Finance Ch 7

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Why is it so important to plan for retirement early?

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Finance

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1

Why is it so important to plan for retirement early?

decrease in standard of living during retirement if you don’t plan ahead due to difficulty of paying expenses such as medical bills.

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2

Why is it different for your generation than for previous generations?

years ago people had defined benefit pension plan, which doesn't exist anymore

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3

Why is it necessary to invest for retirement instead of saving for retirement?

saving means putting half of your income into a savings account, which is impossible. You accumulate more wealth through investing.

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4

What three things must you do to successfully invest for retirement?

start compounding early, use tax advantaged retirement accounts, and choose the right investments that have high yield returns.

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5

Why is starting your retirement investing early the best way to take advantage of compounding?

the earlier you start, the more earnings of return on investment deposited into your retirement account.

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6

How does an investor benefit by investing in a tax-advantaged account?

Receive immediate or future tax benefits just for contributing. You also receive the benefit of your investment growing without income taxes being assessed annually on any gains, dividends, or interest earned.

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7

What is the difference between a 401(k) plan and a Traditional IRA?

401(k) plan is employer sponsored, an account you open through your employer, while a Traditional Ira is an individual retirement account you open and invest in by yourself.

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8

Why do most employers no longer offer defined benefit plans?

they are expensive to provide and are difficult to plan for. companies did not grow enough to be able to afford them. life expectancies increased

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9

What is a vesting period?

the time that must elapse before the employer paid benefits in a retirement plan are owned by the employee

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10

Why is it especially important to know if you are considering changing jobs?

you will lose some or all of the benefits if you change before you're 100% vested

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11

You get a new job and have $17,000 in your former employer’s 401(k) plan. What is usually the best thing to do with the money? Explain your reasoning.

roll the money over to the retirement plan of your new employer, or to an IRA of your choice. it is better since it puts your retirement accounts in one place making management easier and is more cost-effective.

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12

What is the difference between a Roth IRA and a Traditional IRA?

With a Roth IRA, your contributions are made with after-tax income, but withdrawals made during retirement are tax-free. With a Traditional IRA, your contributions can be made with pre-tax income, but withdrawals made during retirement are taxable.

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13

Which would be better for a young adult with minimal income to start investing in?

Roth Ira for young adult with little tax liability

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14

Why are bank type savings tools such as CDs or money market accounts inadequate for the needs of most retirement investors?

They do not offer high enough returns on investment.

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15

Review the market capitalization descriptions in Section 5. If you had to choose just one of the three major market-cap categories to invest your retirement savings in for the next 40 years, which would you select? Explain your reasoning.

Mid-cap funds because they have more growth potential than large-cap stocks and are safer than small company stocks

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16

What is an ESG fund

stock mutual or exchange-traded fund that uses some combination of environmental, socially conscious, or governance criteria to select potential investments.

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17

Do you think screening companies with those types of criteria will generate better or worse returns than comparable non-ESG funds?

a worse return than non-ESG funds because ESGs could be more risky and have less opportunities.

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18

Why might sector funds be more risky than other types of mutual funds?

they invest in stocks of companies in a specific area of the economy, meaning there is no diversification

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19

Review the list of equity funds in Figure 7-7. Select the one that you think would be most appropriate to invest in now for retirement. Explain your reasoning.

John Hancock Disciplined Value Mid-Cap because the investment seeks long-term growth of capital with current income as a secondary objective.

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20

Review the list of bond funds in Figure 7-8. Assume you were recommending a fund to a 70-year-old retiree who wanted the safest fund of the group. Which would you recommend? Explain your reasoning.

Pimco Long-Term U.S. Government Bond Fund because investment seeks maximum total return, consistent with preservation of capital and prudent investment management.

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21

Why are target date funds so popular with retirement investors?

they attempt to solve the problem of both how to pick the right mutual funds for a retirement portfolio, and then reallocate the assets of a portfolio as the investor nears retirement.

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22

Tom is planning to retire in the year 2045 at age 45. Should he pick a Target Date 2045 fund? Explain.

Yes, because he has to pick the Target Date fund of the year he wants to retire on which is 2045.

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23

Which do you think is a better rule to follow when planning your own retirement, the 4% Rule or 3% Rule? Explain your reasoning.

4% Rule because by following this rule it means you will be able to sustain a good lifestyle with less of chance of running out of money when you retire.

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24

Most people are assuming that in the future, either Social Security benefits will be reduced, or the retirement age will be increased. Assuming one or both happens, how should that affect your planning for retirement?

If its reduced, it will be more likely for elderly people to run out of funds since it is a source of income. If the age increases, you will have less years to receive benefits since you will get them later than expected.

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