Accumulating Wealth & Debt Exam Guide PDF

**Accumulating Wealth & Debt Chapters 15/16/6/7** **Retirement Planning:** **Pension**: is a retirement plan that provides regular income payments to an individual after they retire from work, typically funded by contributions from the employee, employer, or both. Pensions are often defined-benef...

**Accumulating Wealth & Debt Chapters 15/16/6/7** **Retirement Planning:** **Pension**: is a retirement plan that provides regular income payments to an individual after they retire from work, typically funded by contributions from the employee, employer, or both. Pensions are often defined-benefit plans, meaning the payout amount is predetermined based on factors like years of service and salary history, ensuring a stable income during retirement. **Social Security**: is a primary source of retirement income for many senior citizens. Social security may not be there for another 40 years. **FICA**: FICA taxes paid today are providing benefits for today's retirees. The money you pay is not being saved up and invested in an account for you. Eligibility: 95% of Americans are covered. With 40 credits, you are eligible for retirement, disability, and survivor benefits plans to apply. **Retirement Benefits**: Benefits formula---replace 42 percent of average earnings\ based on number of earnings years, average level of earnings, adjustments for inflation, income brackets. Full benefits at retirement age 62. You should increase your benefits if you delay retirement. **Disability and Survivor Benefits**: Provided through mandatory Social Security insurance program and for those with impairment that keeps them from work for at least 1 year. - **Employer Funded Pensions**: People used to work for the same company all of their working life and the company would support their employees through retirement. Nowadays, defined benefit pension plans are rare. **Traditional Pension Plan**: is where you receive defined pension payout at retirement, such as noncontributory retirement plan and contributory retirement plan. **Portability**: often refers to the ability to transfer benefits or funds from one system to another without losing value. For example, some retirement accounts or health insurance policies offer portability when changing employers. **Vested**: refers to having a secured or guaranteed right to something, often used in the context of employment, finance, or legal rights. **In employment Benefits**: \"vested\" refers to the amount of retirement funds (such as a 401(k)) that an employee is entitled to keep, even if they leave the company. Many employers have a \"vesting schedule\" that dictates how much of their contributions become the employee\'s permanent asset over time. For instance, if you are \"fully vested,\" you have complete ownership of the funds. **Funding Status**: a. Funding Pension Plan, b. Unfunded Pension Plan a. b. Cash Balance Plans, The latest Twist in Defined Benefits Plans: **7 Steps to fund Retirement needs**: Set Goals, estimate how much you will need, Estimate Income at Retirement, Calculate the Annual Inflation- Adjusted Shortfall, Calculate how much you will need to cover this shortfall, Determine how much you will save annually between now and retirement, and put the plan in in play and save. **Play now, Retire Later**: Play Now Retire Later: Calculate the Annual Inflation-Adjusted Shortfall, - - - - - - Online retirement planning: 1. T. Rowe price Retirement Income Calculator, 2. Vanguard Retirement, MyPlan by Fidelity **Features**: Is free and extremely easy to use, which allows you to project monthly retirement income based on different planning scenarios. Put the plan in Play and Save: Hardest step, must know the choices before you can make a choice. Save early or pay a lot later: The percentage of your annual salary you will have to save every year to accumulate 75 percent of your ending salary at retirement at age 65. - **Plan now to retire later**: Put the plan in play and save, this is the hardest step, and you should know the retirement plan before you make the choice. - - - **Tax-Deferred Retirement Account**: A tax-deferred account is a type of investment account where you can postpone paying taxes on earnings until you withdraw the funds, typically in retirement, allowing your investments to grow without immediate tax impact. Common examples include traditional IRAs and 401(k) plans. **Saving on a Non-Tax-Deferred Account**: Saving on a non-tax-deferred basis means that any earnings (like interest, dividends, or capital gains) are taxed in the year they're earned, rather than being postponed until withdrawal. This applies to regular savings or brokerage accounts where income and gains are taxed annually, and like Roth IRA. Defined Contributions Plan: Contribution limits on the rise, \$19,500 for 401(k) and 403(b) plans in 2021 rises in \$500 increments with inflation. - **Employer Sponsored Retirement Plan:** You and employer or your employer alone contributes directly to a retirement account set aside for you. Which also plays a role like a savings account for retirement. **There are 5 Defined Contributions Plans**: a. Profit Sharing Plan, b. Money Purchase Plan, c. Thrift and Savings Plan, d. Employe Stock Ownership Plan, e. 401 (K) plan **Retirement Plans for self-employed** or those who works **in small businesses**: a. b. c. d. There are three Individual Retirement Arrangement (IRA) Accounts: a. - b. c. - - - - **Facing Retirement -- Payout**: a. b. **By Age 50**; you're eligible to make extra or catch-up contributions, in 2021 \$6, 000 was the amount of catch up, and it is indexed to inflation in the future. For IRA, the catch up amount was \$1, 000. **By Age 55**: If you leave your job or retire and you're between the age of 55 and 50 ½ you can begin withdrawals from your IRA account but with a 10% penalty. **By Age 59**: When you reach regardless, regardless of whether you're retired or left your job, the 10% penalty doesn't anymore apply when you will be withdrawing money from an account. **By Age 62**: You are finally reaching the early retirement age, and at this stage you're eligible to receive social security benefits. - Age 62-70: The longer you wait to begin receiving the SS, the larger your benefits will be. - An Annuity or Lifetime Payments: - - - - **Where your retirement Income from:** 33.2% Social Security, Earnings 32.2%, and pensions 20.9%, 9.7% Asset income, 4.0% public assistance. - **Possible Complications**: Change in inflation can have a drastic effect on your retirement. It is just not the value of any stocks that you own, but they affect the amount of money that you will need for a comfortable retirement. - - - - **Chapter 16, Estate Planning: Savings your Heirs Money and Headaches** **Estate Planning**: is a planning for what happens to your wealth and your dependents after you die. Step 1: Determine the value of your Estate: Level of your wealth determines tax planning needs. **Probate**: is the legal process that occurs after someone passes away, during which a court oversees the distribution of their assets according to their will, or, if they didn't have a will, according to state law. **What is a will**: a legal document that outlines a person's wishes for how their assets and property should be distributed after they pass away. **Heirs**: are individuals who are legally entitled to inherit some or all of the estate of a deceased person. Heirs typically include close family members like children, spouses, and sometimes parents or siblings, depending on the laws of the jurisdiction and the presence of a will. **Liquid Fund**: is a type of mutual fund that primarily invests in short-term, high-quality debt instruments like treasury bills, certificates of deposit, and commercial paper. **Above Credit** means possessing a credit score that is higher than average for instance 700 or higher, reflecting a strong credit history and responsible financial behavior. This level of creditworthiness can lead to advantages like lower interest rates, better loan terms, and increased access to credit options, ultimately saving money and providing financial flexibility. **The Estate Planning Process has 4 steps**: 1. Your Estate Net worth= Value of your Estate -- Level of Estate Liabilities 2. a. b. c. 3. a. 4. a. b. **Gift Taxes**: transfer wealth prior to death, reducing the taxable value of the Estate. - - a. **The Generation Skipping Transfer Tax**: A tax on wealth and property transfers to a person two or more generations younger than the donor. - **Calculating Estate Taxes**: a. **Beneficiary**: an individual who is willed property. **Executer**: is a person or institution appointed in a will to manage the estate of the deceased. Guardian: Who will care for children under the age of 18 **Advantages of Probate** allow for orderly distribution of assets of someone who dies intestate- without a valid will. **Disadvantages**: Cost and slowness - **Bequest**: is a gift specified in a will, where the deceased leaves certain assets, money, or property to a designated person, group, or organization. **Writing a Will**: Introductory statement, payment of debt and taxes clause, Disposition of property clause, appointment clause, common disaster clause, attention and witness clause. **Codicil**: is legal document used to make changes or additions to an existing will, which allow the person to modify their will, such as adding to removing a beneficiary without needing to rewrite a legal document. **Letter of Last Instruction**: is generally written to the surviving spouse. - - - - 1. 2. 3. 4. Gifts: Avoid probate and reduce taxable value of estate. **Trust**: is a legal entity that holds and manages an asset for another person. And the trustee can be an individual, an investment firm, or a bank. As well as any asset can be placed in trust. **Trusts**: Avoid probate, are more difficult to challenge in court, and reduce taxes, can hold money until a child reaches maturity. **Revocable living Trust:** you control the assets in the trust and can receive income from the trust without removing assets from the estate. **Irrevocable Living Trusts**: are trusts in which you relinquish title and control of the assets when they are placed in trust. **Testamentary Trust**: Created by a will, active after you die. **Chapter 6 (Using Credit Cards: The Role of Open Credit**) - - - - a. - - - - - - - - - - - - - - - - - a. - - a. b. c. - a. - - - - - - - - - - - - - - - - a. - - **Identity Theft**: happens when someone else uses your