Personal Financial Planning

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Enfurq_87

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Ch 13 Questions 1, 2, 3, 4, 5, 8, 9, 11, 12, 13, 15, 16

Ch 13 Problems 13.2, 13.3, 13.4

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13.2 Dawn and Mildred had the same starting sum of $120,000. Each made withdrawals of $24,000 a year. In years 2, 3, and 4, each had returns of 9 percent a year. Dawn had a 50 percent drop in year 1 and a 50 percent gain in year 5, while Mildred had a 50 percent gain in year 1 and a 50 percent drop in year 5. a. Calculate the remaining sum for each woman at the end of year 5. b. Explain why there is such a big difference in the remaining amounts. 13.3 Kenneth was considering whether to place $10,000 in a tax-deferred annuity or a tax-free municipal bond. Assume the municipal bond returned 5 percent a year and the tax-deferred annuity 6 percent. Calculate approximately how long he would have to hold the annuity so that, if he withdrew the money and paid taxes on it, he would come out ahead. His mar- ginal tax rate is 35 percent. 13.4 Elizabeth, age 62, wanted to consider the benefits of age 62 Social Security at a reduced 75 percent payout versus full payments at age 66. She could invest the monies at 5.5 percent after tax and expects to live until age 88. She will receive $15,000 a year after tax at age 66. Which alternative should she select? Show all calculations. 7. What is the principal benefit of nonqualified plans over other forms of savings? 8. When would a mutual fund be more attractive than an annuity? 9. What does capital needs analysis provide? 10. What is longevity risk? 11. What are the similarities and differences between retirement needs and insurance? 12. How does investing for retirement differ from investing after retirement? Why? 13. Why is it advisable to have a significant amount of a retirement portfolio invested in equity? 14. Explain withdrawal risk. 15. Name three strengths and weaknesses of annuities. 16. Identify the factors that will help make the decision as to whether to take Social Security early 1. Why is retirement perceived as so important to people? 2. List the principal concerns of people in planning retirement. 3. Explain the relationship of life cycle theory to retirement planning. 4. Explain the difference between a defined benefit and a defined contribution plan. 5. Which plan is more likely to be attractive to a younger person, a defined benefit or a defined contribution plan? 6. Why do people save through qualified pension plans?
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Explanation & Answer

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1). Why is Retirement perceived as so important to people?
Answer
This is because retirement provides an opportunity to people to maintain their current lifestyle
and the desire to enjoy their envisioned lifestyle.
2). List the principle concerns of people in planning retirement
Answer


The Concerns for expenses that are to be paid in retirement



The expected health care costs in retirement



The need to have a steady flow of income



The desire to save much money

3) Explain the relationship of lifecycle theory to retirement planning
The Life-Cycle theory is a theory that explains the savings and spending behavior pattern of
people in the course of their life. It assumes that people make their financial plans with an eye
into the future. For instance, people will spend and save less in their early years, spend less and
save more during middle age for them to enjoy their savings when they retire. In retirement there
is less income and high spending on the savings.
4). Explain the difference between a defined benefit and a defined contribution plan
Answer
A Defined benefit plan is where the post-employment benefits are predetermined and the
employer pay contributions to the plan which is invested and on which the expected returns are

to enable the meeting the obligations of the defined post-employment benefits. If the fund is in
excess there could be a break in the contributions but if the fund is insufficient the employer
makes additional payments into the plan to meet the deficit.
A defined contribution plan is a plan in which the employer together with the current employees
pays regular contributions to a plan a defined amount. The contributions are investment and the
contributions together with benefits earned paid to the employee after leaving employment that is
when he/she retires. The benefits are not usually known to the beneficiary until retirement. The
investment benefits depend upon the performance of the investment.
5).Which plan is more likely to be attractive to a young person, a defined benefit or a
defined contribution plan?
Answer
A Defined benefit plan is more likely to be attractive to a young person because of the assurance
of the benefits upon retirement. Also it does not require employees to make contributions to the
plan.
8).When would a mutual fund be more attractive than an annuity?
Answer
A mutual fund is a kind of investment that does not offer guaranteed payments but it is more
attractive to an investor because of the possibility to withdrawal from a contract easily without
attracting high withdrawal charges unlike in annuity. This flexibility also makes a mutual fund
more liquid than an annuity.
9). What does capital needs analysis provide?

Answer
Capital ...


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