Test Bank Questions, Chapter 13
1. Which of the following is the second step of the retirement planning process?
a. Analyze retirement risks.
b. Familiarize yourself with retirement issues.
c. Develop goals.
d. Become knowledgeable about retirement structures.
e. None of the above.
2. The percentage of the elderly population is expected to:
a. Rise from 13 percent in 2010 to 20 percent in 2040
b. Rise from 7 percent in 2010 to 25 percent in 2040
c. Fall from 21 percent in 2010 to 15 percent in 2040
d. Fall from 25 percent in 2010 to 5 percent in 2040
e. None of the above.
3. Pensions are best defined as:
a. The way through which the government supports the elderly
b. Tax-deductible retirement investments
c. Equity investments offered to state government employees.
d. Savings structures into which money is deposited to generate income for retirees
e. None of the above
Answer: d
4. The point at which an employee is entitled to a stated amount of nonrevocable
benefits from an employer is known as:
a. Limit point
b. Statement date
c. Vesting
d. Pension date
e. Either a or b
5. The Employee Retirement Income Security Act:
a. Requires that employers act as fiduciaries managing investment assets in the
employee’s best interests
b. Requires that employees act as fiduciaries managing investment assets in the
employer’s best interests
c. Guarantees pension assets or income when companies go bankrupt
d. Guarantees pension assets but not income when companies go bankrupt
e. None of the above
6. Qualified plans are best defined as:
a. Pension structures that are qualified to trade on major stock exchanges
b. Pension structures that require employees to qualify for participation through
annual contributions to the pension
c. Pension structures that comply with established government regulations
d. Pension structures that require employees to qualify for participation through
working for the employer for a prespecified period of time
e. None of the above
7. A qualified plan that places an amount of money in the pension regularly is a:
a. Defined benefit plan
b. Defined contribution plan
c. Qualified contribution plan
d. Qualified benefit plan
e. None of the above
8. A pension plan that may be used for retirement but whose deposits are generally not
eligible to receive a tax deduction is know as a:
a. Qualified plan
b. Taxable plan
c. Defined tax plan
d. Nonqualified plan
e. None of the above
9. If tax-deferred annuities are not withdrawn at the time of your death, then:
a. All gains over original cost associated with tax-deferred annuities are subject to
tax at ordinary income rates
b. All gains over original cost associated with tax-deferred annuities are subject to
10% penalty
c. All gains over original cost associated with tax-deferred annuities are not
taxable.
d. All gains over original cost associated with tax-deferred annuities are taxable up
to the amount contributed.
e. None of the above
10. Which of the following is not an advantage of a fixed annuity versus a taxable bond?
a. Tax deferral
b. Lack of fluctuation in principal
c. Higher pretax return
d. All of the above are advantages of a fixed annuity versus a taxable bond
e. None of the above is an advantage of a fixed annuity versus a taxable bond
11. Which of the following is not an advantage of a mutual fund versus a variable
annuity?
a. Favorable capital gains rates on equity fund, appreciation and dividends
b. Higher total expense ratios and a redemption charge for annuities
c. Limitation on investment choice for annuities
d. All of the above are advantages of a mutual fund versus a variable annuity
e. None of the above is an advantage of a mutual fund versus a variable annuity
12. Which of the following is not a goal of the Social Security system?
a. To provide retirement payments to individuals based on their contributions
b. To minimize the riskiness of pension investments
c. To redistribute income so that all workers may retire at a minimum standard of
living
d. All of the above are goals
e. None of the above are goals
13. The retirement age for full Social Security benefits for those born in 1974 is:
a. 55
b. 62
c. 65
d. 67
e. None of the above
14. What is the normal retirement age for an individual born in 1942?
a. 65 + 10 months
b. 66 + 10 months
c. 65 + 2 months
d. 66 + 10 months
e. None of the above
15. Which of the following categories are more likely to favor a later Social Security
payout date?
a. Men.
b. People in low marginal tax brackets
c. Women
d. Those in weak health
e. None of the above
16. Which of the following is a disadvantage of company pension plans and Social
Security?
