14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 1
1. Many people tend to be too conservative when investing their retirement funds.
a. True
b. False
2. It really makes little difference whether you start retirement savings at age 25 or at age 45.
a. True
b. False
3. The third step in retirement planning is to formulate an investment program.
a. True
b. False
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 2
4. The first step in retirement planning is to identify retirement goals.
a. True
b. False
5. Your Social Security contribution depends on your current income and retirement income goal.
a. True
b. False
6. Workers who elect to retire early—at age 72—will receive reduced Social Security retirement benefits.
a. True
b. False
14. Planning for Retirement
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 4
DATE MODIFIED: 11/30/2018 7:56 AM
9. Profit-sharing plans allow flexible employer contributions to the plans.
a. True
b. False
10. Single premium annuities result in a lump-sum payment of benefits.
a. True
b. False
11. One of the biggest financial benefits of starting early to save for your retirement fund is related to:
a. the increased cost of living.
b. compound interest.
c. lower tax deductions.
d. inflation.
e. reduced expenses.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 5
12. Retirement planning starts with:
a. determining the size of the required nest egg.
b. considering the longevity of the retiree.
c. defining the investment program.
d. determining the interest on income-earning assets.
e. setting retirement goals.
13. Planning for retirement over a series of short-run time frames requires:
a. stating your retirement income objectives as a percentage of your present earnings.
b. the retiree to wait until age 50 to start planning.
c. annual savings of at least $100,000.
d. investment of retirement funds in more risky investments.
e. estimating the inflation factor by reducing inflation projections.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 6
14. An annual contribution of $3,000 to a retirement account that earns 6% will be worth approximately _____ in 20
years. (Use the table of future value annuity factors or a financial calculator. Round to the nearest whole dollar.)
a. $60,000
b. $96,780
c. $100,000
d. $110,360
e. $192,600
15. Gordon and Lisa estimate that they will need $1,875,000 in 40 years for their retirement fund. If they can earn 8%
annually on their funds, how much do they need to save annually? (Round to the nearest whole dollar.)
a. $7,238
b. $7,987
c. $8,103
d. $9,234
e. $9,875
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 7
16. Which of the following statements regarding Social Security benefits is true?
a. Social Security benefits are retirement benefits extended only to self-employed people.
b. For the average wage earner, Social Security benefits match a percentage of the income earned in the year before
retirement.
c. Social Security benefits are available to military personnel only.
d. Social Security benefits may be reduced if the recipient is under age 55 and still gainfully employed.
e. To obtain Social Security benefits, you must participate in enough quarters.
17. Social Security benefits (cash benefits) are funded by:
a. voluntary contributions from the government, employers, and self-employed people.
b. compulsory contributions from employees, employers, and self-employed people.
c. state and income taxes.
d. charitable contributions from the federal government.
e. federal income taxes.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 8
18. In the year 2027, a person will have to be a minimum of _____ years to be able to retire with full social benefits.
a. 59
b. 62
c. 64
d. 67
e. 72
19. The purpose of the Social Security Act of 1935 was to create a basic program to:
a. ensure retirement income equal to 75% of preretirement income.
b. pay for retirees’ health care costs.
c. replace defunct pension fund plans.
d. provide a basic and adequate income to eligible retirees.
e. levy a tax on the retirement funds of federal civilian employees.
20. The average level of Social Security benefits for retirees aged 67 and above is adjusted upward each year with
subsequent increases in the:
a. retirees’ income.
b. number of dependents.
c. quality of life.
d. cost of living.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 9
e. preretirement cost of living.
21. Which of the following is a requirement for an individual to qualify for full retirement benefits under the Social
Security system?
a. The individual must be employed in a job covered by Social Security for at least 60 quarters, or 15 years, which
need not be consecutive.
b. The individual must be employed in a job covered by Social Security for at least 50 quarters, or 12.5 years, which
need not be consecutive.
c. The individual must be employed in a job covered by Social Security for at least 50 consecutive quarters, or 12.5
years.
d. The individual must be employed in a job covered by Social Security for at least 40 quarters, or 10 years, which
need not be consecutive.
e. The individual must be employed in a job covered by Social Security for at least 40 consecutive quarters, or 10
years.
22. Melissa’s retirement plan is described in her employee handbook as follows:
Noncontributory
Cliff vesting (100%) after 3 years of full-time employment
Monthly retirement benefits based on average salary over the last 3 years of employment and the total number of years
worked for the company
Which of the following statements about this retirement plan is true?
a. Melissa will have to pay money into the plan.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 10
b. If Melissa leaves this company before working full time for 3 years, she will not receive any benefits.
c. Melissa will have to make investment decisions regarding her retirement plan.
d. Melissa’s retirement plan is a defined contribution plan.
e. For Melissa, vesting takes place gradually over the first 3 years of employment.
23. The Employee Retirement Income Security Act (ERISA) was established to provide:
a. funding for retirement plans.
b. the ability to retain the same retirement insurance when employees change employers.
c. mandatory retirement plans for self-employed individuals.
d. protection to employees participating in private employer retirement plans.
e. individual trust funds for employees retiring from jobs in the federal government.
24. In which of the following procedures does vesting take place gradually over the first 6 years of employment?
a. Cliff vesting
b. Contributory vesting
c. Self-directed schedule
d. Graded schedule
e. Maximum vesting
14. Planning for Retirement
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 12
27. Lillian has a defined benefit plan that promises an annual retirement benefit based on 2% of her final 3-year average
annual salary for each year of service. At retirement, Lillian has 15 years of service and had an average salary of $80,000
over the last 3 years. What is the amount of her annual benefit?
a. $65,000
b. $50,500
c. $35,400
d. $24,000
e. $0
28. Henry has a defined benefit plan that promises an annual retirement benefit based on 2% of his final 5-year average
annual salary for each year of service. At retirement, Henry has 21 years of service and had an average salary of $95,000
over the last 5 years. His annual benefit will be:
a. $95,000.
b. $60,500.
c. $49,875.
d. $39,900.
e. $15,200.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 13
29. The employer retirement plan that is intended to promote employee productivity and allows the employer to vary the
amount of annual contributions is a:
a. qualified defined contribution plan.
b. thrift and savings plan.
c. profit-sharing plan.
d. 401(k) plan.
e. 403(b) plan.
30. In order to avoid penalties, a person who is not gainfully employed must typically start taking minimum distributions
from Keogh retirement accounts by age:
a. 50.
b. 59½.
c. 65.
d. 70½.
e. 75.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 14
31. Jacque Solis, a 38-year-old, is leaving her current job and would like to take a long vacation before a new job. She has
$62,000 in a qualified plan that she would like to live on during this period. If she is in a 25% marginal tax bracket, how
much will she have left after paying taxes and penalties?
a. $40,300
b. $43,500
c. $37,700
d. $29,000
e. $14,500
32. If you withdraw funds from a Keogh pension plan before age 59½, you will have to pay a _____ federal income tax
penalty.
a. 5%
b. 10%
c. 15%
d. 20%
e. 25%
14. Planning for Retirement
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 16
36. If an annuity plan is designed so that the monthly payment is adjusted by the actual investment experience of the
insurer, it is a(n):
a. guaranteed-minimum annuity.
b. equity annuity.
c. variable annuity.
d. uncertain annuity.
e. temporary annuity.
37. In the case of a refund annuity:
a. the monthly income provided by the policy varies as a function of the insurer’s actual investment experience.
b. the insurance company agrees to pay a guaranteed rate of interest on the insured’s money.
c. a specified monthly income is provided for a stated number of years without consideration of any life
contingency.
d. if the annuitant dies, the designated beneficiary receives monthly payments until the total price of the annuity is
paid back.
e. the insurance company guarantees the annuitant a stated amount of monthly income for life.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 17
38. The Social Security tax rate for an employee remains in effect:
a. until the employee’s expenses change.
b. until the cost of living increases.
c. permanently.
d. until the employee reaches a maximum wage basis.
e. until the employee changes jobs.
39. Lois, a 67-year-old, is receiving Social Security benefits. She received $25,000 in interest and dividends this year. Her
Social Security benefits are:
a. subject to an earnings test.
b. reduced to half because of these earnings.
c. not reduced because of these earnings.
d. reduced by the federal tax paid on her interest income.
e. reduced by a penalty.
14. Planning for Retirement
Copyright Cengage Learning. Powered by Cognero.
Page 18
40. Harry starts receiving reduced retirement benefits at age 62. These benefits:
a. increase when he reaches the normal retirement age.
b. are not subject to federal income taxes.
c. are deducted from the future benefits he will receive after age 67.
d. increase the tax deductions available to him.
e. remain the same when he reaches the normal retirement age.
41. Marcia works for Telephonic Industries and participates in its supplemental retirement plan. Last year, the firm did not
earn a profit. Therefore, it did not contribute to the supplemental retirement plan. This plan is a(n):
a. defined benefit plan.
b. noncontributory plan.
c. SEP plan.
d. profit-sharing plan.
e. Keogh plan.
42. Contributions are made in after-tax dollars to:
a. traditional 401(k) plans.
b. traditional IRA plans.
c. SEP plans.
d. Roth 401(k) plans.
e. 403(b) plans.
14. Planning for Retirement
14. Planning for Retirement