354 Practice Exam

Question 1

1. Your client works for XYZ Company and earns $200,000. The wage base for year x is $120,000. The traditional Social Security and Medicare tax rules apply to the client and there are no current government tax incentives in the system to stimulate the economy. How much Social Security and Medicare tax will your client pay in year x? (LO 8-1-1)
A. $9,180
B. $10,340
C. $15,300
D. $18,360

Answer 1

1. The answer is B. It is determined as follows: .062 x 120,000 (wage base) plus .0145 x $200,000 (all income) = $7,440 + $2,900 = $10,340

Question 2

2. What is your client’s full retirement age if she was born August 11, 1950? (LO 8-2-1)
A. 65
B. 66
C. 66 and 2 months
D. 66 and 10 months

Answer 2

2. The answer is B. Those born between 1943 and 1954 have an age 66 full retirement age.

Question 3

3. Your single client Peggy has a full retirement age of 67 and is planning on claiming Social Security benefits 60 months early at age 62. If her primary insurance amount was $2,500, her monthly benefit at age 62 would be (LO 8-2-2)
A. $1,667
B. $1,750
C. $1,791.75
D. $1,875

Answer 3

3. The answer is B. There is a 30 percent reduction. 5/9 x 36 = 20% plus 5/12 x 24 = 10%. Thirty percent times $2,500 = 750. $2, 500-$750 =$1,750

Question 4

4. Your married client Rick delays claiming Social Security two years beyond his full retirement age. If his monthly PIA was $1,700 he will receive an adjusted PIA of: (LO 8-2-2)
A. $1,700
B. $1,836
C. $1,972
D. $2,244

Answer 4

4. The answer is C. His actuarial increase is 16%. (2/3 x 24 =16%). $1,700 times 1.16 = $1,972

Question 5

5. Social Security is considering changing how COLAs are calculated by using a chain-weighted approach. This will: (LO 8-2-3)
   A. Allow for replacement (not a fixed market basket of goods). For example, trade out pork for beef if the price of beef goes up.
   B. Calculate the CPI specifically for the elderly.
   C. Allow a client claiming at 66 to get the COLA’s for age 62, 63, 64, and 65.
   D. Require Medicare premium increases cannot be greater than the COLA that a client receives

Answer 5

5. The answer is A. B is CPI-E. C and D are correct statements under current law

Question 6

6. What is the provisional income of a single client who has a $20,000 adjusted gross income (AGI), $2,000 in municipal bond income and a Social Security benefit of $18,000? (LO 8-3-1)
A. $29,000
B. $31,000
C. $38,000
D. $40,000

Answer 6

6. The answer is B. It is determined as follows: ($20,000 AGI + $2,000 in municipal bonds + ½ of $18,000 in Social Security ($9,000) =$31,000

Question 7

7. Which of the following questions about Social Security taxation is correct? (LO 8-3-1)
   A. A single client with $40,000 in provisional income will pay no taxes on their Social Security income.
   B. A married couple who files jointly with $50,000 in provisional income will pay no taxes on their Social Security income.
   C. A single dollar over the applicable 50% threshold will trigger all Social Security to be taxed at the 85% rate.
   D. Municipal bonds are not taxed advantaged when it comes to determining the percentage of Social Security benefits that are taxed

Answer 7

7. The answer is D. A is $25,000. B is $34,000. C - A few dollars over a threshold will not trigger all SS to be taxed at the higher rate. The closer the client is to the floor, the less the percentage of SS that is taxed. The closer the client is to the ceiling, the more the percentage of SS that is taxed

Question 8

8. Under the deemed filing provision: (LO 8-4-1)
   A. A state employee who was not covered by Social security is not entitled to a spousal benefit.
   B. A worker can repay up to 8 years of Social Security benefits in order to restart benefits with the actuarial increases that would apply had the worker waited to start benefits.
   C. Medicare is automatically granted to anyone who has filed for Social Security benefits.
   D. Prior to full retirement age an application for a spousal benefit is deemed to be an application for the worker benefit and vice versa.

Answer 8

8. The answer is D. A reflects part of the theory of the windfall elimination rule. B reflects a rule that was repealed by the Social Security administration. C is a true statement, but it is not the deemed filing provision

Question 9

9. Your clients have currently married for 35 years. The husband was a worker covered by the Social security system. His wife stayed at home to raise the family and never worked for wages. The wife has a normal retirement age of 66 and claims her spousal
   benefit at 62 (48 months early). The husband’s PIA is $1,000 per month. How much per month is the wife’s Social Security spousal benefit? (LO 8-4-2)
   A. $500
   B. $400
   C. $367
   D. $350

Answer 9

9. The answer is D. If a spouse with a full retirement age of 66 claims at 62 (48 months early), they will have a 30% reduction. (25/36x36=25) plus (5/12x12=5) = total 30%. So if the husband’s PIA is $1,000 per month the wife will receive $500 per month at 66 (50%) and $350 per month at age 62. (500x30%=150; 500-150=350)

Question 10

10. Which of the following statements concerning opportunities that beneficiaries have for changing their Social Security claiming decisions is (are) correct? (LO 8-2-2)
    A. A worker who has claimed benefits can withdraw her application within 24 months from the time benefits began.
    B. A worker can voluntarily suspend benefits at age 67 and start again at age 70 as a way to increase future benefits.
    C. A worker who wants to withdraw his application has to pay back all benefits plus interest.
    D. A worker can voluntarily suspend benefits as early as age 62.

Answer 10

10. The answer is B. Withdrawing the Social Security application (and making a new claiming decision later) is one option. The other is voluntary suspension of benefits. However, only B contains a statement with the correct application of the requirements for one of these strategies. A is incorrect as the time period for withdrawing an application is 12 months. C is incorrect because a worker that withdraws an application only has to pay back the benefits—payment of interest is not required. D is incorrect as voluntary suspension is only allowed at or after full retirement age

Question 11

11. When reviewing the factors that need to be considered before choosing a retirement age, planners are likely to encounter which of the following: (LO 9-1-1)
    A. Clients will typically overestimate their life expectancy.
    B. The Social Security annuity is inferior to commercial annuities in a low interest rate environment.
    C. People have less debt today than they did in the past (e.g., the 1990’s).
    D. There is an incredibly strong link between the presence of health insurance for the client and the choice of a retirement age.

Answer 11

11. The answer is D. Statement A is incorrect because clients typically underestimate their life expectancy. Statement B is incorrect because the Social Security annuity will be superior to commercial annuities in a low interest rate environment. Statement C is incorrect because today’s retirees have more debt than in recent generations (e.g., the 1990’s).

Question 12

12. The average retirement age (the age at which half of the people have left the workforce) for men is: (LO 9-1-2)
A. Age 60
B. Age 62
C. Age 64
D. Age 66

Answer 12

12. The answer is C. Age 60 (A) and 66 (D) are incorrect. Age 62 (B) is the average age of retirement for women.

Question 13

13. Which of the following statements about work to retirement ratios as a way to look at the retirement age choice is correct? (LO 9-1-4)
    A. A two-thirds work/retirement ratio will result in the most manageable scenario.
    B. Clients should always think of retirement as their age from birth rather than as a work/retirement ratio.
    C. Age 65 is the default position when the work to retirement ratio is used.
    D. The decision about the work/retirement ratio depends to some extent on the active (or disability-free) life expectancy

Answer 13

13. The answer is D. Statement A is incorrect. A three quarters work (45 years)/retirement (15 years) ratio will create a more manageable scenario. Statement B is incorrect because the “age from birth” thinking ignores upward changes in longevity that have occurred and will occur. Statement C is incorrect. Age 65 is obsolete thinking. Our improved longevity needs to be factored into the equation of when to retire

Question 14

14. Which of the following statements concerning the types of phased retirement programs is correct? (LO 9-3-2)
    A. Encore careers are formal workplace policies contained in the personnel policies of the employer that allow an employee to continue working with their employer at a reduced schedule.
    B. “Phasing a little” is work that is dramatically different from a full-time schedule. Clients who are phasing a little are often thought of as phasing post-retirement.
    C. Informal phased retirement is more common than formal phased retirement.
    D. Bridge jobs with a new employer require a bona fide termination of employment

Answer 14

14. The answer is C. A is incorrect because encore careers are when a client retires and starts a new career in a different company, often times to double dip. B is incorrect because “phasing a little” is working close to a full-time schedule by only making a modest change in work schedule and conditions. Clients who are phasing a little are often thought of as phasing pre-retirement. D is incorrect because bridge jobs occur immediately or shortly after the employee has left his or her long-time employer. They do not require a bona fide termination of employment. A bona fide termination of employment is required in a retirement and rehire phased retirement.

Question 15

15. An annuity contract purchased by Sarah in 2005 was gifted to her friend Kara as a gift in 2012. In 2012, Sarah has a $50,000 basis in the annuity contract and the annuity contract has a cash surrender value of $55,000. What is Kara’s basis in the annuity after it is gifted to her? (LO 10-2-1)
    A. Kara has a basis of $0 because the annuity was a gift.
    B. Kara has a basis of $5,000.
    C. Kara has a basis of $50,000.
    D. Kara has a basis of $55,000

Answer 15

15. The answer is D. Kara will have the basis of the cash surrender value of the annuity contract

Question 16

16. Which of the following is a true statement regarding the early withdrawal penalty tax? (LO 10-2-1)
    A. A 5-year term certain immediate annuity purchased at age 50 is subject to the early withdrawal penalty tax.
    B. A 5-year term certain immediate annuity purchased at age 60 is subject to the early withdrawal penalty tax.
    C. A 5-year term certain deferred income annuity purchased at age 45, with payments beginning at 50, is subject to the early withdrawal penalty tax.
    D. A 5-year term certain deferred income annuity purchased at age 55, with payments beginning at 60, is subject to the early withdrawal penalty tax

Answer 16

16. The answer is C. A and B are incorrect statements because immediate annuities are not subject to the 10% tax. Lastly, the tax is only applicable to a distribution from a
    nonqualified annuity made prior to attainment of age 59½.

Question 17

17. A husband and wife are joint owners of a nonqualified annuity purchased in 2001 with the son as the beneficiary and the wife as the annuitant. When the husband dies, what happens to the annuity? (LO-10-2-2)
    A. The benefits become payable to the wife.
    B. The benefits become payable to the son.
    C. Benefits can stay in the deferred annuity indefinitely.
    D. The wife has the option to make herself or her son the beneficiary.

Answer 17

17. The answer is B. The son, as the beneficiary of the contract, is able to receive the benefits. Note that this would be the case unless the insurance contract had specific provisions that protect a joint owner. C is incorrect since the son is the beneficiary and distributions to the son are subject to required minimum distribution rules

Question 18

18. Which one of the following statements is correct regarding the current product offerings of guaranteed level withdrawal benefit (GLWB) riders? (LO-10-3-4)
    A. Fixed deferred annuities do not offer GLWB riders.
    B. Indexed annuities do not offer GLWB riders.
    C. Fixed deferred annuities with GLWB riders can be a competitive flooring strategy.
    D. Indexed annuities with GLWB riders can be a competitive flooring strategy.

Answer 18

18. The answer is D. Indexed annuities offer GLWB benefits and in some cases the implied yield is higher than others, making indexed annuities with GLWB riders a viable option to consider for creating an income floor

Question 19

19. Which of the following statements concerning the tax treatment of distributions from a deferred nonqualified annuity is correct? (LO 10-4-2)
    A. Earnings are taxed first before premiums are distributed tax-free.
    B. Premiums are returned tax-free before earnings are taxed.
    C. Earnings are taxed as short-term capital gains.
    D. Earnings are taxed as long-term capital gains

Answer 19

19. The answer is A. Earnings are taxed first, and with income annuities an exclusion ratio applies

Question 20

20. An executive expects tax rates will increase and will most likely choose to make tax-deferred contributions to a nonqualified plan if (LO 11-1-1)
    A. The deferral period is long and the expected tax rate increase is modest.
    B. The deferral period is short and the expected tax rate increase is modest.
    C. The deferral period is long and the expected tax rate increase is dramatic.
    D. The deferral period is short and the expected tax rate increase is dramatic.

Answer 20

20. The answer is A. The longer the deferral period and the lower the tax rate increase the likelihood an executive would make a tax-deferred contribution to a nonqualified plan.

Question 21

21. Which of the following provisions to a supplemental nonqualified plan creates the strongest “golden handcuff” policy? (LO 11-1-1)
    A. A plan has a long vesting period and a large employer contribution for each year of service.
    B. A plan has a short vesting period and a large employer contribution for each year of service.
    C. A plan has a short vesting period and a small employer contribution for each year of service.
    D. A plan has a long vesting period and a small employer contribution for each year of service

Answer 21

21. The answer is A. A long vesting period supports the golden handcuff policy by encouraging executives to stay until the plan vests. A large employer contribution for each additional year of service also ties the executive to stay.

Question 22

22. Which of the following statements concerning life insurance planning is correct? (LO 11-2-1)
    A. Income replacement planning is less critical for couples with large age discrepancies.
    B. As a client ages, insurability becomes less of an issue.
    C. Household expenses generally drop significantly after the loss of one spouse.
    D. Coverage should generally include a non-income earning spouse.

Answer 22

22. The answer is D. Non-income earning spouses are often not covered. However, they typically provide a substantial amount of benefits both financial and otherwise

Question 23

23. In what year did (does) the federal benefit system change from the Civil Service Retirement System (CSRS) to the Federal Employee Retirement System (FERS)? (LO 11-3-1)A. 1974
    B. 1983
    C. 1986
    D. 2015

Answer 23

23. The answer is B.

Question 24

24. Which of the following statements concerning the Thrift Savings Plan sponsored by the Federal government is correct? (LO 11-3-4)
    A. The plan provides for involuntary cash outs for distributions under $5,000.
    B. Plan distributions cannot be rolled into an IRA.
    C.The plan does not allow lump sum distributions.
    D.The salary deferral limit is the same as with a 401(k) plan.

Answer 24

24. The answer is D. Statement A is incorrect because there are no involuntary cash outs for small balances. Statement B is incorrect because benefits can be rolled into an IRA (Roth elections are rolled to a Roth IRA). Statement C is incorrect because the plan does allow rollovers to IRAs.

Question 25

25. Which of the following statements concerning the establishment of a tax-advantaged retirement plan for a small business with a number of employees other than the owner is correct? (LO 11-4-2)
    A. A defined-benefit plan may be the best option for an older business owner who wants to contribute as much as possible on his or her own behalf.
    B. A SEP is an excellent plan option since a large part of the total contribution can be for the business owner.
    C. The coverage rules that apply to qualified plans require that 100 percent of the nonhighly compensated employees who are full-time, age 21 and have worked for one year must be covered under the plan.
    D. A small business owner may choose a profit-sharing plan to avoid covering any of the other employees.

Answer 25

25. The answer is A. B is incorrect, since in a SEP contributions must be allocated as a level percentage of pay or integrated with Social Security. C is incorrect, as the coverage requirements do not require 100 percent of the nonhighly compensated employees to be covered. D is incorrect as profit-sharing plans have to meet the coverage requirements that apply to all qualified plans

Question 26

26. Sally owns several women’s clothing stores. She and her three managers would like to make salary deferral contributions of approximately $10,000. She is willing to make a small contribution for those who choose to contribute to the plan, but she would be surprised if anyone other than the managers would choose to contribute. She has insisted that the plan be easy to implement. Which is the best plan? (LO 11-4-2)
A. SIMPLE
B. SEP
C. 401(k)
D. Profit-sharing plan

Answer 26

26. The answer is A. The SIMPLE provides administrative ease, no concerns over nondiscrimination testing, and in this case matches both the employees and the
    employer’s budget

Question 27

27. Which of the following illustrates a reason to NOT invest in an employer’s stock? (LO 12-2-1)
    A. Employees have a good understanding of how their own company operates.
    B. Employees could see significant financial returns if their company is successful.
    C. Employees have a comfort level in investing in their own company.
    D. Employees tie their human capital returns and savings to their company performance.

Answer 27

27. The answer is D. This illustrates the problem that if both the employee’s savings and human capital returns come from one company, if that company goes out of business they lose their savings and job.

Question 28

28. Which of the following is a benefit of percentage-of-portfolio rebalancing over calendar rebalancing? (LO 12-2-3)
    A. Percentage-of-portfolio approach is a less expensive approach.
    B. Percentage-of-portfolio approach is easier to manage.
    C. Percentage-of-portfolio approach is the most popular discipline.
    D. Percentage-of-portfolio approach results in more desirable asset class exposures

Answer 28

28. The answer is D. On each trading day, the financial planner will examine the client’s portfolio and adjust his or her asset class exposures when a specified threshold corridor of exposure is exceeded

Question 29

29. For a retiree with a (50-50 equity/bond portfolio), the best approach to create an income floor during retirement is to (LO-12-3-3)
    A. Reduce equity exposure over time by purchasing more bonds.
    B. Reduce bond exposure over time by purchasing more equities.
    C. Exchange bonds for an immediate annuity.
    D. Exchange an equal portion of bonds and equities for an immediate annuity

Answer 29

29. The answer is D.
    D helps provide an immediate annuity floor of income and protects against regulator concerns of heavy equity driven retirement plans for seniors. In addition, it also helps protect against portfolio failure by keeping a good mix of bonds and equities

Question 30

30. According to the safe withdrawal rate research, the optimal asset allocation in a post-retirement portfolio between stocks and bonds (LO 12-4-2)
    A. Is roughly 30-70 equities to bonds for a 30-year time horizon
    B. Is roughly 60-40 equities to bonds for a 30-year time horizon
    C. Is roughly 70-30 equities to bonds for a 20-year time horizon
    D. Is roughly 50-50 equities to bonds for a 40-year time horizon

Answer 30

30. The answer is B. The longer the period the higher the optimal allocation between bonds and equities becomes. For example, a 20-year time period has a 50% bond to equity mix, 30 years is 60-40 and 40 years is 70-30

Question 31

31. Which of the following is accurate regarding the impact of taxes on the safe withdrawal rate? (LO 12-4-2)
    A. Taxes were considered when calculating the safe withdrawal rate.
    B. A high tax rate will have a minimal impact on the safe withdrawal rate.
    C. A low tax rate will have no impact on the safe withdrawal rate.
    D. A low tax rate has a lower impact on the safe withdrawal rate than a high tax rate.

Answer 31

31. The answer is D. Higher tax rates have a much larger impact on the safe withdrawal rate.

Question 32

32. Which of the following statements concerning the tax treatment of bonds held in a brokerage account is correct? (LO 12-5-1)
    A. With original issue discount bonds, income is not taxed until the bond matures or is sold.
    B. Treasury bond earnings are taxed only at the state level.
    C. Corporate bond earnings are taxable income unless the coupon payments are reinvested in other bonds.
    D. Municipal bond earnings are exempt from federal income tax

Answer 32

32. The answer is D. Municipal bonds are fully exempt from federal income taxes. C is incorrect as corporate bonds are fully taxable. B is incorrect as Treasury bonds are exempt from state taxes but are subject to Federal income taxes. A is incorrect as the interest on original issue discount bonds is taxed each year

Question 33

33. Which of the following statements concerning the use of a bond ladder to build an income floor is correct? (LO 12-5-1)
    A. A bond ladder can eliminate longevity risk.
    B. Callable bonds are an excellent flooring option because they reduce the cost.
    C. Using municipal bonds eliminates any default risk.
    D. Corporate bonds could lower the cost of creating the income floor.

