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Exam 21: Taxes, Inflation, and Investment Strategy

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Question 31

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Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual return. How much money will Sharon have in her retirement plan after 6 years?

A) $30,000
B) $35,575
C) $38,175
D) $61,451

E) C) and D)
F) B) and C)

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Question 32

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Tilting your retirement savings plan toward your later years should only be done by investors ________.

A) who are sufficiently risk averse
B) who are more tolerant of risk
C) who are unsure if their income growth will keep up with inflation
D) who want to retire early

E) A) and B)
F) B) and C)

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Question 33

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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?

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 $6000 deposit into a retirement plan today that generates an 7% return for 20 years if the investor is taxed at the 24% level?

An investor must decide between putting a one-time contribution of $2000 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?

A worker plans to retire in 22 years. He needs $27,000 per year in retirement income in today's dollars. If inflation is forecast at 3.1% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $27,000?

One feasible way to hedge labor income is to ________.

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 ________.

Sharon decides to put $6,500 into her retirement plan at the age of 26. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10.8% annual return. How much money will Sharon have in her retirement plan when she is ready to retire at age 63?

What is the value of a $3,500 deposit into a retirement plan if the investment earns 10.5% per year for 20 years?

An individual wants to have $57,000 per year to live on when she retires in 27 years. The individual is planning on living for 23 years after retirement. If the investor can earn 6.2% during her retirement years and 9.10% during her working years, how much should she be saving during her working life? (Hint: Treat all calculations as annuities.)

The Social Security system ________.

The employees of a firm complain that they cannot afford to contribute $9,000 per year to a 401k because of the loss of $9,000 of take-home pay. In fact, how much will the take-home pay be reduced if all taxes combined total 33%?

Withdrawals after retirement from a traditional retirement plan are ________, and withdrawals after retirement from a Roth retirement plan are ________.

A worker plans to retire in 32 years. He hopes to receive $68,000 per year in retirement income. If inflation is forecast at 3.1% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $68,000?

An investor may deposit $2,000 into a traditional or Roth IRA. After 30 years, given a 9% annual return and a 20% tax rate, how much more or less money will the investor have if all investments are liquidated after 30 years?

The calculation of a standard annuity, using the PMY function of Excel or a financial calculator, will produce an insufficient income because that approach fails to consider ________.

In planning for retirement, an investor decides she will save $3,000 every year for 25 years. At a 5.7% return on her investment, how much money will she have at the end of 25 years?

An investor wants to retire when she has $3,000,000 in savings, after-taxes. Given a 20% tax rate at retirement, how much money, per year, must she save in order to retire in 30 years, given an 11% annual return? Assume she uses a traditional IRA and liquidates the entire portfolio at retirement.

In planning for retirement, an investor decides she will save $15,000 every year for 45 years. At a 10% return on her investment, how much money will she have at the end of 45 years (to the nearest hundred thousand dollars) ?