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43. An investor plans to retire at age 60 with total savings of $1,000,000. If she is currently 35
years old, has no savings, and expects to earn 8% per year on her investments, how much money
must she set aside every year?
44. An insurance company plans to sell annuities to investors. Based on actuarial calculations,
an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end
of each year. If the insurance company uses a 4% assumed investment rate, how much should the
annuity cost?
45. A safe driver who drives faster as a result of purchasing collision car insurance would be
an example of the ___________ problem.
46. A worker plans to retire in 20 years. He needs $20,000 per year in retirement income in
today's dollars. If inflation is forecast at 3.5% per year, what annual income should he plan to
receive in the first year of retirement in order to maintain the purchasing power on $20,000?
47. An insurance company plans to sell annuities to investors. Based on actuarial calculations,
an investor has a 20-year life span, and she wants a $50,000-per-year annuity, payable at the end
of each year. If the insurance company uses a 3% assumed investment rate, how much should the
annuity cost?
48. A worker plans to retire in 30 years. He hopes to receive $65,000 per year in retirement
income. If inflation is forecast at 2.5% per year, what annual income should he plan to receive in
the first year of retirement in order to maintain the purchasing power on $65,000?
49. An investor must decide between putting $2,000 into a regular retirement plan or putting
$1,440 into a Roth retirement plan. If the investor's tax rate is 28% now and in retirement, and she
expects to earn 12% per year over the next 20 years, which will produce more cash in the end?
50. A regular retirement plan requires that taxes be paid at the time the money is removed
from the plan. What is the after-tax value of a $5,000 deposit into a retirement plan today that
generates an 8% return for 20 years if the investor is taxed at the 28% level?
51. What is the value of a $2,500 deposit into a retirement plan if the investment earns 12%
per year for 15 years?
52. The employees of a firm complain that they cannot afford to contribute $8,000 per year to
a 401k because of the loss of $8,000 of take-home pay. In fact, how much will the take-home pay
be reduced if all taxes combined total 33%?
53. An employee uses her firm's 401k plan. If she decides to contribute $11,000 per year and
pays an effective tax rate for all items of 28%, what is the reduction in her take-home pay each
year?
54. An investor has an effective tax rate on all items of 30%, and he decides to put $8,000 into
a 401k. The future value of the investment that results from the deferral of taxes over 30 years at
an 8% return equals _____________.
55. Withdrawals after retirement from a traditional retirement plan are __________, and
withdrawals after retirement from a Roth retirement plan are ____________.
56. If you start saving for retirement only in your later years and your income growth from that
point is rapid, then ________________________.
57. Which one of the following statements about 401k plans is
not
correct?
58. Suppose you have maxed out your allowable contributions to your tax-sheltered
retirement plans and you still want to shelter income. The best choice of investment for you to
minimize the tax bill is to invest in _________.
59. A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a
taxable investor. If the stocks paid no dividends, we know that the ________.
60. Statistics show that life expectancy at age 66 for males is about _____ additional years
and for females is about _____ additional years.
61. Currently, the maximum combined taxable income of a retired household that avoids
having to pay any taxes on a portion of their Social Security benefit is ______.
62. An investor can earn a 6% nominal rate of return, but inflation is expected to be 3%. If the
individual invests $2,000 per year for 20 years, the real future value of this investment is ________.
(All investments occur at year-end).
63. An individual wants to have $95,000 per year to live on when she retires in 30 years. The
individual is planning on living for 20 years after retirement. If the investor can earn 6% during her
retirement years and 10% during her working years, how much should she be saving during her
working life? (
Hint:
Treat all calculations as annuities.)
64. If you plan for a bequest for your children, your grandchildren, their children, and so on,
your planning horizon becomes _____.
65. You want to minimize your current tax bill by maximizing your contributions to your
_____________.
66. Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue
to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual
return.
How much money will Sharon have in her retirement plan after 6 years?
67. Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue
to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual
return.
How much money will Sharon have in her retirement plan when she is ready to retire at age 62?
68. A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of
his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes
$56,000 a year.
What is the amount of the total contribution to his 403b if John contributes 5% of his own money?
69. A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of
his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes
$56,000 a year.
What is John's effective salary reduction if he is in the 25% tax bracket?
70. A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of
his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes
$56,000 a year.
What is John's total cost of his 5% contribution?
71. The fact that the U.S. government provides deposit insurance to banks creates a form of
___________, which is at least partially offset by requiring banks to hold more capital if they are
riskier.
72. An investor in the 34% tax bracket would be indifferent between a corporate bond with a
before-tax yield of 8% and a municipal bond with a yield of _________.
73. An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5%
yield corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible
