FINA 200 Lecture Notes - Lecture 10: Savings Account, Registered Retirement Income Fund, Reverse Mortgage

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sapphirecaribou284

14 Apr 2018

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Old age security (oas): this is a monthly pension payment available to old people of 65 and up. If you lived in canada for 40 years since tunring 18 you receive full oas benefit. If you lived in canada for less than 40 years, but more than 10 years since turning 18, you get partial oas benefit. Oas offers inflation protection; it is adjusted every quarter for inflation. Oas claw back: if your income exceeds certain amount, then the benefits you receive from oas will be subject to clawback (15%) Ex: the minimum income threshold in 2017 is74 788$, so if sally"s net income is 80 000$, then she would have to repay some of the oas benefits and this amount would be 15% of (80 000 -74. Deferring old age security: you can defer your oas pension benefits for up to 5 years after you are eligible.

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home / study / questions and answers / business / finance / your friend john asks you for advice concerning ... Question Your friend John asks you for advice concerning life insurance. John is 40 years old and graduated from law school last year. He currently earn $43,000 per year as a first year attorney. John is married and has two children, Billy, age 12, and Sarah, age 4. John's wife, Mary, is a professor who currently earn $56,000 per year. Mary is 38 years old. John and Mary pay $1,700 per month for their home mortgage, which will be paid off in 15 years. The interest rate on their mortgage is 3.5%. (Their current equity in the home is $50,000) The couple owns two cars, both 8 years old, and personal property( such as cloths, electronic, furniture, etc) valued $35,000. Their investments have been used up paying for John's law school education, so they currently have only $1,000 in savings and checking accounts, and $2,000 in a mutual fund. John has no life insurance. Mary has $125,000 of life insurance provided by her employer. Mary' pension plus social security are expected to total $65,000 per year, beginning when she is 67 years old. If John should die, Mary would receive approximately $12,000 per year from social security until Billy reaches age 18, and $6,000 per year after that until Sarah reaches age 18. Mary'semployer subsidizes 75% of family' healthcare costs, so the family only pays about $3,000 per year out of pocket. John and Mary spend most of their current income, although they do try to save about $50 per month. Their investments earn approximately 4% per year. Inflation is currently rather low at about 2% per year, but John wonders if it will increase after the Federal Reserve stops their expansive monetary policy. In addition to their home mortgage, John makes student loan payment of $400 per month. He plans to pay back the loan in 4 years and the loan' interest rate is 6% per year. Given that Mary enjoys a flexible work schedule, and because Mary' mother lives close by and watches the kids two days per week, they currently are not paying any child care expenses. John is worried about what may happen to his family is he should die. He is considering the purchase of life insurance and asks your advice. question: Assuming neither John nor Mary will receive large inheritance, how much life insurance do you think John needs on his life? (Use the needs approach.) Show all calculation and explain your answer. Make any assumptions you believe are reasonable, and make sure your assumptions are clearly stated. Also indicate the type of insurance you would recommend, whole life or term, and explain why. If you select term insurance, indicate the number of years of coverage to purchase

orangewombat84

Hi, Please help me to solve these questions with detailexplanation . Thanks

Question 4
Dustin, who is 48 years old, works for Pinnacle Inc., with a salaryof $300,000, a car allowance, and a very nice expense account.Pinnacle is a Fortune 1,000 company that sponsors a defined benefitplan that pays 2 percent times years of participation times theaverage of the three final years of compensation. In addition,Pinnacle sponsors a 401(k) / profit sharing plan and contributes18% of employees salary to the profit sharing plan. There is noadditional match. If the ADP of the NHCEs is 3%, what is themaximum that Dustin can defer this year (2018)?
A.

$5,500.
B.

$13,750.
C.

$15,000.
D.

$18,500.

Question 5
Larry, age 55, is employed by BB Trucking Company as a tire repairspecialist. He earns $62,000 per year and received an allocation of$40,000 to his employer-provided profit sharing plan for the year.If BB Trucking does not match employee deferrals, what is themaximum amount Larry can defer to his 401(k) plan for the 2018 planyear?
A.

$15,000
B.

$18,500
C.

$21,000
D.

$24,500

Question 6
Jacques, who is age 45, has just resigned from his current job. Heworked for Ace, which sponsors a cash balance plan and a standard401(k) plan. Each of the plans uses the longest permitted vestingschedule and both plans are top heavy. He has a balance of $40,000in the cash balance plan, has deferred $20,000 into the 401(k) planand has employer matching contributions of $10,000. If he has beenemployed for three years, but only participating in the plans forthe last two years, how much does he keep if he leaves today?
A.

$ 20,000.
B.

$30,000.
C.

$60,000.
D.

$64,000.

