CRPC PRACTICE EXAM #2 WITH COMPLETE
SOLUTIONS QUESTIONS WITH DETAILED
VERIFIED ANSWERS (100% CORRECT
ANSWERS) /ALREADY GRADED A+
Ex. Mary Goodwin's financial situation is as follows:
Cash/cash equivalents $15,000
Short-term debts $8,000
Long-term debts $133,000
Tax expense $7,000
Auto note payments $4,000
Invested assets $60,000
Use assets $188,000
What is her net worth? - ANSWER-$122,000
Assets = $263,000; liabilities = $141,000, so net worth is $122,000. Taxes and auto note payments
appear on the cash flow statement.
Ex. Which of the following are correct statements about income replacement percentages?
Income replacement percentages are typically much higher for those with higher preretirement
incomes.
Income replacement percentages vary between low-income and high-income retirees.
Income replacement ratios should not be used as the only basis for planning.
Income replacement ratios are useful for younger clients as a guide to their long-range planning and
investing. - ANSWER-II, III, and IV
The inverse of Option I is true. Those with a lower preretirement income typically need a much higher
income replacement percentage in retirement.
Ex. If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their
retirement date in 25 years (rather than an amount that grows with inflation each year), what level
annual end-of-year savings amount will they need to deposit each year, assuming their savings earn 7%
annually? - ANSWER-$31,621
Keep in mind that it says LEVEL and they provide you with a savings rate here. Set calculator "End"
and "1 P/Yr" Inputs: FV = 2000000, i = 7, N = 25, PV = 0, then Pmt = $31,621
Ex. Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during
retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per month
at the beginning of each month. Over the 12 remaining years of their preretirement period, they expect
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, to generate an average annual after-tax investment return of 8%; during their 25-year retirement period,
they want to assume a 6% annual after-tax investment return compounded monthly. They want to start
their monthly retirement withdrawals on the first day they retire.
What is the lump sum needed at the beginning of retirement to fund this income stream? - ANSWER-
$389,957
The monthly retirement income need is not specified as "today's dollars," and no inflation rate
specified; therefore, it must be assumed that the $2,500 net monthly income need represents retirement
dollars, and the retirement period income stream is level. To calculate the lump sum needed at the
beginning of retirement, discount the stream of monthly income payments at the investment return rate:
10BII+ PVAD calculation:
Set calculator on BEG and 12 periods per year, then input the following:
2,500 [PMT]
25 [SHIFT] [N] - b/c compounding monthly?
6 [I/YR]
0 [FV]
Solve for PV = $389,957
Ex.
Chris and Eve Bronson have analyzed their current living expenses and estimated their retirement
income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are
confident that they can earn a 7% after-tax return on their investments, and they expect inflation to
average 4% over the long term.
Determine the lump sum amount the Bronsons will need at the beginning of retirement to fund their
retirement income needs, using the worksheet below.
(1) Adjust income deficit for inflation over the preretirement period:$ 90,000present value of retirement
income deficit25number of periods until retirement4%% inflation rateFuture value of income deficit in
first retirement year$239,925(2) Determine retirement fund needed to meet income deficit:
$239,925payment (future value of income deficit in first retirement year)30number of periods in
retirement
The lump sum needed at the beginning of t - ANSWER-$4,911,256
This PVAD calculation requires that the calculator be set for beginning-of-period payments. First, the
annual retirement income deficit is expressed in retirement-year-one dollars, resulting in a $239,925
income deficit in the first retirement year. This income deficit grows with inflation over the 30-year
retirement period, and the retirement fund earns a 7% return. The calculator inputs are $239,925,
[PMT]; 30, [N]; 2.8846, [I/YR]. Solve for [PV], to determine the retirement fund that will generate this
income stream. If you enter 2.8846 directly into the calculator, you will get $4,911,265. If you use the
equation to compute I/YR, and then hit the I/YR button you will get $4,911,256. Either way the answer
is clear. The difference is that when you calculate the I/YR, the calculator takes the interest rate out to
nine decimal places. If you enter in the 2.8846, then the calculator only takes the interest rate to four
decimal places.
