Sample/practice exam Autumn 2020, questions and answers PDF

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Formal assessment 8...

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11/16/2020

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Assessment >> Formal Assessment Assessment: Retirement Planning Web - Academic Partners Unit 8 Post-Assessment (C114V20U8L0A25Q20) Date Submitted:

11/16/2020 11:11:00 PM

Total Correct Answers:

20

Total Incorrect Answers:

0

Your Mark (total correct percentage): 100% 1

Penelope's retirement plan assumes she will retire at age 65, live to age 90 and receive a before-tax income of $53,000 at the beginning of each year of her retirement if she draws on her capital and earns 10% annually on her investments. In reality, her investments only earned 8%. How much less will Penelope receive each year during her retirement than she originally anticipated?

Correct The correct answer: $7,098 Your answer: $7,098 Solution: If Penelope was hoping to receive $53,000 at the beginning of each year if her returns were 10%, then she must have accumulated $529,191 by her retirement date, calculated by entering DISP = 0, P/YR = 1, ×P/YR = 25, I/YR = 10%, PMT = $53,000, FV = $0, MODE = BEGIN and solving for PV of an annuity due. If she only earned 8% on her investments, she could receive only $45,902 each year, calculated by not clearing your calculator entering I/YR = 8% and solving for PMT. As a result of her lower investment earnings, Penelope received $7,098 less, calculated as ($53,000 - $45,902).

2

George's retirement plan assumes that he will live to 90 years of age, earn 7% on his savings and receive a before-tax income of $42,000 at the beginning of the year during his retirement if he draws on his capital. He had originally planned on retiring at the age of 65. However, when he turned 65, he was in excellent health and enjoying his work. So, he continued working until he was 70 years old. When George retired, how much less did he need in savings to meet his retirement objectives?

Correct The correct answer: $47,617 Your answer: $47,617 Solution: If George had retired at age 65, he would have needed $523,712, calculated by entering DISP = 0, P/YR = 1, ×P/YR = 25, I/YR = 7%, PMT = $42,000, FV = $0, MODE=BEGIN and solving for PV of an annuity due. When he retired at age 70, he needed $476,095, calculated by not clearing your calculator, entering ×P/YR = 20 and solving for PV of an annuity due. So by delaying his retirement, George needed $47,617 less, calculated as ($523,712 - $476,095).

3

Robert is developing a retirement plan for his clients, Brett and Stacey. Brett is 42 and Stacey is 37. They are both in excellent health and plan on retiring at age 65. In calculating the amount of savings that they need to sustain them during their retirement, Robert needs to determine the expected duration of retirement. Which of the following should he select as a starting point for his calculations?

Correct The correct answer: From the time Brett turns age 65 until Stacey reaches age 90. Your answer: From the time Brett turns age 65 until Stacey reaches age 90. Solution: When calculating the duration of retirement for a normal healthy couple, the financial planner should start by using the number of years from the time of retirement of the older spouse until the younger spouse reaches age 90.

4

After Victoria retired at age 65, her investments provided her with an annual income of $45,000 received at the beginning of every year. Her investments earned a return of 8% per year that compounded annually, and it was projected that her capital would be depleted by the time that she reached age 90. Victoria had named her grandson, Nathaniel, as sole beneficiary of her investments should she die before age 90. Victoria died at the age of 83. Disregard inflation and taxes. Victoria did not save any of her retirement income. How much did Nathaniel inherit?

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Correct The correct answer: $253,030 Your answer: $253,030 Solution: First you must determine how much Victoria had when she retired, then you must determine how much of that was left after 18 years. Victoria must have had $518,794 when she retired, calculated as DISP = 0, P/YR = 1, ×P/YR = 25, I/YR = 8%, PMT = $45,000, FV = 0, MODE = BEGIN and solving for PV of an annuity. Then, Nathaniel inherited $253,030, calculated without clearing your calculator, entering ×P/YR = 18 and solving for FV.

5

In determining the appropriate length of time for a retirement plan, you should consider all of the following, EXCEPT:

Correct The correct answer: the number of years until the older spouse reaches 90 years of age. Your answer: the number of years until the older spouse reaches 90 years of age. Solution: In deciding upon a planning period, a conservative starting point as indicated by general life expectancy statistics is the number of years until the younger spouse reaches age 90. In the case of an individual, this number should be reduced if health problems indicate a shorter life expectancy for a specific client, or it could be increased if the family has a history of longevity.

6

Jennifer belongs to her employer's defined-contribution RPP. Jennifer and her employer each contribute 5% of her salary. All of the following statements are true, EXCEPT:

Correct The correct answer: Jennifer's RPP will provide her with adequate retirement income, so she should restrict the use of RRSPs in her retirement savings plan. Your answer: Jennifer's RPP will provide her with adequate retirement income, so she should restrict the use of RRSPs in her retirement savings plan. Solution: Jennifer's RPP will provide her with adequate retirement income, so she should restrict the use of RRSPs in her retirement savings plan. Most defined-contribution RPPs have a combined employer/employee contribution rate of much less than 18%, so most members have to consider RRSPs as an important component of their retirement savings plan.