Answer 33

33. The answer is D. A is incorrect. A bond ladder cannot eliminate longevity risk—a way to reduce the risk is to establish a conservatively long income period. B is incorrect. Callable bonds are problematic for flooring needs as the bonds may become called before the income is needed. C is incorrect. Municipal bonds do have some default risk

Question 34

34. Which of the following represents the most tax efficient withdrawal strategy for a client with taxable, tax-deferred, and tax exempt accounts? (LO 12-6-1)
    A. Take withdrawals from the tax-exempt account first.
    B. Take withdrawals from the tax-deferred account first.
    C. Take a combination of withdrawals from the tax-exempt and taxable accounts first.
    D. Take a combination of withdrawals from the tax-deferred and the taxable account first

Answer 34

34. The answer is D. Taxable accounts are taxed more heavily than the tax deferred account and tax-exempt accounts, so as a general rule take money from taxable accounts first. However, to the extent that withdrawals can be taken from a tax-deferred account at a low rate that should also be part of the strategy.

Question 35

35. According to Reichenstein’s second principal of tax-efficient withdrawals, if the participant with a tax-deferred account has a 25 percent normal marginal tax rate, then the government owns (LO 12-6-1)
A. 25% of the earnings
B. 75% of the principal
C. 25% of the principal
D. 75% of the earnings

Answer 35

35. The answer is C. The government “owns part of the principal—for every dollar withdrawn, the government receives a percentage equal to the tax rate

Question 36

36. Which of the following statements about Social Security’s role in retirement security is (are) correct? (LO 8-1-2)
    I. Widows, in particular, are very dependent on Social Security.
    II. Social Security is currently the major source of retirement income for the majority of retirees and this is expected to continue in the future.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 36

36. The answer is C. Both I and II are correct

Question 37

37. Kim had worked for private industry her whole life and has Social Security income of $18,000 per year and her husband Rick is a non-covered state employee who receives a $25,000 annual pension from the state. Both Kim and Rick are retired. Which of the following statements about them is (are) correct? (LO 8-2-5)
    I. If Rick had been an employee who was covered by Social Security; he would be entitled to a spousal benefit at full retirement age of $9,000 per year. However,
    the government offset provision applies and he will not receive any spousal benefit.
    II. Rick will be eligible for a survivor benefit of $18,000 when Kim dies.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 37

37. The answer is A. Statement II is incorrect because the offset applies and this will eliminate the survivor benefit

Question 38

38. Which of the following statements about the Social Security claiming date is (are) correct? (LO 8-2-6)
    I. A client born on January 1 will get the full retirement age and same PIA formula as someone born in the prior year.
    II. Most people can’t claim Social Security at 62. Unless they were born on the 2nd day of the month they have to wait until 62 and 1 month.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 38

38. The answer is C. Both I and II are correct.

Question 39

39. Which of the following statements about the “tax torpedo” is (are) correct? (LO 8-3-2)
    I. Each dollar coming out of the client’s retirement plan (e.g., 401(k) plan) may trigger the tax torpedo by increasing the client’s provisional income.
    II. Over 80 percent of individuals are affected by the “tax torpedo.”
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 39

39. The answer is A. Statement II is incorrect since 68 percent of individuals do not pay
    tax on their Social Security

Question 40

40. Which of the following statements about the earnings test is (are) correct? (LO 8-3-3)
    I. It is really a forced suspension of benefits as benefits are recalculated (increased) at full retirement age.
    II. It applies after full retirement age.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 40

40. The answer is A. Statement II is incorrect because it only applies to full retirement age.

Question 41

41. Which of the following statements about survivor benefits under Social Security is (are) correct? (LO 8-4-3)
    I. Widows receive a survivor benefit equal to the benefit the spouse was receiving if it is higher than their own worker benefit.
    II. Widows and widowers can begin receiving Social Security benefits at any age if they are caring for a dependent child under age 16.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 41

41. The answer is C. Both statements are correct

Question 42

42. Which of the following statements about Social Security claiming strategies is (are) correct? (LO 8-5-4)
    I. If the husband and wife are the same age, the husband is in bad health, the wife is in excellent health, and the wife is only entitled to a spousal benefit, the couple will still benefit by deferring the husband’s worker’s benefit, even though he is in bad health.
    II. If a husband and wife are the same age, the wife is in better health, both are entitled to a worker’s benefit, and the husband has a higher PIA by a significant amount, the couple is likely to benefit more by deferring the wife’s benefit than by deferring the husband’s benefit.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 42

42. The answer is A. Statement II is incorrect because the couple benefits more by deferring the husband’s benefit since this is the benefit that will be paid for a joint lifetime.

Question 43

43. Which of the following statements about changing client perceptions through an educational program is (are) correct? (LO 8-6-2)
    I. The concept of passing up “free money” at age 62 is short-sighted; clients must also consider the “free money” that results in larger monthly payments later in retirement.
    II. The desire for a specified retirement age should not dictate the claiming decision.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 43

43. The answer is C. Both statements are correct

Question 44

44. Kathy is single and was never married. She is fully funded with no risk of funds running out, or her standard of living being compromised prior to death. Which of the
    following statements concerning the decision of when Kathy will claim Social Security benefits is(are) correct? (LO 8-6-9)
    I. She will probably base her decision on the net present value break-even age approach and her expected longevity.
    II. She is potentially eligible for a spousal benefit.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 44

44. The answer is A. Since she was never married she cannot receive a spousal benefit

Question 45

45. Which of the following statements concerning anchor points is (are) correct? (LO 9-1-1)
    I. Anchor points should be the primary consideration when choosing a retirement age.
    II. Clients should separate out the Social Security claiming anchor point from the retirement age decision.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 45

45. The answer is B. Statement A is incorrect because anchor points ignore the fact that where a client stands on the question of when to retire depends upon his or her unique perspective and goals, not social norms

Question 46

46. Which of the following is a/(are) strategy(ies) the planner can use to help their client choose their retirement age? (LO 9-1-1)
    I. Planners can change the client’s thinking about the retirement age as an age from birth (e.g., 65) to a longevity analysis or a ratio analysis, and this framework may make more economic sense.
    II. Planners need to help clients balance their desire for leisure with their desire to work.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 46

