective after a person dies?

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

What occurs during forbearance of a loan?

<p>Payments can be delayed while interest continues to accrue (B)</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 (B)</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. (C)</p> Signup and view all the answers

Which repayment plan is NOT listed among the repayment methods?

<p>Flat repayment plan (D)</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. (C)</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 (C)</p> Signup and view all the answers

What does a home equity loan require as collateral?

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

How is the state interest rate calculated?

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

Which of the following represents an inexpensive source of loans?

<p>Home equity loans (D)</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 (C)</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 (B)</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 (D)</p> Signup and view all the answers

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

<p>Finance companies (B)</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 (A)</p> Signup and view all the answers

Flashcards

Funding Status

Describes whether a pension plan is funded (has enough assets to pay future benefits) or unfunded (lacks sufficient assets).

Defined Benefit Plan

A retirement plan where benefits are calculated based on factors like years of service, salary and is not dependent on investment performance.

Cash Balance Plan

A defined benefit plan that calculates benefits based on a hypothetical balance of an account to which contributions and earnings are credited.

Retirement Planning

The process of determining how much you'll need for retirement, and how best to accumulate those savings.

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Retirement Income Calculator

A tool for projecting monthly retirement income based different planning scenarios.

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Tax-Deferred Retirement Account

An account where taxes on earnings are postponed until withdrawal during retirement.

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Non-Tax-Deferred Account

Savings or investment accounts where taxes on earnings are paid annually.

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Defined Contribution Plan

A retirement plan where both employees and employers may contribute to help accumulate funds for retirement that depends on your investment growth.

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Employer-Sponsored Retirement Plan

A retirement plan sponsored by an employer to help build retirement funds.

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Employee Stock Ownership Plan

A plan that allows employees to own a portion of the company's stock, often as part of their compensation package

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401(k) plan

A retirement savings plan sponsored by an employer, often allowing pre-tax contributions to grow tax-deferred

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Individual Retirement Arrangement (IRA)

A retirement savings account for self-employed or small business owners.

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Catch-up contributions

Additional contributions allowed to retirement accounts for individuals aged 50 and older to help them save more for retirement.

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IRA catch-up amount (2021)

The maximum additional contribution allowed to an IRA in 2021 for those aged 50 and older.

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Withdrawal penalty (age 55-59)

10% tax penalty for withdrawing funds from retirement accounts before age 59 1/2, unless certain exceptions apply.

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Estate Planning

Planning to distribute wealth and assets to dependents after death.

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Probate

Legal process overseeing asset distribution after death, per will or state law.

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Will

Legal document specifying how assets should be distributed after death.

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Heirs

Individuals legally entitled to inherit assets of a deceased person.

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Liquid Fund

A mutual fund that invests in short-term, high-quality debt instruments.

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Above-Credit Score

A credit score higher than average (e.g., 700 or above), indicating strong financial responsibility.

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Estate Net Worth

The value of an estate minus its liabilities.

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Gift Taxes

Taxes on transferring wealth before death.

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Generation Skipping Transfer Tax

Tax on wealth transfers to someone more than one generation younger.

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Beneficiary

A person who receives assets in a will.

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Executor

Person managing a deceased person's estate.

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Probate

Legal process for distributing assets after death.

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Probate Advantages

Orderly asset distribution for those without a will (intestate).

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Probate Disadvantages

Costly and lengthy process.

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Bequest

A gift of assets, money, or property in a will.

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Codicil

Legal document modifying a will without rewriting it.

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Trust

Legal entity that holds and manages assets for another.

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Revocable Living Trust

A trust where the owner retains control of the assets and income.

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Irrevocable Living Trust

A trust where the owner gives up control of assets.

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Testamentary Trust

A trust set up in a will, active after death.

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Identity Theft

Using another person's information for fraud.

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Credit Card

Open credit; use to charge until paying minimum debt.

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Lenders

Individuals or institutions giving loans.

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Consumer Loan

Money borrowed for personal expenses.

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Five Cs of Credit

Measures of creditworthiness (character, capacity, collateral, conditions, capital).

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Installment Purchase Contract

Buying something by paying in installments.

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Home Equity Loan

Using home equity as collateral for a loan.

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Automobile Loan

Loan to buy a car.

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Direct PLUS Loans

Federal loans for graduate/professional students and parents of undergrads to pay for education.

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Direct Consolidation Loans

Combine multiple federal student loans into one loan with one payment.

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Private Loans

Loans from commercial banks or credit unions after federal aid is exhausted.

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Repayment Plans

Methods for repaying student loans (Standard, Extended, Income-based, Graduated).

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Consumer Loans

Variety of loans (single-payment, installment, secured, unsecured).

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Forbearance

Delaying student loan payments due to illness, hardship, or residency requirements. Interest still accrues.

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Deferment

Postponing student loan payments for up to 3 years due to hardship (no interest on subsidized loans).

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Loan Costs (Finance Charges)

Interest, processing fees, credit checks, and insurance fees associated with a loan.

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Collateral Loan

A loan secured by an asset (collateral). If the borrower defaults, the lender can seize and sell the collateral.

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APR

Average Annual Finance Charges divided by Average Balance Outstanding.

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State Interest Rate Calculation

Interest = principal * interest rate * time

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Payday Loan

A high-cost, short-term loan with a single lump-sum payment.

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Debt Limit Ratio

Total non-mortgage debt payments divided by total monthly take-home pay.

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Debt Resolution Rule

Forces repayment of all debt obligations every 4 years (excluding education and home loans).

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Consumer Debt

Money borrowed for personal, family, or household purposes.

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Controlling Debt

Managing debt effectively through budgeting, responsible spending, and seeking help when needed.

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Chapter 7 Bankruptcy

A legal process where most debts are wiped out after assets are liquidated.

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Direct Subsidized Loans

Federal loans for undergraduates where interest doesn't accrue until after graduation.

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Direct Unsubsidized Loans

Federal loans where interest accrues from the disbursement date while in school.

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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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Related Documents

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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