Question 1

Your 18 year old client says he's not working pass the age of 30. A life of retirement is for him. You inform that the costs of goods and services that retirees use most often increase faster than the general rate of inflation measured by the ______?

Accepted Answer

The costs of goods and services that retirees use most often increase faster than the general rate of inflation measured by the Consumer Price Index. Inflation is just one area of concern when determining financial needs during retirement. Retirement period and life expectancy must be considered with family history in mind. Lifestyle demands during retirement and the total return of project investment with tax rate must also be contemplated.

Question 2

Martha and Matt are retiring in 30 years and they want to make sure they have enough funds to maintain their lifestyle until they pass away. As a financial planner you know a comprehensive income-need analysis must be calculated. What calculation type would you not take into consideration for the analysis?

Accepted Answer

When calculating a comprehensive income-need analysis a financial planner would not take into consideration paid bills. For a retirement income-need analysis calculation present value, interest rate, number of periods, future value, and payment must be calculated if the analysis is to be comprehensive.

Question 3

Beth is the most optimistic and altruistic client you've ever had. She saves 10 percent of her income weekly and her living expenses only take-up 30 percent of her pay; the rest is given to charity. She wants to retire early and maintain her current lifestyle. What option would you suggest to have her save more income to meet her financial needs?

Accepted Answer

An individual that wishes to retire early while maintaining their current life style should be informed to reduce charitable contributions if they are only saving 10 percent and giving 60 percent to charity. Other considerations are to decrease current and future expenditure, participate in aggressive investments, or to lower desired amount of income.

Question 4

After calculating a comprehensive income-need analysis for Martha and Matt, you realize they need to start saving $100,000 per year to retire like Madonna will. What for projected cash-flow shortfall compensation strategy would you not suggest?

Accepted Answer

When considering a compensation strategy for projected cash-flow shortfalls one would not suggest level annual payments instead of serial annual payment. In fact, it would be best to consider serial (increasing) annual payments versus level annual payments. Additional alternatives include; consider making maximum contribution to qualified retirement plans, decrease current and future expenditures, participate in more aggressive investments, advance the retirement age or lower the desired amount of income, and to accept higher risk levels for investments.

Question 5

John has broken his tow and insists he can no longer work - ever! He insists you help him start getting disability payments. You try to explain to John that:

Accepted Answer

An individual with just a broken toe should be told there is a five-month waiting period if not exempted and his toe would already be healed. Additionally, a person is entitled to disability benefits is they meet the following requirements: is insured for disability benefits, is under the age of 65, has been disabled for 12 months, or is expected to be disabled for 12 months, has filed application for disability benefits, and has completed a five-month waiting period or is exempted from this period.

Question 6

Becky's parents have died in a car crash, she is five. Her grandparents are 59 years old and now care for her. Granddad is considering taking on some work to earn a little extra money. He is wondering how an extra job may affect the benefits they receive for Becky's care, what do you tell him about working?

Accepted Answer

For a grandchild to be considered a child by grandparents after parents have died, they must not earn more than $14,160 per year to maintain benefit eligibility. This rule also applies for grandchildren who were legally adopted by the surviving spouse as well. However, once the grandparents are of retirement age, they can earn $37,680 without losing benefits as of 2009.

Question 7

How many days does Medicare cover at a skilled nursing facility?

Accepted Answer

Medicare will cover the first 100 days at a skilled nursing facility; however, they do not pay for custodial care. Benefits are primarily a specified amount per day. They are sold in increments of $10 per day up to $500 per day. Benefits can be provided on an indemnity bases that covers 80 - 100 percent of charges up to a maximum amount.

Question 8

For Medicare Part A, how many days in the hospital is paid in full?

Accepted Answer

For Medicare Part A, 60 days in the hospital is paid in full. This is followed by 30 additional days with co-payment and a 60-day lifetime reserve. A benefit period begins when a Medicare recipient is hospitalized and ends only when the recipient has been out of the hospital or skilled-nursing facility for s60 consecutive days. There is no limit on the amount of benefit periods a person can have in a lifetime. The 60-day lifetime reserve may be used if the 90-day period has been exhausted.

Question 9

Under what circumstances are Medicare benefits not provided?

Accepted Answer

Medicare benefits are not provided for those traveling outside of the United States. However, there are often exceptions for emergencies if the travel destination is Mexico or Canada. Medicare does not cover custodial care, dental work, cosmetic surgery (except after an accident), routine foot care, eye and hearing exams, prescription glasses and hearing aids, most prescription drugs, private room in hospital or nursing home, services covered under workers' compensation, most chiropractic care, acupuncture or most immunizations.

Question 10

Your client is currently taxed for FICA at 7.65 percent; however, they are considering opening their own business. What would be the new tax rate for FICA?

Accepted Answer

FICA for employees are 7.65 percent, those who are self-employed have a FICA rate of 15.3 percent. This is a combination of 12.40 percent Social Security tax and 2.9 percent Medicare tax.

Question 11

Mitch is a stay-at-home Dad with 8 year old twins. His wife just passed-away and he is not sure what to do with his financial situation. There are some savings from his wife's law firm and Mitch will receive monies from the firm as part owner. What should you inform Mitch of?