46. The answer is C. Both statements are correct

Question 47

47. Which of the following statements about phased retirement is (are) correct? (LO 9-3-1)
    I. It must be with jobs that require the same work as the prior full-time job.
    II. It is more often chosen by people who are less educated and have lower household wealth and income.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 47

47. The answer is D. Statement I is incorrect because phased retirement can be with jobs that require the same work, jobs that require different work, or jobs that require skills similar to the full-time job. Statement II is incorrect because phased retirement is
    more often chosen by people who are more educated and have higher household wealth and income

Question 48

48. Which of the following statements about characteristics of a phased retirement program is (are) correct? (LO 9-3-3)
    I. The employee or former employee could reduce the hours, days, or weeks they work.
    II. The employee or former employee could engage in a job-sharing program.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 48

47. The answer is D. Statement I is incorrect because phased retirement can be with jobs that require the same work, jobs that require different work, or jobs that require skills similar to the full-time job. Statement II is incorrect because phased retirement is
    more often chosen by people who are more educated and have higher household wealth and income

Question 49

49. Which of the following statements concerning a client choosing to work for her former employer as a part-time employee during phased retirement is (are) correct? (LO 9-3-6)
    I. As long as she was a full-time employee for 25 or more years, she must be eligible for the employer’s phased retirement program if the employer offers one.
    II. She may lose life insurance benefits because those benefits may be contingent on the hours worked.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 49

49. The answer is B. Statement I is incorrect because there is no such requirement.

Question 50

50. Which of the following statements concerning the NAIC’s model regulations on annuity suitability is/are correct? (LO 10-1-1)
    I. There must be a reasonable basis to believe that the client will benefit from the annuity’s features.
    II. There must be a reasonable basis to believe that the annuity as a whole is suitable.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 50

50. The answer is C. The NAIC’s model regulations on annuity suitability require that there is a reasonable basis to believe the annuity as a whole is suitable and that the client benefits from the annuity

Question 51

51. Which of the following statements regarding regulators’ concerns about elderly clients purchasing annuities is/are correct? (LO 10-1-1)
    I. Regulators do not want family members involved in elderly clients’ financial decisions.
    II. Regulators are looking for confirmation that an annuity is purchased as a long-term investment.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 51

51. The answer is B. I is wrong because regulators want elderly clients to be well informed and protected, this can include involving family members in the client’s decisions. II is correct because this is a major concern for regulators; they want to make sure that clients understand that annuities are a long-term and not short term investment option.

Question 52

52. Which of the following statements would encourage a 1035 exchange? (LO 10-1-1)
    I. A new annuity product has a lower minimum interest rate.
    II. A new annuity product has a higher expense ratio.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 52

52. The answer is D. Lower expense rations and higher minimum interest rates would be the appropriate time to consider a 1035 exchange

Question 53

53. Which of the following statements correctly describes the federal income tax treatment of a bond ladder using treasury bonds? (LO 10-3-1)
    I. Federal income taxes are paid on earnings during the accumulation period.
    II. Federal income taxes are paid on earnings during the distribution period.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 53

53. The answer is C. Federal income taxes are paid every time there are earnings

Question 54

54. Which of the following statements correctly describes the return structure of fixed term certain (non-life contingent) annuities? (LO 10-3-1)
    I. The returns are tied to current interest rate assumptions.
    II. The returns are tied to mortality pooling.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 54

54. The answer is A. Term certain annuities are not tied to mortality pooling

Question 55

55. Which of the following statements accurately describes benefits associated with deferred income annuities (DIAs)? (LO 10-3-2)
    I. DIAs allow for payments to increase if assets perform well in the market.
    II. DIAs can show consumers the portion of their assets that would be required to meet their future income needs.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 55

55. The answer is B. DIAs offer a lot of certainty for clients in projecting out a level of income in the future. Because DIAs can be paid for now and have inflation protections, it can be a good way to show clients how much of their assets it takes to purchase a DIA.

Question 56

56. Typically, guaranteed minimum income benefit (GMIB) riders may allow (LO 10-3-3)
    I. For an annuitized benefit based on contractual factors.
    II. To be used along with a guaranteed minimum death benefit rider.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 56

56. The answer is C. These benefits are typically annuitized and can be paired with a
    guaranteed minimum death benefit rider

Question 57

57. Which of the following statements regarding multi-year fixed term deferred annuities is/are correct? (LO 10-3-4)
    I. Multi-year fixed term deferred annuity products generally compete with high return equity portfolios.
    II. Multi-year fixed term deferred annuities generally are available for periods between 3-10 years.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 57

57. The answer is B. Multi-year fixed term deferred annuities are typically good alternatives to CDs and generally compete with them primarily based on available rates of return. Furthermore, the products are typically available for a period between 3-10 years

Question 58

58. An income floor can be created by (LO 10-4-1)
    I. Purchasing a deferred income annuity prior to retirement with lifetime payments beginning at retirement age
    II. Purchasing a bond ladder and a deferred income annuity with payments beginning at an advanced age
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 58

58. The answer is C. Both of these are good uses of a DIA as an income floor as they create annuitized payments for spending during retirement

Question 59

59. Which of the following statements is(are) true with regards to small business owner retirement planning? (LO 11-4-1)
    I. Small business owners typically do not prepare succession plans far in advance of when they are needed.
    II. Small business owners often look forward to retirement and have little trouble with the transition.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 59

59. The answer is A. Small business owners typically do not plan well or think about succession and retirement planning

Question 60

60. Which of the following statements correctly describes risk tolerance? (LO 12-1-1)
    I. Risk tolerance is partially determined by one’s ability to take risk.
    II. Risk tolerance is partially determined by one’s willingness to take risk.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 60

60. The answer is C. Risk tolerance is determined both by one’s ability to take risk and their willingness to take risk

Question 61

61. Which of the following statements correctly describes the differences between tactical and strategic asset allocation? (LO 12-1-4)
    I. Strategic asset allocation focuses on short-term expectations (1-10 years).
    II. Tactical asset allocation focuses on long-term expectations (10+ years).
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 61

61. The answer is D. Tactical Asset Allocation focuses on short-term expectations and Strategic Asset allocation focuses on long-term expectations.

