CRPC PRACTICE EXAM #2 WITH
COMPLETE SOLUTIONS
Richard wants to have an annual retirement income of $100,000 (payable at the
beginning of each year) protected against 3% inflation.
Assuming a 7% after-tax rate of return and a retirement period of 30 years, how much
money does Richard need in order to meet his goal?
Explain how you need to input this on the calculator and why. - ANSWER-Step One -
Set the calculator to BEGIN.
Step Two - Calculate the inflation adjusted rate of return (One plus the Rate of Return
divided by One plus the interest rate, minus one, multiplied by 100 = the inflation
adjusted rate of return) Put this number in the I/YR
Step Three - 100,000 goes in as a PMT
Step Four - 30 goes in as N
Step Five -Press PV
Richard needs $1,822,042.88 in today's dollars to meet his needs.
What is a deductible IRA? - ANSWER-A deductible IRA can lower your tax bill by
allowing you to deduct your contributions on your tax return - you essentially get a
refund on the taxes you paid earlier in the year. You fund a NON-deductible IRA with
after-tax dollars
What is a traditional IRA? - ANSWER-A traditional IRA lets you make tax-deductible
contributions to a retirement account that grow tax-deferred until you're ready to start
taking distributions in retirement. It's a popular option for many savers, but it doesn't
work for everyone. One alternative is the non-deductible IRA, which lets high earners
get in on the IRA action
What is a non deductible IRA? - ANSWER-Depending on your circumstances, you may
be ineligible to deduct IRA contributions. For example, according to the 2015 limits, a
married couple filing jointly who both save in employer-sponsored retirement plans and
who have a combined adjusted gross income (AGI) of $118,000 or more cannot make
deductible IRA contributions. That's where a non-deductible IRA comes in.
How do you calculate the inflation-adjusted rate of return? - ANSWER-1 plus the Rate
of Return
, Divided by
1 plus the interest rate
minus one
multiplied by 100
Tom has been promised a stream of $40,000 annual payments at the end of each year
for 25 years. The present value of these payments discounted at a rate of 5% is which
one of the following amounts? - ANSWER-Step One - The problem says END in it so
you have to set your calculator to the END mode.
Step two - Enter the $40000 as a PMT
Step Three - Enter 25 as the N.
Step Four - Enter 5 as the I/R
Step Six - Hit PV.
$563,758
Nick wants to maintain the purchasing power of $75,000 (in today's dollars) in
retirement. If inflation continues to average 3.5%, approximately what amount will Nick
need in 20 years to equal the purchasing power of $75,000 today? (Round your
answer.) - ANSWER-If you know the Rule of 72, and you divide 3.5 into 72, you arrive
at the number 20, which is the number of years it will take for a sum to double. With a
calculator, you can solve for the future value of $75,000 over 20 years at 3.5%.
Keystrokes: 20 N, 3.5 I/YR, 75,000 PV, FV = $149,234; rounded = $150,000
What is the second step in the retirement planning process? - ANSWER-The second
step in the retirement planning process is to gather client data, including goals and
expectations
What is the first step in the retirement planning process? - ANSWER-The first step is to
establish and define the client-counselor relationship which includes disclosing the
counselor's compensation arrangement
What is a characteristic of a TIP? - ANSWER-The increase in principal is taxable each
year. Any annual increase in principal is subject to federal taxation (unless in a tax-
deferred account). Returns are tied to the consumer price index. TIPS are sold at par
value and have maturities up to 30 years.
What is a correct statement about the effect that income and asset ownership have on
Social Security benefit payments? - ANSWER-Unearned income, such as income from
COMPLETE SOLUTIONS
Richard wants to have an annual retirement income of $100,000 (payable at the
beginning of each year) protected against 3% inflation.
Assuming a 7% after-tax rate of return and a retirement period of 30 years, how much
money does Richard need in order to meet his goal?
Explain how you need to input this on the calculator and why. - ANSWER-Step One -
Set the calculator to BEGIN.
Step Two - Calculate the inflation adjusted rate of return (One plus the Rate of Return
divided by One plus the interest rate, minus one, multiplied by 100 = the inflation
adjusted rate of return) Put this number in the I/YR
Step Three - 100,000 goes in as a PMT
Step Four - 30 goes in as N
Step Five -Press PV
Richard needs $1,822,042.88 in today's dollars to meet his needs.
What is a deductible IRA? - ANSWER-A deductible IRA can lower your tax bill by
allowing you to deduct your contributions on your tax return - you essentially get a
refund on the taxes you paid earlier in the year. You fund a NON-deductible IRA with
after-tax dollars
What is a traditional IRA? - ANSWER-A traditional IRA lets you make tax-deductible
contributions to a retirement account that grow tax-deferred until you're ready to start
taking distributions in retirement. It's a popular option for many savers, but it doesn't
work for everyone. One alternative is the non-deductible IRA, which lets high earners
get in on the IRA action
What is a non deductible IRA? - ANSWER-Depending on your circumstances, you may
be ineligible to deduct IRA contributions. For example, according to the 2015 limits, a
married couple filing jointly who both save in employer-sponsored retirement plans and
who have a combined adjusted gross income (AGI) of $118,000 or more cannot make
deductible IRA contributions. That's where a non-deductible IRA comes in.
How do you calculate the inflation-adjusted rate of return? - ANSWER-1 plus the Rate
of Return
, Divided by
1 plus the interest rate
minus one
multiplied by 100
Tom has been promised a stream of $40,000 annual payments at the end of each year
for 25 years. The present value of these payments discounted at a rate of 5% is which
one of the following amounts? - ANSWER-Step One - The problem says END in it so
you have to set your calculator to the END mode.
Step two - Enter the $40000 as a PMT
Step Three - Enter 25 as the N.
Step Four - Enter 5 as the I/R
Step Six - Hit PV.
$563,758
Nick wants to maintain the purchasing power of $75,000 (in today's dollars) in
retirement. If inflation continues to average 3.5%, approximately what amount will Nick
need in 20 years to equal the purchasing power of $75,000 today? (Round your
answer.) - ANSWER-If you know the Rule of 72, and you divide 3.5 into 72, you arrive
at the number 20, which is the number of years it will take for a sum to double. With a
calculator, you can solve for the future value of $75,000 over 20 years at 3.5%.
Keystrokes: 20 N, 3.5 I/YR, 75,000 PV, FV = $149,234; rounded = $150,000
What is the second step in the retirement planning process? - ANSWER-The second
step in the retirement planning process is to gather client data, including goals and
expectations
What is the first step in the retirement planning process? - ANSWER-The first step is to
establish and define the client-counselor relationship which includes disclosing the
counselor's compensation arrangement
What is a characteristic of a TIP? - ANSWER-The increase in principal is taxable each
year. Any annual increase in principal is subject to federal taxation (unless in a tax-
deferred account). Returns are tied to the consumer price index. TIPS are sold at par
value and have maturities up to 30 years.
What is a correct statement about the effect that income and asset ownership have on
Social Security benefit payments? - ANSWER-Unearned income, such as income from