a. The absence of an option to draw down the money earlier than the scheduled
date of payment
b. The inability to transfer this asset to others at death
c. Level payments that are not subject to market fluctuations
d. Both a and b
e. Both b and c
17. Which of the following is not a disadvantage of personal savings using mutual funds?
a. Mandatory withdrawals
b. No overall tax shelter
c. After-tax dollar contributions
d. Both a and b
e. Both b and c
18. Which of the following is not a feature of a defined benefit plan?
a. Tax Deferral on Income and Capital Gains
b. Taxation of Pension Payout of Original Deposit
c. Typically Indexed for Inflation
d. Both a and b
e. Both b and c
19. Which of the following is categorized as belonging to the human-related total
portfolio asset category?
a. Defined contribution
b. Defined benefit
c. Annuity
d. Personal saving
e. None of the above
20. Which of the following is not type of risk associated with planning for retirement?
a. Investment risk.
b. Inflation risk.
c. Longevity risk.
d. Health risk.
e. All of the above are types of risk associated with planning for retirement.
21. What is withdrawal risk?
a. The risk that an individual will miss working upon retirement.
b. The risk that a household member will withdraw savings from a retirement
account without permission.
c. The chance of taking monies out to fund retirement when asset prices are
depressed.
d. The potential of below asset returns.
e. None of the above.
22. Which of the following is not a way through which to adjust for overall investment
uncertainties?
a. Diversification.
b. Lower bond allocation.
c. Conservative projections of future returns.
d. Risk-adjusted projections.
e. All of the above are ways to adjust for overall investment uncertainties
23. Which of the following is not a strategy through which a retiree can control inflation
risk?
a. Owning a home that one is willing to liquidate
b. Make inflation assumptions that are at the high end of the range
c. Substantive concentrations in stocks
d. Inflation-indexed bonds
e. All of the above are strategies through which a retiree can control inflation risk
24. How many years of projected retirement are a female that retires at age 65 expected
to have?
a. 16
b. 19
c. 22
d. 25
e. 28.
25. Which of the following is a strength of a traditional annuity?
a. They can significantly reduce longevity risk.
b. Annuities allow you to receive a fixed sum of money each year
c. Lack of liquidity once you annuitize
d. Both a and b
e. Both b and c
26. Which of the following is a weakness of a traditional annuity?
a. You cannot outlive your annuity payments
b. A payout guarantee from a company which itself is subject to bankruptcy risk
c. Lack of liquidity once you annuitize
d. Both a and b
e. Both b and c
27. Which of the following best defines heath risk as it pertains to financial matters?
a. The possibility of large unreimbursable costs
b. The possibility of small unreimbursable costs
c. The possibility of poor health following retirement
d. Both a and c
e. Both b and c
28. Typically the most attractive place to save for retirement is a qualified pension, with
one exception. What is that exception?
a. The purchase of a charitable annuity
b. Social Security
c. The purchase of a home
d. Private investment in mutual funds
e. None of the above
29. Which of the following is not a common risk factor that incorporated by financial
planners when performing post-retirement planning?
a. Health difficulties forces retirement at an earlier age than expected
b. Investment returns proved lower than expected
c. Planning for retirement was not done in a logical, structured way
d. All of the above are common risk factors when performing post-retirement
planning
e. None of the above is a common risk factor when performing post-retirement
planning
30. What is the major difference between pre- and post-retirement planning?
a. The opportunity to enhance cash inflows is limited or nonexistent post-retirement
b. Individuals tend to have more cash available than expected post-retirement
c. Post-retirement planning is primarily focused are largely focused on revenues
d. All of the above are major differences
e. None of the above is a major difference
Essay questions:
31. For each of the following competing instruments, compare the advantages of an
annuity and the advantages of the competing instrument.
a. CD
b. Taxable Bond
c. Municipal Bond
32. What is the reasoning behind each of the following factors in the Social Security
payout date decision?
a. Risk Tolerance – Investments
b. Longevity
c. Desire for Current Funds
d. Tax Bracket
33. Bob and Dave each started with $130,020. They retired, and both took out $6,500 of
their money at the end of each year and spent it. Bob had 32 percent declines in his
assets in year 2 whereas Dave’s occurred in year 3. They both had a 7 percent
increase per year in their assets in the remaining years. Assuming no tax impact,
what sums did each have at the end of each year for each of the four years following
retirement?
