CSR486 Exam 1

What does retirement mean in financial planning terms?

Achieving financial independence — living without needing to work.

What is the FIRE movement?

Financial Independence, Retire Early — saving/investing aggressively to retire early.

What are the two phases of retirement planning?

Accumulation (saving/investing) and Distribution (withdrawing efficiently).

Name three sources of retirement income.

Social Security, pensions (DB), 401(k)/other DC plans, personal savings, annuities.

What type of plan promises a guaranteed retirement benefit?

Defined Benefit (DB) plan.

What type of plan depends on contributions and investment performance?

Defined Contribution (DC) plan.

Who carries the risk in a Defined Benefit plan?

Employer.

Who carries the risk in a Defined Contribution plan?

Employee.

Give an example of a DB plan.

Traditional pension.

Give an example of a DC plan.

401(k), 403(b), Profit-sharing plan.

What is vesting?

The process of gaining ownership of employer contributions.

What is cliff vesting?

100% ownership after a set period (max 3 years), 0% before.

What is graded vesting?

Ownership increases gradually (e.g., 20% per year until 100%).

What is a forfeiture?

Loss of unvested employer contributions when leaving early.

Name one expense that increases during retirement.

Healthcare (also leisure, long-term care).

Name one expense that often decreases in retirement.

Commuting costs, payroll taxes, work-related expenses.

Name a factor that affects accumulation.

Savings rate, working years, investment returns, retirement age, inflation, education.

What is superannuation?

The risk of outliving your assets.

What is portfolio diversification?

Spreading investments across assets to reduce risk.

Why must diversification change over time?

Younger = more stocks (growth); older = more bonds/cash (preserve).

What is the Wage Replacement Ratio (WRR)?

Expenses in retirement ÷ pre-retirement income.

Typical WRR target?

70–80%.

Why might WRR not be 100%?

Some costs fall in retirement (taxes, commuting), but healthcare may rise.

What are pension plan requirements?

Mandatory funding, actuarial oversight, limited life insurance, PBGC coverage.

What does an actuary do?

Calculates funding needs, contributions, and liabilities.

What happens if mandatory funding is not met?

Penalties apply; PBGC may step in.

What is PBGC insurance?

Pension Benefit Guaranty Corporation insures DB plans if employer defaults.

Does PBGC always pay full benefits?

No, benefits are capped.

How is PBGC insurance funded?

Employer-paid premiums (flat per participant + variable if underfunded).

How much employer stock can pensions hold?

Maximum 10% of assets.

Name three pension benefit formulas.

Flat amount, flat percentage of salary, unit credit.

Pension benefits are based on what factors?

Compensation and years of service.

What is a survivor annuity?

Pension/annuity that continues to pay a spouse after the retiree dies.

What is a profit-sharing plan?

Employer contributions tied to company profits; discretionary.

When can in-service withdrawals from profit-sharing plans begin?

Age 59½.

What two factors determine age-based profit-sharing allocations?

Age and compensation.

What is a new comparability plan?

Profit-sharing plan with different contribution rates for groups of employees.

What is the Minimum Allocation Gateway?

Rule ensuring fairness in new comparability plans.

Catch-up contribution limit for 401(k) in 2025?

$7,500 for age 50+.

What is the regular 401(k) contribution limit in 2025?

$23,000.00

Which entities can establish a 401(k)?

Corporations, partnerships, LLCs, sole proprietors, tax-exempt entities.

What is a hardship distribution?

Withdrawal allowed for immediate financial need, subject to IRS rules.

What is tax deferral?

Deferring taxes on contributions/earnings until withdrawal.

How are traditional 401(k)/IRA withdrawals taxed?

As ordinary income.

How are Roth accounts taxed?

After-tax in; tax-free qualified withdrawals.

Which plan type reduces payroll taxes?

Employer contributions (not subject to FICA).

What does ERISA stand for?

Employee Retirement Income Security Act.

What does ERISA regulate?

Funding, vesting, fiduciary duties, nondiscrimination.

Name one thing ERISA limits.

Favoring highly compensated employees, employer stock %, contribution limits.

What is a top-heavy plan?

When >60% of benefits go to key employees.

What is a controlled group?

Businesses linked by common ownership subject to plan aggregation rules.

What does a plan administrator do?

Runs day-to-day operations, compliance, reporting.

What does an ERISA attorney do?

Ensures legal compliance, drafts/amends plan documents.

What does an actuary do?

Calculates DB funding needs, liabilities.

Why do investors demand higher returns for higher risk?

Risk premium principle.

What is financial infidelity?

Hiding/lying about financial matters from a partner.

What are common sources of marital financial conflict?

Spending vs saving, debt, secrecy.

What is the annuity method for retirement needs?

Uses annuity formulas to calculate required savings.

What is the uneven cash flow method?

Uses NPV to account for varying yearly retirement expenses.

What is the capital preservation model?

Preserves principal; only interest is spent.

What is the purchasing power model?

Adjusts retirement needs for inflation.

What is the capitalization of earnings model?

Uses perpetuity formula: annual income ÷ rate of return.

What is sensitivity analysis?

Testing how changing assumptions (life expectancy, inflation) affect outcomes.

What is financial independence?

Ability to cover expenses without working.

What is the difference between commingled vs separate accounts?

Commingled = pooled assets; Separate = tracked individually.

What is a Money Purchase Pension Plan?

Employer must contribute fixed % of salary annually (mandatory, DC).

What are advantages of qualified plans?

Tax deferral, ERISA protection, employer deductions, retirement security.

What are disadvantages of qualified plans?

Complexity, regulation, costs, contribution limits.

What is a safe harbor 401(k)?

Employer contributions ensure plan automatically passes nondiscrimination tests.

What is a QACA?

Qualified Automatic Contribution Arrangement — auto enrollment + employer contribution.

What is permitted disparity?

Higher contributions allowed for higher earners above Social Security wage base.