name, address, SCN, bank or credit card information without your knowledge to commit fraud and other crimes. **How to Identify if you're a victim of Theft**: a. b. c. d. **What should I do when my Identity is stolen** - - - Controlling and Managing your Credit Cards and Open Credit: - - - - **How to prevent Theft**: Keep the information about your credit and debit cards, Don't carry SCN, Keep your birth certificate in a safe place, check your credit report etc. **Main Form of an Open Credit**: the credit card which you can use to make charges up to a certain point as long as you pay off the minimum amount of your debt each month. - **Lenders**: determine creditworthiness using the five "five Cs" of credit -- character, capacity, collateral, and condition. - - **Consumer Loan**: is a type of loan that individuals borrow from financial institutions, such as banks or credit unions, to finance personal expenses or needs. These can include buying a car, consolidating debt, covering medical expenses, making home improvements, or funding other major purchases. a. b. c. **Four kinds of Consumer Loans**: a. - - - b. c. d. e. The Loan Maturity- a. b. **Understand the Terms of the Loan**: Insurance agreement clause, Acceleration clause, Defenciency payment clause, and Recourse clause. **Installment purchase contract**: is a contract where the buyer agrees to make a series of regular payments (installments) over time to purchase an item or property, with ownership typically transferring to the buyer only after all payments are made. **Home Equity Loan**: is secured loan using equity in home as collateral. Automobile (Car) loans: are secured loan which are usually between 24, 36, or 48 months but it be extended to 5 or 6 years. **Collateral loan**: is a type of loan secured by an asset or property, known as collateral, which the lender can seize and sell if the borrower defaults on the loan. **APR= Average Annual Finance Charges/ Average Balance Outstanding** **State Interest Rate is calculated:** Interest= principal\*interest rate\*time - **Payday Loan**: which is a dangerous kind single payment loan. - - - - - The Role of 78 determines what proportion of each payment goes toward principal. - - - Step 4: Determine the portion of interest that will be avoided if the loan is repaid early Portion Of interest Rate Avoided: 21 **Determining the dollar interest charge avoided by an early:** **21/78\*(0.14\*\$5, 000\*1year= \$188. 46** **Getting the best Rate on your Consumer Loan:** **Inexpensive sources:** family, home equity loans, cash life insurance loan**.** **More expensive Sources:** credit union, savings and loans, and commercial banks **Most Expensive Sources:** retail stores, finance companies, or small loan companies **Keys to Getting the Best Rate**: a. b. - - - - C. Debt is an expense **Controlling your use of Debt**: Debt limit ratio= total monthly non mortgage debt payments/ total monthly take-home pay - - - Debt Resolution Rule: Control debt obligation, excluding borrowing for education and home financing, by forcing you to repay all outstanding debt obligations every 4 years. - **Consumer debt:** refers to the money individuals borrow for personal, family, or household purposes. **What to do if you can't pay your bills**: a. Budget so more money comes in, b. Use self control in the use of credit, c. Go to your creditor, d. Go to a credit counselor The wages Earn's Plan: Design a plan that allows you to pay the majority of your debt over time. Chapter 7: **Bankruptcy**: The majority of your debt will be wiped out after most of your assets are liquidated. **Borrow less and Borrow Smarter**: Compare financial aid package and college costs **Planning for your college**: a. 529 plan, prepaid tuition plan **Direct Subsidized loans**: It's been provided for undergraduate students through the federal government and the interest rate gets charged after you graduate from college. **Direct Unsubsidized Loan**: Through the federal government, the interest rate gets charged on you from the day you receive the loan while being in college. Direct PLUS Loans: **Direct PLUS Loans** are federal loans available to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid but it does require a credit check. **Direct Consolidation Loans** allow borrowers to combine multiple federal student loans into a single loan with one monthly payment. This can simplify repayment and potentially lower monthly payments by extending the repayment term, although it may result in paying more interest over time. **Private Loan**: with funds after you have exhausted all federal financial aid, which gets offered by the commercial banks and credit unions, and the interest rates are normally high then the federal loans. Repayment Methods: Plans: Standard, Extended, Income-based, Graduated **Deferment**: If you face hardships, unemployment etc you can postpone up to 3 years. And no interest rate gets accrued on subsidized loans. **Forbearanc**e: Delay payments due to illness, financial hardship, or residency requirements. Interest accrues. **Consumer loans**: can be single-payment loans, installment loans, secured loans, or unsecured. Loan Costs are Finance Charges: which include interest payment, loan processing fees, credit check fees, and insurance fees.