Quiz 4 Flashcards
(41 cards)
1
Q
How often should we expect prices to double, with 3% inflation?
A
Every 24 years
2
Q
Basic, overall steps of retirement planning
A
- First analyze your assets and liabilities to figure out where you are financially
- Next, evaluate the planned retirement income from pensions and investments
- Finally, increase your income by working part-time if necessary
3
Q
Common place to put retirement funds/money
A
- The stock market, by purchasing stocks, mutual funds, index funds, or ETFs
4
Q
Your Federal Income Taxes will probably be ______ after retirement
A
- Lower; you can regulate better (use Roth IRA when taxes are high and 401(k) when taxes are low
5
Q
How long are people generally in retirement?
A
16-30 years
6
Q
Things you should do if you plan to move when you retire to avoid retirement housing traps
A
- Contact the local chamber of commerce to learn about taxes and the economic profile and future of the area
- Check on state income and sales taxes and taxes on pension income
- Estimate what your utility, health care, auto insurance, food, and clothing costs would be in the area
- Visit or vacation there and talk to the people who live there
- Rent for a while instead of buying immediately
7
Q
Social Security
A
- Full retirement benefits are offered at age 65-67, depending on what year you were born, but you can start pulling money out at age 62, or hold off until age 70
- For every year before 67 (for us) that you pull out social security, you get 8% less social security money than the full amount, and for every year after 67(up to 70) you get 8% more.
- That being said, don’t count on Social security even existing when we retire
- In 1945, there were 42 workers per retiree. In 2010 there were 3.2 workers per retiree, and by 2032 its estimated to drop to 2.1 workers per retiree
8
Q
401k
A
- Retirement account in the company you work for
- A defined contribution account
- There are investments you can choose from, so the accounts can be tailored to employee preferences
- Employee funded and managed
- Tax deferred until the money is used
- In 2020, employees can save up to $19,500 per year if they’re under age 50, or $26,000 per year if 50 or older
- The employer makes the employees non-taxable contributions and reduces the employee salary by the same amount
- Not guaranteed by the government
9
Q
Pension
A
- Defined benefit
- Employer will pay you a certain amount per month when you retire based on your pre-retirement salary and years of service
- Employer makes the investment decisions for you and their contributions, but your benefit amount stays the same regardless of how the investments perform
- Guaranteed by the government
10
Q
Plan Portability
A
- Ability to carry earned benefits from one employer’s pension plan to another’s when you change jobs
- Normally pensions stay in the original plan
11
Q
Vesting
A
- your right to at least a portion of the benefits you have accrued or earned under an employer pension plan, even if you leave before you retire
- Pensions are normally not available unless you have worked for that place for 5 or more years
12
Q
What you can do with your defined contribution plan when you leave your job
A
- Leave it in the plan
- Transfer it to a new employer plan if you have a new job
- rollover the funds into an IRA
- Cash in your account (tax consequences and penalties)
13
Q
What you can do with your defined benefit plan when you leave a job
A
- Have the employer keep the funds you will get as a future pension from them
- Transfer the funds to invest in a pension with your new employer if your pension is portable
- you need to be vested to do either of these
14
Q
Regular (traditional) IRA
A
- Functions like a 401k
- In 2019, you could contribute up to $6,000 annually if under 50, and $7,000 if 50 or older
- Earnings accumulate tax free until you start taking the money out
- Pay taxes on the money when you withdraw it when you’re retired, and you must begin withdrawing funds by age 72 as prescribed by the IRS based on life expectancy data
- When withdrawing lump-sum, its taxed as ordinary income
- Installments are based on life expectancy
- Withdrawals prior to age 59 1/2 are subject to a 10% tax in addition to the ordinary income tax
15
Q
Rollover IRA
A
- Traditional IRA that accepts rollovers of your taxable distribution from a retirement plan or other IRA
- You use this when you change companies
16
Q
Roth IRAs
A
- Contributions are not tax deductible, meaning after tax moneys used to fund them, but earnings accumulate with distributions tax free if the money is in the account for at least 5 years
- Don’t pay taxes on it when you take it out
- In 2020 you can contribute up to $6,000 ($7,000 if over 50 years old) per year
- No age limit for making contributions
17
Q
Roth 401k
A
- An employer-sponsored investment savings account that is funded with after-tax money
- Anyone, no matter their income, is allowed to invest up to the contribution limit into the plan (no income limitations)
18
Q
Keogh Plan
A
- Retirement accounts for self-employed people
- Can contribute up to $57,000 of your net earnings in 2020
19
Q
Annuities
A
- An annuity provides a guaranteed income stream for a period of time or for life, like a paycheck
- It’s guaranteed income, so you don’t have to worry about stock market fluctuations
- If you have fully funded all other retirement options, you may want to buy an annuity
- You can buy an annuity with the proceeds of an IRA, company pension, or supplemental retirement income
- Immediate annuities: payments begin right away
- Deferred annuities: income payments begin at some future date. Contributions and the interest they earn are tax-deferred until you begin withdrawing the money
- Annuities are generally not very liquid
20
Q
Tips for dipping into your retirement nest egg
A
- Try to live on interest
- One can normally dip in by 4% per year and not outlive their money
- Your investment should be greater than your withdrawal rate, and your investment return should be greater than the inflation rate
21
Q
When comparing cost of a mortgage to cost of renting…
A
- Add 40-50% onto the mortgage cost to cover all other expenses you’ll be paying (property tax, home insurance, etc) and that will tell you about how much you’ll actually be paying per month on your mortgage
22
Q
How much of your pay is it recommended to spend on a mortgage/housing?
