Retirement

Question 1

Which of the following capital needs analysis methods mitigates the risk of outliving retirement funds?

Capital Preservation Model
Present Value of an Annuity Due Model
Purchasing Power Preservation Model
Serial Accumulation Model

Answer 1

Solution: The correct answer is A.

The Capital Preservation Model assumes at life expectancy, as estimated in the annuity method, the client has exactly the same account balance as he/she started with at retirement. So if life expectancy is exceeded there is still capital available.

Question 2

When calculating the Wage Replacement Ratio (WRR), what percentage of income is subtracted for a self-employed individual for Social Security and Medicare Taxes?

7.65%
6.20%
15.30%
13.3%

Answer 2

Solution: The correct answer is C. 15.30

This is an important point to stress as many clients are self-employed and pay both employer and employee portions of the tax.

Question 3

Calculating the amount which must be saved each year in order to meet a retirement income goal would be decreased by which of the following:

1. Assumption of capital utilization after retirement.
2. Increased longevity due to improved medical technology.
3. Increased rates of return (in excess of assumed rates in the plan).
4. Increased inflation.

I and III only.
I, III and IV only.
II and IV only.
II and III only.

Answer 3

Solution: The correct answer is A. I and III only

Using up retirement capital and receiving a higher-than-expected rate of return would reduce the amount needed to be put aside each year. Statements “II” and “IV” would increase the funding required.

For example:

If I want 40,000 in retirement and believe I can earn 8%, let’s say for 20 years.

Capital preservation – I need $500,000 at the beginning of retirement (40,000 / .08)

Capital utilization – I need $424,143 at the beginning of retirement (use a TVM calculation to arrive at this number)

Question 4

Which of the following retirement plans would permit an employee (filing single status) making $100,000 a year to still make the fully deductible contribution to an IRA in the current year?

401(k)
403(b)
SEP
457

Answer 4

Solution: The correct answer is D.

IRC Section 457 plans are nonqualified deferred compensation plan, and therefore do not make the employee an “active” participant in a qualified retirement plan. The 401(k) is a qualified plan and the 403(b) and SEP are ‘wannabe’ be plans that would make the employee an “active” participant.