Question 62

62. Which of the following statements accurately describes the value of human capital at retirement? (LO 12-2-1)
    I. A person’s human capital is strongest at retirement.
    II. Human capital continues to grow throughout retirement.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 62

62. The answer is D. Human capital is typically at its lowest right before, or at retirement. However, planning based on human capital is extremely important for retirement planning

Question 63

63. Which of the following statements regarding the investment characteristics of human capital is(are) correct? (LO 12-2-1)
    I. Human capital is similar to a bond if one’s future earnings are stable, predictable and not impacted by stock market conditions.
    II. Human capital is like a stock if one will have greater risk of unemployment or lower earnings if the stock market performs poorly.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 63

63. The answer is C. Example I – Professors with tenure are like a bond. Example II - Commission based job is like a stock market

Question 64

64. An optimal withdrawal rate should take into account a person’s (LO 12-3-1)
I. Risk tolerance
II. Legacy goals
A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 64

64. The answer is C. A person’s risk tolerance and legacy goals are important when determining an optimal withdrawal rate

Question 65

65. According to research, increasing the equity allocation of a portfolio to 80% on average will (LO 12-3-1)
    I. Increase the risk of portfolio failure.
    II. Decrease the remaining legacy balance.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 65

65. The answer is A. While the average risk of portfolio failure increases with high equity portfolio allocations as compared to 60-40 or 70-30 asset to bond allocations, the average remaining legacy balances have been shown to be higher.

Question 66

66. Which of the following statements is a reason why the 4% safe withdrawal rate was not successful for many European counties during the 20th century? (LO 12-4-2)
    I. Down markets recovered slowly after World War I and II.
    II. Many countries faced high levels of inflation.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 66

66. The answer is C. High levels of inflation and wars played a role in lower safe withdrawal rates in many European countries during the 20th century

Question 67

67. Which of the following statements concerning tax-efficient withdrawal strategies is/are correct? (LO 12-6-1)
    I. As a general rule, nonqualified annuities should be liquidated after a taxable account and before a tax-deferred (i.e. deductible IRA) account.
    II. If estate planning objectives are predominate an older client with significant untaxed capital gains in a taxable account may choose to first withdraw from a tax-deferred account before withdrawing from the taxable account.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 67

67. The answer is C. I is correct as nonqualified annuities have some tax drag–but less than a taxable account. II is correct it represents an exception from the normal rule of taking withdrawals from taxable accounts first. Taxable accounts with untaxed capital gains will generally result in a step up in basis and an avoidance of capital gains entirely if held until the death of the owner

Question 68

68. All of the following statements about Social Security are correct EXCEPT (LO 8-1-1)
    A. There is a 1.45% FICA tax (Medicare portion) on all income.
    B. There are 2 Medicare trust funds.
    C. Encouraging continued work by a client beyond age 62 may increase Social Security benefit amounts.
    D. Affluent clients need to save less for retirement because Social Security provides them with a higher replacement ratio than less affluent clients.

Answer 68

68. The answer is D. Affluent clients need to save more for retirement because Social Security provides them with a lower replacement ratio

Question 69

69. Clients are desirous of claiming Social Security at the earliest possible time for a variety of legitimate and spurious reasons. All of the following are reasons clients are reluctant to defer Social Security benefits EXCEPT (LO 8-1-3)
    A. The earnings test
    B. A belief that Social Security should be viewed primarily as a salary continuation plan
    C. Social convention
    D. Fears of Social Security failing

Answer 69

69. The answer is A. The earnings test would actually encourage people to defer Social Security (at least until full retirement age

Question 70

70. All of the following statements concerning choosing one Social Security claiming age over another are correct EXCEPT (LO 8-2-4)
    A. When spousal benefits are considered the replacement ratios for delayed claiming are even more dramatic than for a single client.
    B. An 8-year delay (age 62 to age 70) increases monthly benefits by 76 percent.
    C. There is no actuarial increase in the workers Social Security benefits for claiming after age 68.
    D. Continued employment may lead to increased Social Security benefits because of higher wages being applied to the PIA formula.

Answer 70

70. The answer is C. The age after which actuarial increases cease is 70.

Question 71

71. All of the following statements about survivor benefits are correct EXCEPT (LO 8-5-5)
    A. A widow who is caring for a child under 16 is eligible for a full, unreduced survivor benefit.
    B. A widow over age 60 is eligible for a survivor benefit.
    C. If a widow age 60 (without a dependent child) claims a survivor benefit, the benefit will be subject to a reduction factor.
    D. If a widow waits to age 70 to claim a survivor benefit, the benefit is eligible for an actuarial increase

Answer 71

71. The answer is D. Neither spousal nor survivor benefits are eligible for an actuarial increase for deferring past full retirement age. Only the worker’s benefit is eligible for deferral credits.

Question 72

72. All of the following statements about the claiming Social Security later to increase your portfolio’s longevity strategy are correct EXCEPT (LO 8-5-7)
    A. The desirability of this strategy increases with the client’s wealth.
    B. The delay in claiming Social Security benefits will increase the portfolios longevity when applying the 4 percent/30 year rule.
    C. Delaying may help to cause a reverse tax torpedo.
    D. It pays to delay even if the client does not live 30 years as long as the client lives beyond age 80

Answer 72

72. The answer is A. The desirability of this strategy decreases with the client’s wealth

Question 73

73. All of the following are factors used in the net present value break-even age approach to claiming Social Security benefits EXCEPT (LO 8-6-4)
A. The discount rate
B. The client’s personal life expectancy
C. The earnings test
D. The bridge period test

Answer 73

73. The answer is D. There is no bridge period test. The bridge period analysis comes into play when looking at Social Security as a hedge against longevity risk.

Question 74

74. All of the following are reasons to choose a delayed claiming age for Social Security EXCEPT (LO 8-6-5)
    A. There is a “reverse tax torpedo” if Social Security benefits are taken late.
    B. There is a preservation of liquidity and potential bequests.
    C. There is a “snowballing” effect on delaying Social Security benefits because of both the actuarial increases and the compounding of COLA increases.
    D. Some of the investment risk has been transferred by a delayed claiming

Answer 74

74. The answer is B. Just the opposite is true. There is a loss of liquidity and the potential to leave money to heirs is compromised if a delayed claiming is chosen because retirement assets are typically consumed in order to delay benefits.

Question 75

75. All of the following statements concerning the choice between claiming Social Security benefits later and using 401(k) funds to fund retirement needs versus claiming early and preserving 401(k) funds are correct EXCEPT (LO 8-6-6)
    A. In all but rare instances where the 401(k) would earn a significant rate of return it will be cheaper to “delay Social Security and use the 401(k) funds.
    B. Planners need to factor in liquidity when making this decision.
    C. Planners need to factor in the loss of Medicare if Social Security is not claimed when making this decision.
    D. Planners need to factor in potential widows benefits when making this decision.

Answer 75

75. The answer is C. The claiming age for Social Security benefits does not have an impact on the client’s eligibility for Medicare benefits

Question 76

76. All of the following statements concerning the Family and Medical Leave Act (FMLA) are correct EXCEPT (LO 9-1-1)
    A. It provides for up to 12 weeks off in a 12-month period to provide caregiving to a spouse, child, or parent with a serious health condition.
    B. It provides for job-protected leave.
    C. It provides for paid leave.
    D. It provides for benefit-protected leave.

Answer 76

76. The answer is C. FMLA provides for unpaid leave.

Question 77

77. All of the following statements concerning the analysis of when households will be able to retire done by the Boston College Center for Retirement Research using their Retirement Risk Index are correct EXCEPT (LO 9-2-1)
    A. Less than 50 percent of households are ready to retire at age 65.
    B. Lower income households are more at risk for failing to continue their pre-retirement standard of living in retirement than higher income households.
    C. A reason for a steep improvement in financial retirement readiness between age 62 and age 70 is because of delayed claiming of Social Security.
    D. It shows that younger households will be better prepared for retirement than older households.

Answer 77

77. The answer is D. Statement D is incorrect because older households will be better prepared for retirement than younger households

Question 78

78. Clients should consider all of the following factors before they decide to retire EXCEPT (LO 9-2-3)
    A. The client needs to look into alternate or part-time work opportunities in retirement.
    B. The client needs to formulate ideas about how much they would like to work (if at all) in retirement.
    C. The client needs to determine the factors that are critical to maintaining a personally satisfying retirement.
    D. The client needs to plan for the ability to live on a four percent withdrawal rate

Answer 78

78. The answer is D. There are many decumulation options. A specific withdrawal rate can be chosen. However, the 4 percent withdrawal strategy does not mean the client will be living on only 4 percent of their assets (for example, the client may have Social Security

Question 79

79. All of the following are reasons people may opt for phased retirement EXCEPT (LO 9-3-4)
    A. To maximize benefits in a defined-benefit plan
    B. To increase retirement income
    C. To adjust for age-related changes in stamina or ability
    D. To try new work activities

Answer 79

79. The answer is A. Statement A is incorrect because in some cases phased retirement may hurt defined-benefit pensions by lowering the final average compensation

Question 80

80. All of the following statements concerning plan designs of a phased retirement program are correct EXCEPT (LO 9-3-7 and 9-3-8)
    A. A phased program can allow an employee to draw defined-contribution benefits while working part-time to supplement their part-time wages.
    B. A phased program can cover part-time phased retirees in the employer medical plan.
    C. A phased program can allow workers to “snowbird” and work in other locations.
    D. A phased program must only be offered to highly compensated employees or managers under the Section 409A top hat rule

Answer 80

80. The answer is D. There is no such requirement

Question 81

81. All of the following information must be gathered to satisfy the NAIC’s model regulations on annuity suitability EXCEPT (LO 10-1-1)
A. Client’s age
B. Children’s marital status
C. Client’s tax status
D. Intended uses

Answer 81

81. The answer is B. Agents are required to gather all of the following information: client’s age, annual income, financial situation, financial experience, financial objectives, intended uses, financial horizon, existing assets, liquidity needs, current liquid net worth, risk tolerance, and tax status

Question 82

82. The NAIC’s model regulations on annuity suitability require all of the following EXCEPT (LO 10-1-1)
    A. Registering the annuity with the NAIC
    B. The gathering of suitability information
    C. Disclosure of information about the annuity
    D. Reasonable determination of suitability

Answer 82

82. The answer is A. There is not a requirement under the NAIC’s model regulations on annuity suitability to register the annuity with the NAIC

Question 83

83. All of the following are accurate with regards to the tax treatment of a gift of an annuity purchased after 1987 EXCEPT (LO 10-2-1)
    A. The income tax rule does not apply to a gift of an annuity to a charitable organization.
    B. If there is an income tax event, the gift tax value for the donor is the cash surrender value of the contract.
    C. There are no income tax consequences for gifts between spouses.
    D. For tax purposes, the transaction is treated as if the contract is surrendered and the cash is gifted

Answer 83

83. The answer is A. The income tax rule still applies even if the gift is to a charitable organization

Question 84

84. All of the following statements are true regarding current market trends with deferred income annuities (DIAs) EXCEPT (LO-10-3-2)
    A. DIAs are experiencing increased consumer awareness.
    B. Because of high current interest rates, companies are offering many new DIAs.
    C. DIAs are experiencing a wider acceptance by advisors and regulators.
    D. Product flexibility is increasing

Answer 84

84. The answer is B. DIAs are experiencing more awareness and acceptance by consumers, advisors, and regulators. However, current interest rates have a lot of companies waiting on the rates to change. There is also a move to more flexible and multi-purpose products in the market

Question 85

85. All of the following could be reasons to use a guaranteed level withdrawal benefit (GLWB) rider with a variable annuity EXCEPT (LO-10-3-3)
    A. Provide downside protection for the growth portion of the portfolio
    B. Provide a long-term care rider
    C. Provide lower premium payments
    D. Provide a flooring strategy

Answer 85

85. The answer is C. This rider will not lower the policy’s premium but it could provide some of the benefits of a flooring strategy, long-term care, and provide downside protection for the portfolio

Question 86

86. Employers may choose to limit the payout amount on group term life insurance policies to $50,000 for all of the following reasons EXCEPT (LO 11-1-2)
    A. The tax burden placed on the employer for additional insurance coverage.
    B. The tax burden placed on the employees for additional insurance coverage.
    C. Limiting the payout amount keeps premium payments down.
    D. Limiting the payout amount reduces the possibility of premium increases in the future

Answer 86

86. The answer is A. The main reasons why employers limit the payout amount is to keep payouts low, costs down, premium payments down, and there is a big tax burden on employees after 50,000 in payouts

Question 87

87. When building a life insurance policy intended to maximize saving for retirement it is important to satisfy both Code Sec. 7702 and the modified endowment requirements to benefit from all of the following EXCEPT (LO 11-1-3)
    A. Loans are tax-free.
    B. All internal growth is fully tax deferred.
    C. Death benefits are tax free.
    D. Tax free withdrawals of all lifetime distributions

Answer 87

87. The answer is D. Lifetime withdrawals are only tax-free up to the cost basis

Question 88

88. All of the following concerning Sec. 162 bonus life insurance plans are correct EXCEPT (LO 11-1-3)
    A. A plan can be voluntary and paid for entirely by the employee.
    B. The employee has access to the funds in the policy.
    C. The employee is the owner of the life insurance policy and chooses the beneficiary.
    D. Employer-paid premiums are not treated as taxable income until the employee terminates employment

Answer 88

88. The answer is D. If the premiums are paid by the employer, the premiums are
    taxable income to the employee at the time the premiums are paid.

