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Exam 21: Taxes, Inflation, and Investment Strategy

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Question 1

Multiple Choice

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A person in poor health trying to buy supplemental health insurance is an example of ________.

A) moral hazard
B) adverse selection
C) a Texas hedge
D) actuarial error

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

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Question 2

Multiple Choice

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A nonprofit organization offers a 5.5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5.5% when John contributes 5.5% of his salary. John makes $.66,000 a year. What is the amount of the total contribution to his 403b if John contributes 5.5% of his own money?

A) $7,260
B) $10,890
C) $11,200
D) $12,500

E) A) and D)
F) A) and C)

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Question 3

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An investor has an effective tax rate on all items of 33%, and he decides to put $9,000 into a 401k. The future value of the investment that results from the deferral of taxes over 30 years at an 8% return equals ________.

Which one of the following statements about 401k plans is not correct?

How many years of Social Security contributions count for determination of benefits?

Which one of the following is not likely to be subject to adverse selection?

Inflation has an adverse effect on your savings because: I. It erodes the purchasing power of the dollars you have saved. II. It increases the real rate of return on the dollars you save. III. Unless sheltered, it increases the taxes owed on investment income.

If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance?

Social Security is ________.

Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and ________ toward Medicare.

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 ________.

You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment?

The U.S. income tax code is generally ________.

In a private defined benefit pension plan the ________ bears the investment risk, and in a private defined contribution plan the ________ bears the investment risk.

An investor plans to retire at age 62 with total savings of $1,000,000. If she is currently 37 years old, has no savings, and expects to earn 9% per year on her investments, how much money must she set aside every year?

An investor can earn a 6.7% nominal rate of return, but inflation is expected to be 3%. If the individual invests $3,000 per year for 25 years, the real future value of this investment is ________. (All investments occur at year-end) .

Employers commonly match at least some portion of employee contributions to: I. 401k plans II. 403b plans III. Self-directed retirement plans

A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of ________.

An employee uses her firm's 401k plan. If she decides to contribute $ $12,000 per year and pays an effective tax rate for all items of 24%, how much will she actually take home after the reduction?

In planning for retirement, an investor decides she will save $4,000 every year for 35 years. At a 6.8% return on her investment, how much money will she have at the end of 35 years?