FINC320 Final Study Guide

What are the key variables influencing a retirement cash flow plan?

Client current age, age at retirement, projected living expenses, social security benefits, current assets and liabilities, inflation assumptions, investment assumptions, and life expectancy assumptions.

What is the sensitivity of variables in cash flow planning?

Financial planners must recognize that clients may experience returns higher or lower than the assumed rate over time, impacting retirement needs.

What are the two methods for cash flow projections?

1. Straight line approach (constant rates for growth) 2. Monte Carlo approach (running thousands of scenarios based on varying returns and volatility).

What is the average life expectancy for a 30-year-old woman, as per the lecture?

Approximately 86 years, leading to about 19 years of retirement.

What happens if the probability of success in a retirement plan is low?

Clients may need to consider postponing retirement, working part-time, downsizing, reducing spending, or considering a lifetime annuity.

What are the eligibility requirements for disability benefits for those disabled before age 24?

6 credits in the 3 years prior to the disability.

At what age can a spouse receive benefits from a worker's Social Security?

At normal retirement age, a spouse may receive 50% of the worker's Primary Insurance Amount (PIA).

How are taxes applied to Social Security benefits?

Individual taxpayers pay tax on up to 50% of benefits with combined income between $25,000 to $34,000 and up to 85% with income over $34,000.

What is the key difference between qualified and non-qualified retirement plans?

Qualified plans have many rules and provide special benefits, while non-qualified plans have fewer rules and allow employee discrimination.

What is a backdoor Roth IRA?

A strategy where taxpayers with high income can contribute to a traditional IRA and then convert it to a Roth IRA without increasing taxable income as long as no pre-tax funds are involved.

What is the contribution limit for IRAs in 2024?

$7,000, or $8,000 for individuals age 50 and over.

What is a simple trust?

A trust that must distribute all income annually, with no principal distributions or charitable deductions.

What is ERISA and why is it important?

The Employee Retirement Income Security Act sets minimum standards for retirement plans to protect employees' benefits.

What is the tax implication of NUA when assets are distributed in-kind?

The net unrealized appreciation is not taxed at distribution but will be taxed as capital gains when the employer securities are sold.

What is the consequence of gift tax exposure for irrevocable trusts?

Gift tax may be due if the transferred gift exceeds the unified exemptions since once gifted, the trustis considered complete.

What is the primary goal of estate planning?

To fulfill the client's property transfer wishes, minimize taxes and costs, and provide for heirs and dependents.

What happens to a traditional IRA conversion to Roth IRA?

The converted amount is taxed as ordinary income in the year of conversion.

Define anchoring in the context of cognitive biases.

Attaching one’s thought to a reference point, often leading to illogical conclusions, such as believing past stock prices determine future ones.

What is the difference between a defined-contribution plan and a defined-benefit plan?

In a defined-contribution plan, the employer contributes an amount and employees bear investment risk; in a defined-benefit plan, the employer promises a certain benefit amount and bears the investment risk.