Question 89

89. All of the following statements are true regarding the distribution of death benefits of a life insurance policy EXCEPT (LO 11-2-1)
    A. A trust can be a beneficiary of a life insurance contract.
    B. Many people elect a single sum settlement option.
    C. Many people do not consider the range of settlement options available.
    D. Life insurance proceeds cannot be annuitized as a settlement option

Answer 89

89. The answer is D. Life insurance policies can give the option of rolling the proceeds over into an annuitized payment option. However, it is important to check these rates to those available in the market

Question 90

90. All of the following are true statements regarding a life insurance contract that is not a modified endowment contract (non-MEC) EXCEPT (LO 11-2-2)
    A. The cash value benefits can be used to meet college funding needs without affecting FASFA financial aid determinations.
    B. A loan can be made against the policy without any tax consequences.
    C. All lifetime withdrawals are treated as distributions of taxable earnings.
    D. Lifetime withdrawals are treated as a return of premiums until premiums have been recovered

Answer 90

90. The answer is C. Lifetime withdrawals are treated as a return of premiums until premiums have been recovered.

Question 91

91. All of the following statements about the Federal Employee Retirement System (FERS) are correct EXCEPT (LO 11-3-2)
    A. Benefit statements come in two forms. A retirement calculator and a Thrift Savings Plan Statement.
    B. All retirees at age 55 or later are eligible for unreduced benefits.
    C. Any individual who defers retirement benefits cannot elect to continue health insurance benefits in retirement.
    D. Employees make a mandatory contribution of .8 percent of pay each year

Answer 91

91. The answer is B. The benefit is reduced by 5 percent for each year of retirement prior to age 62.

Question 92

92. All of the following statements about the Civil Service Retirement System (CSRS) are correct EXCEPT (LO 11-3-3)
    A. Participants in the CSRS system contribute 7 percent of salary.
    B. Participants in the CSRS system get a cost of living adjustment (COLA) during retirement.
    C. Participants in the CSRS system get a 6 percent dollar for dollar matching contribution if they contribute to the Thrift Savings Plan.
    D. Participants in the CSRS system can retire at age 60 if they have 20 years of service with no early retirement reduction in pension benefits

Answer 92

92. The answer is C. CSRS employees are eligible for the Thrift Savings Plan but are not entitled to a matching contribution.

Question 93

93. All of the following are true regarding building a succession plan for a small business EXCEPT (LO 11-4-1)
    A. The succession plan should be created a few years before retirement.
    B. The succession plan should consider the desires and types of business partners.
    C. The succession plan should consider potential tax consequences.
    D. The succession plan should take into account the business’s legal form

Answer 93

93. The answer is A. Succession planning should start not a few years before retirement but it should start when the business is being started. This is often hard to accomplish because entrepreneurs are more concerned with how to get a company up and running as opposed to how to plan for its dissolution or succession

Question 94

94. Your client has purchased a vacation home and has the intention of selling her primary residence and moving into the vacation home full-time in retirement. All of the following could be issues with this part of the retirement plan EXCEPT (LO 11-5-1)
    A. It creates asset diversification concerns.
    B. It may be difficult to determine the current value of the primary residence.
    C. It provides for forced savings through the mortgage payments.
    D. It may be difficult to let go of the family home, which may strain the retirement plan.

Answer 94

94. The answer is B. It is not difficult to obtain a market value for the home

Question 95

95. Company specific risks include all of the following EXCEPT (LO 12-1-2)
A. Inflation risk
B. Legal risk
C. Actuarial risk
D. Strategic risk

Answer 95

95. The answer is A. Inflation risk is a market risk that affects everyone the same and is
    not a company specific risk.

Question 96

96. Under modern portfolio theory, in order to determine the optimal risky portfolio you need all of the following inputs EXCEPT (LO 12-1-3)
    A. Expected average return on each risky asset considered for inclusion
    B. Expected standard deviation of each of the associated return series
    C. Expected correlation between each asset’s return series
    D. Expected investment in risk-free asset

Answer 96

96. The answer is D. To determine the MPT optimal risky portfolio you do not need to know the investments planned in risk-free assets. However, to determine the optimal household portfolio you would need to know this.

Question 97

97. Strategic asset allocation can be driven by all of the following expectations EXCEPT (LO 12-1-4)
    A. Changes in investment returns
    B. Changes in investment risk
    C. Changes in correlations between asset classes
    D. Changes in short-term market trends

Answer 97

97. The answer is D. Strategic asset allocation takes into account short-term expectations of macro-economic conditions

Question 98

98. All of the following should be taken into consideration when an investor is pre-paying a mortgage as a substitute for a risk free asset EXCEPT (LO 12-2-2)
    A. The investor’s tax situation
    B. The investor’s current equity returns
    C. The investor’s liquidity needs
    D. The investor’s mortgage characteristics

Answer 98

98. The answer is B. Pre-paying a mortgage should be done as an alternative to risk-free assets and not risky returns

Question 99

99. All of the following are correct concerning the “safe savings rate” EXCEPT (LO 12-3-2)
    A. The rate was tested using Monte Carlo analysis.
    B. The rate was successful in the worst case scenario.
    C. The rate changes as the anticipated length of retirement changes.
    D. The rate changes as the anticipated length of the savings period changes

Answer 99

99. The answer is A. The safe savings rate is calculated similarly to the safe withdrawal rate by using rolling historical data for different periods

Question 100

100. All of the following statements concerning the historical approach methodology to retirement income research are correct EXCEPT (LO 12-4-1)
     A. It looks at overlapping historical periods.
     B. It uses historical correlations between bond and stock returns.
     C. It provides the comfort that the assumptions are real to the extent that they happened before.
     D. It allows for a thousand or more sample periods

Answer 100

100. The answer is D. There are only a limited number of 30-year historical periods that can be tested.