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SOLUTIONS QUESTIONS WITH DETAILED
VERIFIED ANSWERS (100% CORRECT
ANSWERS) /ALREADY GRADED A+
Ex. Mary Goodwin's financial situation is as follows:
Cash/cash equivalents $15,000
Short-term debts $8,000
Long-term debts $133,000
Tax expense $7,000
Auto note payments $4,000
Invested assets $60,000
Use assets $188,000
What is her net worth? - ANSWER-$122,000
Assets = $263,000; liabilities = $141,000, so net worth is $122,000. Taxes and auto note payments
appear on the cash flow statement.
Ex. Which of the following are correct statements about income replacement percentages?
Income replacement percentages are typically much higher for those with higher preretirement
incomes.
Income replacement percentages vary between low-income and high-income retirees.
Income replacement ratios should not be used as the only basis for planning.
Income replacement ratios are useful for younger clients as a guide to their long-range planning and
investing. - ANSWER-II, III, and IV
The inverse of Option I is true. Those with a lower preretirement income typically need a much higher
income replacement percentage in retirement.
Ex. If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their
retirement date in 25 years (rather than an amount that grows with inflation each year), what level
annual end-of-year savings amount will they need to deposit each year, assuming their savings earn 7%
annually? - ANSWER-$31,621
Keep in mind that it says LEVEL and they provide you with a savings rate here. Set calculator "End"
and "1 P/Yr" Inputs: FV = 2000000, i = 7, N = 25, PV = 0, then Pmt = $31,621
Ex. Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during
retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per month
at the beginning of each month. Over the 12 remaining years of their preretirement period, they expect
1
, to generate an average annual after-tax investment return of 8%; during their 25-year retirement period,
they want to assume a 6% annual after-tax investment return compounded monthly. They want to start
their monthly retirement withdrawals on the first day they retire.
What is the lump sum needed at the beginning of retirement to fund this income stream? - ANSWER-
$389,957
The monthly retirement income need is not specified as "today's dollars," and no inflation rate
specified; therefore, it must be assumed that the $2,500 net monthly income need represents retirement
dollars, and the retirement period income stream is level. To calculate the lump sum needed at the
beginning of retirement, discount the stream of monthly income payments at the investment return rate:
10BII+ PVAD calculation:
Set calculator on BEG and 12 periods per year, then input the following:
2,500 [PMT]
25 [SHIFT] [N] - b/c compounding monthly?
6 [I/YR]
0 [FV]
Solve for PV = $389,957
Ex.
Chris and Eve Bronson have analyzed their current living expenses and estimated their retirement
income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are
confident that they can earn a 7% after-tax return on their investments, and they expect inflation to
average 4% over the long term.
Determine the lump sum amount the Bronsons will need at the beginning of retirement to fund their
retirement income needs, using the worksheet below.
(1) Adjust income deficit for inflation over the preretirement period:$ 90,000present value of retirement
income deficit25number of periods until retirement4%% inflation rateFuture value of income deficit in
first retirement year$239,925(2) Determine retirement fund needed to meet income deficit:
$239,925payment (future value of income deficit in first retirement year)30number of periods in
retirement
The lump sum needed at the beginning of t - ANSWER-$4,911,256
This PVAD calculation requires that the calculator be set for beginning-of-period payments. First, the
annual retirement income deficit is expressed in retirement-year-one dollars, resulting in a $239,925
income deficit in the first retirement year. This income deficit grows with inflation over the 30-year
retirement period, and the retirement fund earns a 7% return. The calculator inputs are $239,925,
[PMT]; 30, [N]; 2.8846, [I/YR]. Solve for [PV], to determine the retirement fund that will generate this
income stream. If you enter 2.8846 directly into the calculator, you will get $4,911,265. If you use the
equation to compute I/YR, and then hit the I/YR button you will get $4,911,256. Either way the answer
is clear. The difference is that when you calculate the I/YR, the calculator takes the interest rate out to
nine decimal places. If you enter in the 2.8846, then the calculator only takes the interest rate to four
decimal places.
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