A
- 25-33% of your take-home pay, BUT prof thinks this is a bit low, and that it should be 25-33% of your GROSS pay
23
Q
Advantages and disadvantages of renting
A
Advantages:
- Flexibility
- More mobile
- Fewer maintenance and repair responsibilities, if any
- Lower initial costs, and a lot less capital
- Enables you to “try out” an area
Disadvantages:
- No tax benefits
-Limitations regarding remodeling
- Restrictions regarding pets and other activities
- Legal concerns of a lease
24
Q
Legal Details of a Lease
A
- Description of address and property
- Name and address of the owner/landlord (lessor)
- Name of tenant (lessee)
- Effective date and length of the lease
- Amount of security deposit
- Amount and due date of rent
- Obligations of each party
- Location where rent is due
- Date and amount for late rent payments
- List of included utilities, appliances
- Restrictions on certain activities
- The right to sublet the unit
- Conditions where landlord may enter unit
- Penalties for ending early
25
5 steps in the home buying process
1. Determine your home ownership needs
2. Find and evaluate a property to purchase
3. Price the property
4. Obtain financing
5. Close the purchase transaction
26
Benefits and Drawbacks of Home ownership
Benefits:
- Pride of ownership
- Financial benefits, including...
- the potential increase in the value of your home
- building equity in your home
- being able to deduct property taxes and mortgage interest
Drawbacks:
- Financially risky, expensive, time consuming
- Limited mobility
- Higher living costs
27
Condominium
- Owning your own unit in a building of units
28
Tips when finding and evaluating a home to purchase
- Use a real estate agent; they want to sell/get you into a home quickly and for a high price, but they'll take speed over price normally
- Conduct a home inspection or hire an inspector -- spare no expense!
- Mortgage company will want an appraisal, and it will have to support the loan amount plus down payment (they want to make sure they'll be able to sell the home for a profit if you default on your mortgage and they take the home)
29
How much to put down
- It's advisable to put 20% down; 5% down and 10% down are common too
- If you put less than 20% down, you'll have to pay mortgage insurance (PMI) however
30
PITI
- Basically your housing costs; the ongoing (typically monthly) costs associated w/ purchasing a home
- Stands for Principal, Interest, taxes, and Insurance
- There will be other costs on top of this too, like home owners association cost (maybe), repair and maintenance costs, etc
31
Qualifying for a Mortgage
3 steps:
1. Pre-qualification
2. Finding a property, including an appraisal
3. Payment of costs, fees, points, and commitment
- When qualifying for a mortgage, they look at your income, debts, credit history (FICO), down payment amount, length of the loan, and current mortgage rates
32
Points
- In mortgages
- They're fees based on a % of the loan amount and can be tax deductible
- Each point is worth one % of the mortgage value
- They can help you buy down your mortgage rate; you're basically putting more money down, only this money is going to the bank, not the person you're buying from
33
Variable Rate Mortgages
- Have an adjustable rate
- during the life of the loan, the interest rate varies with the primer rate or some other index, like the LIBOR, but it will have a rate cap an an increase cap
34
In a 30 year mortgage, interest is the majority of the payment until year ____
17
35
Reverse Mortgages
- Provides the elderly (>62 years old) w/ tax free income based on their home equity
- Functions as a loan on the equity of the home payable to lenders when the owner dies or the house is sold
36
Refinancing a mortgage
- Trading in your current loan to get a lower rate on one's mortgage
- There are lots of costs associated with this, so you will want to check all the costs to make sure it is financially a good idea to refinance
37
Closing costs
- Can be thousands of dollars
- Includes...
- Title insurance and search fee
- Attorney's and appraiser's fees
- Property survey
- Pest inspection and other inspections
- Deed recording fees; transfer taxes
- Credit report
- Lender's origination fee and points
- Escrow account for tax and insurance reserve
- Real estate commission
38
How much will Real Estate Broker's commission be?
- If you're buying, it will be about 15k-20k for the real estate broker's commission
- If you're the seller, assume 4-7% of the purchase fee
39
Escrow
- It's a neutral place that coordinates and completes the transaction
- The escrow holder has the obligation to safeguard the funds and/or documents while they are in possession of them, and to disburse the funds and/or convey title when all provisions of the escrow have been complied with
- The escrow is written up by the principals to the escrow: the buyer, the seller, the lender, and the borrower
- A close of escrow date will be set, normally 45-60 days after the sales contract is signed
- You get your keys once escrow is completed
40
Appraiser
- Estimates the current value of your home
41
Real Estate agent
- Markets your home
