Questions and Answers
Pensions are best defined as savings structures that generate income for retirees.
True
The point at which an employee is entitled to a stated amount of nonrevocable benefits from an employer is known as vesting.
True
The Employee Retirement Income Security Act requires employees to act as fiduciaries managing investment assets in the employer's best interests.
False
Qualified plans are pension structures that comply with established government regulations.
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An annuity is a type of defined benefit.
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Investment risk is not a type of risk associated with planning for retirement.
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Withdrawal risk is the chance of taking money out to fund retirement when asset prices are strong.
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Diversification is a way to adjust for overall investment uncertainties.
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Inflation-indexed bonds can help control inflation risk for retirees.
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A female retiring at age 65 is expected to have 22 years of projected retirement.
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A significant strength of a traditional annuity is that you cannot outlive your annuity payments.
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Conservative projections of future returns is a way to adjust for overall investment uncertainties.
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Healthy risk is not considered a type of risk associated with planning for retirement.
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Both lack of liquidity once you annuitize and receiving a fixed sum each year are strengths of a traditional annuity.
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Health risk, in financial matters, includes the possibility of large unreimbursable costs.
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A charitable annuity is not considered an attractive place to save for retirement.
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All of the statements listed are common risk factors when performing post-retirement planning.
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Individuals typically have more cash available than expected post-retirement.
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Post-retirement planning is primarily focused on enhancing cash inflows.
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The purchase of a home is often considered an attractive place to save for retirement.
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Pension structures that require employees to qualify for participation through working for the employer for a prespecified period of time are called deferred plans.
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A qualified plan that places an amount of money in the pension regularly is known as a defined contribution plan.
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A pension plan whose deposits are generally eligible to receive a tax deduction is referred to as a nonqualified plan.
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If tax-deferred annuities are not withdrawn at the time of your death, all gains over original cost associated with them are subject to tax at ordinary income rates.
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A fixed annuity has a higher pretax return compared to a taxable bond.
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Favorable capital gains rates on equity fund appreciation and dividends is an advantage of a variable annuity compared to a mutual fund.
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Higher total expense ratios and a redemption charge are disadvantages of a mutual fund versus a variable annuity.
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Limitation on investment choice is an advantage of a mutual fund compared to a variable annuity.
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The percentage of the elderly population is expected to fall from 25 percent in 2010 to 5 percent in 2040.
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Pensions are structures through which the government supports the elderly.
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The point at which an employee is entitled to nonrevocable benefits is called vesting.
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Qualified plans are pension structures that are compliant with government regulations.
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The Employee Retirement Income Security Act requires that employers act as fiduciaries managing assets in the employee's best interests.
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Study Notes
Retirement Planning Process
- The second step of retirement planning involves analyzing retirement risks.
- Familiarizing oneself with retirement issues is an essential first step.
- Developing clear retirement goals helps guide the planning strategy.
Elderly Population Trends
- The elderly population is projected to rise from 13% in 2010 to 20% by 2040.
- An alternative projection suggests it may increase from 7% in 2010 to 25% in 2040.
Definitions and Concepts
- Pensions are savings structures designed to generate income for retirees.
- Vesting refers to the point at which an employee is entitled to nonrevocable benefits.
- Qualified plans comply with government regulations and allow for employee participation under specific conditions.
Types of Pension Plans
- A defined contribution plan regularly places money into a pension for retirement.
- Nonqualified plans are those whose deposits typically do not qualify for tax deductions.
Tax-Deferred Annuities
- Tax-deferred annuity gains are generally subject to ordinary income tax rates upon withdrawal.
Annuities vs Taxable Bonds
- Fixed annuities offer tax deferral and protect principal but may have lower pretax returns compared to bonds.
- Mutual funds may offer favorable tax rates, higher return potentials, and greater investment choices over variable annuities.
Risks in Retirement Planning
- Major risks include investment risk, inflation risk, longevity risk, and health risk.
- Withdrawal risk concerns taking out funds when asset values are low, negatively impacting retirement savings.
Strategies for Investment Uncertainty
- Common strategies to manage investment risks include diversification and conservative projections of future returns.
Controlling Inflation Risk
- Strategies to mitigate inflation risk for retirees include owning liquid assets, significant stock concentrations, and inflation-indexed bonds.