Question 7
Mikael opened a fabulous restaurant ten years ago. The food is soexceptional that the restaurant has become one of the top spots inthe city. Mikael, age 55, is the sole owner with compensation of275,000. Mikaelâs son Jamel, age 28, is the master chef withcompensation of $100,000. Jamel has been with the restaurant fulltime since he turned 18. Mikael also employs 15 other individualswhose ages range between 25 and 35 and have compensation on averageof $40,000 per year. Mikael wants to establish a profit sharingplan. Which of the following statements is true?
A.

If Mikael selected the standard allocation method and the plancontributes 10 percent per individual, the plan will contribute$55,000 to Mikaelâs account.
B.

If Mikael selected the permitted disparity method and the plancontributes 10 percent per individual, the contribution the companymakes for Mikael will be increased.
C.

Considering the needs and wants of Mikael and Jamel, anage-based profit sharing plan is the best plan for both ofthem.
D.

A new comparability plan is the least expensive, simplest way tomeet both Mikael and Jamelâs retirement needs.
Question 8

Which of the following statements regarding an age-based profitsharing plan is correct?
A.

An age-based profit sharing plan provides a greater benefit tothose plan participants whose earnings exceed the Social Securitywage base and who are over fifty years old.
B.

An age-based profit sharing plan only provides a benefit tothose plan participants whose age is within 10 years of the age ofthe owner of the plan sponsor.
C.

An age-based profit sharing plan provides greater benefits tothe older plan participants.
D.

Younger plan participants in an age-based profit sharing planusually receive the majority of the profit sharing planallocation.

Question 9 :
Acme Inc., is establishing a retirement plan and they want a planthat includes a Roth account. Which of the following statements iscorrect about Roth accounts?
A.

Matching contributions can be contributed to Roth account.

Amounts in a traditional 401(k) plan cannot be rolled over to aRoth account.
C.

Roth accounts do not require minimum distributions until afterthe death of the participant.

Roth accounts permit access for taxpayers who may otherwise notbe able to contribute to a Roth IRA.

Question 10
Which of the following qualified plans would allocate a higherpercentage of the planâs current contributions to a certain classor group of eligible employees?

A profit sharing plan that uses permitteddisparity.
An age-based profit sharing plan.
A defined benefit pension plan.
A target benefit pension plan.

1 only
B.

1 and 3
C.

2 and 4
D.

1, 2, 3, and 4

redwolf542

Question: do you agree or disagree with my answer for question(Estimates vary widely as to when the trust fund for SS retirement benefits will be depleted. However, there is wide agreement that the program as currently structured is not sustainable in the long run. Increasing revenue and/or decreasing benefits will be necessary. What changes would you make to keep the program viable?)?Please be very specific.

In order to make the Social Security program viable in the future, the following steps need to be implemented:1-Remove the payroll tax cap so that all payroll wages above $113K are taxed; however, the tax increase should be implemented on a tiered approach for each $50K over the current earned income cap. For example, wages between $113K and $163K would be taxed at 2% for social security, $163.1K to $213K at 1.5%, and the rate would be reduced as each income block increases. This would increase cash flows to the program and reduce the programs deficeit. It is critical to remember that if taxes are increased on social security, other taxes must be decreased in order to keep the overall tax rate for individuals and corporations constant. If taxes increase, corporations have the tendency to reduce their work force, and not hire additional employees. Increases in unemployment could adversely impact the overall solvency of the Social Security program.

2-Giving the citizens the option of managing a portion, but not all, of the Social Security account. The government manages the SS fund at a more effective administrative costs than the private sector; however, they are not able to generate the returns that a private investment firm can because they are forced to invest in Treasury Bonds for the growth of the trust fund. With that in mind, high risk and high rewards comes into play. If an individuals entire account was managed by a private investment firm, the risk of financial loss increases in the event of market recession or stock market crash. Therefore, it is imperative that a portion of the account be managed by the government to hedge that risk. This strategy would reduce the administrative costs of the government.

3-Increase the retirement age to 70, as overall health care is leading people to live longer lives, and therefore have the ability to work longer as well. As "60 is the new 40" philosophy is becoming prevalent in America, it is plausible to expect employees to work longer. Additionally, if the employee wants to take the SS benefit before age 70, the reductions in benefits should be increased to 35 to 40% until the age of 70.

3-Eliminate the cost of living adjustment (COLA) and structure the SS benefit payouts like an annuity, where the recipient would receive a set monthly amount for life. This would enable the administration to budget and project the cash flows of the program with more accuracy, and reduce expenses that are currently hindering the vitality of the programs finances.

4-Educate the American population on the overall purpose and structure of the program, so that they understand what is paid in is to help all of us replace income due to retirement or disability, and educate the country on what is actually paid by an Employee, Employer, and then what is eventually paid out in benefits

pearkangaroo152

FINA 200 Lecture Notes - Lecture 10: Savings Account, Registered Retirement Income Fund, Reverse Mortgage

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