Accepted Answer

A widow(er) with at least one child has the right to apply for survivor benefits, and will receive such benefits until the child is 18 years of age or 19 years of age if a full-time student, and will receive a one-time death payment of $255 as of 2009. Additionally, survivor benefits are per child at 50 percent of the employee's retirement benefits and benefits can be extended to the age of 22 if the child is disabled for the age of 22 years. However, for disability to be granted the child must be under the age of 16 years.

Question 12

Mitch is happy to know there will be some funds coming in the house for his children after his wife passed-away after 11 years of marriage. But the monies are not really enough to maintain their standard of living. What should Mitch be informed of?

Accepted Answer

A surviving spouse with at least one child under the age of 16 years is entitled to 50 percent of his wife's employee benefits until the child is 18 years old or 19 years old if the child is a full-time student and the parents were married at least 10 years. However, once the children are considered adults, if the survivor is under the age of 62 the benefits will cease. Also, if the parents had been married for less than 10 years or the surviving spouse remarries, benefits cannot be applied for.

Question 13

Social Security is common within many benefits plan. What type is/are the method(s) used for Social Security integration?

Accepted Answer

The methods used to determine Social Security integration for benefits plan is excess and offset. The goal of the integration is to correct the disparity in retirement benefits for higher income workers versus lower-income workers. The excess method of integration defines a compensation level called the integration level. The plan then provides a higher rate of benefits for compensation above the integration level. The maximum permitted disparity is 26.25 percent. The offset method has no integration level. The plan formula is reduced by a fixed amount or some formula amount designed to represent the existence of Social Security. No more than half of the benefit provided under the formula without the offset may be taken away by an offset.

Question 14

Eleanor is about to retire. She is trying to determine how her Social Security benefits will be taxed. What item is not included in benefit determination?

Accepted Answer

When determining the taxation of Social Security benefits the number of married children would not be included in benefit determination. As of 2009, the 6.20 percent Social Security tax is computed on the first $106,800 of the employee's wages. The 1.45 percent Medicare tax is computed on the employee's total wages. Self-employment tax is imposed on self-employed people at the rate of 15.3 percent. This is a combination of 12.40 percent Social Security tax and 2.9 percent Medicare tax.

Question 15

There are several types of retirement plans that either contribution or defined plans. What are three-year vesting contribution and five-year vesting benefit plans referred to as for qualified plan vesting schedules?

Accepted Answer

Three-year vesting contribution and five-year vesting benefit plans are referred to cliff vesting for qualified plan vesting schedules. Cliff vesting is employer matching funds at 100 percent after three-years for contribution plans and five-years for benefit plans. For contribution plans or benefit plans that are two- to- six-year vesting are referred to as graded vesting.

Question 16

Rick loves only half of his employees and hates the rest. He is considering offering a qualified retirement plan, but doesn't want to give it to the employees he hates. As his financial advisor, you remind him:

Accepted Answer

An employer that is considering offering qualified retirement plan should be reminded that employers are allowed an immediate tax deduction for amount they contribute and that employees will not have to pay income taxes on the amount they contribute to their savings. Additionally, earnings are tax-exempt, allowing for tax-free accumulation of income and gains on investments, there may be reduced income tax to lump sum distributions to certain participants, income taxes on certain types of distribution may be deferred by rolling over the distribution to IRA's, and installment or annuity payments are taxed only when they are received.

Question 17

What are the major types of qualified plan categories?

Accepted Answer

The two major types of qualified plan categories are defined benefit plans and defined contribution plans. Defined benefit plans have a maximum allowable benefit payable from the plan is the lesser of 100 percent of salary or $195,000 per year as of 2009. Defined contribution plans have a maximum allowable annual contribution is the lesser of 100 percent of salary or $49,000 as of 2009.

Question 18

Marla wants to start a qualified money purchase plan, but she doesn't know much about them beyond what her friend informed her of. What is true about these plans?

Accepted Answer

It is true that qualified money purchase plans can be integrated with Social Security. Additionally, Employer is required to make contributions based on contribution formulas, the plan is subject to minimum funding standard, whether or not the company made a profit, forfeitures may be reallocated to remaining participants, investment in sponsoring company's stock in limited to 10 percent, and since there are no guarantee of future benefits; the investment risk rests on the employee.

Question 19

Cash balance plans are defined benefit plans with features similar to those of a defined contribution plan however, there are a few exceptions. What is a difference is particular to a cash balance plan?

Accepted Answer

The difference particular to cash balance plans and not shared with defined benefit plans is that cash balance plans creates a separate account established for each participant using a hypothetical account balance. This is the only exception to their likeness to include: a) neither plan is portable b)retirement benefits/distributions are not adjusted for cost of living c) both use the Pension Benefits guaranty Corporation d )forfeitures must be used to reduce employer's contribution e) plans are more beneficial to younger participants f) neither plan have inexpensive.

Question 20

Nonqualified vesting schedules pertain to whom within a company?

Accepted Answer

Nonqualified vesting schedules pertain to executives within a company. These plans have few design restrictions regarding benefit structure, vesting requirements, or coverage, they are designed to defer the payment of income taxes by employees until benefits are paid out, employer deduction is deferred to the time of payout and deduction is matched to employee income, assets must be available to pay claims of creditors in order to avoid current taxation, and there is limited benefit security for participants.

Quiz 6: Retirement Savings and Income Planning