Life Expectancy and Retirement
- Females retiring at age 65 can expect an average of about 19 years in retirement.
Annuity Strengths and Weaknesses
- Strengths include providing a fixed income that reduces longevity risk.
- Weaknesses can include the lack of liquidity and potential bankruptcy risks associated with the issuing company.
Health Risk Definition
- Health risk refers to the possibility of incurring large unreimbursed costs due to poor health.
Retirement Savings Considerations
- Qualified pensions are typically ideal for retirement savings unless a charitable annuity is purchased.
Common Risk Factors in Retirement Planning
- Risk factors include unexpected health issues requiring early retirement and lower-than-expected investment returns.
Pre- and Post-Retirement Planning Differences
- Post-retirement planning primarily focuses on managing cash outflows and lacks opportunities to enhance inflows.
Comparative Advantages of Saving Instruments
- Annuities provide tax advantages while other instruments like CDs and taxable bonds offer safety and flexibility.
- Municipal bonds offer tax-free returns for state residents, contrasting with the higher pretax returns of annuities.
Social Security Payout Factors
- Factors influencing Social Security payout decisions include risk tolerance, longevity expectations, the desire for current funds, and tax bracket considerations.
Retirement Planning Process
- The second step of retirement planning involves analyzing retirement risks.
- Familiarizing oneself with retirement issues is a preliminary activity.
- Developing goals is a critical aspect of the planning process.
Elderly Population Projections
- The elderly population percentage is projected to rise from 13% in 2010 to 20% in 2040.
Definition of Pensions
- Pensions are savings structures designed to generate income for retirees.
Vesting in Employment
- Vesting defines the point at which an employee is entitled to a nonrevocable benefit from an employer.
Employee Retirement Income Security Act (ERISA)
- ERISA mandates that employers act as fiduciaries, managing investment assets in the employee's best interests.
Qualified Plans
- Qualified plans adhere to established government regulations for pension structures.
Social Security Goals
- A primary goal is to provide retirement payments based on contributions.
- The system also aims to redistribute income for a minimum standard of living.
Retirement Ages
- Full Social Security benefits for those born in 1974 is available at age 67.
- An individual born in 1942 has a normal retirement age of 66 + 10 months.
Payout Preferences
- Certain demographics, such as women and individuals in good health, generally favor later Social Security payouts.
Disadvantages of Pension Plans
- A significant disadvantage includes the inability to withdraw funds early or transfer assets at death.
Personal Savings Disadvantages
- Mandatory withdrawals and no tax shelter are disadvantages of personal savings through mutual funds.
Defined Benefit Plan Features
- Defined benefit plans typically do not offer tax deferral on income and capital gains.
Health Risk in Financial Planning
- Health risk refers to the possibility of large unreimbursed costs and poor health post-retirement.
Qualified Pensions Exception
- A notable exception to qualified pensions as an attractive savings option is the purchase of a home.
Common Risk Factors in Post-Retirement Planning
- Health issues forcing earlier retirement and lower-than-expected investment returns are common risk factors.
Pre- and Post-Retirement Planning Differences
- In post-retirement planning, opportunities to enhance cash inflows are limited compared to pre-retirement planning.
Annuities vs. Competing Instruments
- Advantages of annuities include tax deferral, while CDs are backed by government guarantees, and other bonds offer flexibility and tax benefits.
Factors Influencing Social Security Payout Decisions
- Risk tolerance influences when to take payouts; low tolerance favors full payouts.
- Longevity affects preferences, with healthier individuals favoring later payouts.
- A desire for current funds pushes some to choose early payouts.
- High tax brackets may prompt individuals to delay payouts to minimize tax burdens.
Retirement Withdrawal Example
- Bob and Dave retired with 130,020eachandwithdrew130,020 each and withdrew 130,020eachandwithdrew6,500 annually.
- Bob faced a 32% decline in his assets in year 2, while Dave experienced his in year 3, ultimately affecting their remaining asset growth.
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Description
Test your knowledge about the retirement planning process, including key concepts, types of pension plans, and the implications of an aging population. This quiz will cover essential terms and trends that impact retirement preparedness and strategies.