7

Mary asked her retirement planner, Francis, to prepare a retirement income projection that factors in the future sale of her principal residence. Francis will have to consider all of the following factors when preparing this income projection for Mary, EXCEPT:

Correct The correct answer: taxation of the proceeds from the sale of Mary's house. Your answer: taxation of the proceeds from the sale of Mary's house. Solution: The proceeds of the house sale need not be subject to tax because it is Mary's principal residence.

8

Questions #8 – #14 refer to the Nicholas and Anna Biscuit case study found in lesson #1 and lesson #2 of unit 8. Nicholas has heard rumours that his company is planning to upgrade the pension plan from 1% per year of service to 1.5% per year of service commencing with the current year. Assume this happens and Nicholas does not make any additional contributions to the plan. Also assume he stays with the same employer for the balance of his career and that he has worked there for 10 years to date. By how much will his annual pension increase at retirement because of an increase from 1% to 1.5% per year of service?

Correct The correct answer: https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp

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$9,926 Your answer: $9,926 Solution: Nicholas has already worked for 10 years, and the question assumes that he does not make any additional contributions to upgrade his past service. So, the pension resulting from his first 10 years of service would be $9,926, calculated as [(average final pensionable earnings x benefit rate) x years of service] or [($99,258 × 1%) × 10]. The pension resulting from his final 20 years of service would be $29,777, calculated as [($99,258 × 1.5%) × 20]. So, his total pension would be $39,703, calculated as ($9,926 + $29,777). If the benefit rate had remained at 1%, he would have retired with a pension of $29,777 calculated as [($99,258 x 1%) x 30]. With the benefit rate increase, this represents an increase of $9,926, calculated as ($39,703 - $29,777).

9

Anna belongs to a defined-contribution pension plan. Based on the assumptions provided in the case study, how much will Anna be required to contribute to the plan during her final year of service?

Correct The correct answer: $5,261 Your answer: $5,261 Solution: Anna currently earns $60,000 per year, and she expects her salary to increase at a rate of 3% per year. She plans to retire in another 20 years. During that time, her salary would be increased 19 times, at the beginning of each new year. So, during her final year of service, her salary is estimated to be $105,210, calculated using your financial calculator by entering DISP = 0, P/YR = 1, ×P/YR = 19, I/YR = 3%, PV = -$60,000, PMT = $0 and solving for FV. Anna must therefore contribute $5,261 during her final year of service, calculated as ($105,210 × 5%).

10 Nicholas and Anna have indicated that they would likely sell their house and move into an apartment when they are 70 years old. In the meantime, they expect that their home will appreciate in value by about 3% a year. How much less will they realize upon the sale of their home if the average rate of appreciation is only 2.5%? Correct The correct answer: $93,963 Your answer: $93,963 Solution: When Anna and Nicholas turn 70 in another 30 years, their house will be worth $691,770, calculated using your financial calculator by entering DISP = 0, P/YR=1, ×P/YR = 30, I/YR = 3%, PV = - $285,000, PMT = $0 and solving for FV. If the house only appreciates at 2.5% per year, it will only be worth $597,807, calculated without clearing your calculator, entering I/YR = 2.5% and solving once again for FV. So, if the rate of appreciation is reduced by only 0.5%, they will realize $93,963 less, calculated as ($691,770 - $597,807).

11 Refer to Schedule 2, "Projections of Retirement Incomes". Based on the information presented in this Schedule, all of the following statements are true, EXCEPT: Correct The correct answer: Anna and Nicholas will be able to reduce their combined tax burden if they assign their CPP pensions to each other. Your answer: Anna and Nicholas will be able to reduce their combined tax burden if they assign their CPP pensions to each other. Solution: Anna and Nicholas would not benefit from assigning their CPP pensions because they both expect to receive the same benefit. If Nicholas and Anna are both currently 40 years of age, it will be another 25 years before their CPP benefits are projected to commence at age 65. https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp

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Schedule 2 shows that Anna and Nicholas will have a target retirement income of $144,490 in the year they turn 60 years of age—their first year of retirement. This amount is basically their desired $80,000 of annual expenses in 20 years factoring in inflation. If they rely on Nicholas' pension, and make hefty withdrawals from their current registered and non-registered savings, they will be able to meet that target but, only during their first year of retirement at age 60. Based on their current savings, they would experience a shortfall of funds in their second year of retirement and just in the five years that follow, this shortfall would amount to over $300,000 in retirement dollars. Clearly, Nicholas and Anna have more saving to do!

12 Refer to Schedule 4, Additional Savings Required at Retirement. All of the following statements regarding the Biscuit's retirement situation are true, EXCEPT: Correct The correct answer: assuming that they could come up with the additional cash, they can meet their savings targets by making the specified contributions to Anna's own RRSP. Your answer: assuming that they could come up with the additional cash, they can meet their savings targets by making the specified contributions to Anna's own RRSP. Solution: The Income Tax Act would not allow Anna to make such a contribution of $39,271 to her RRSP. Her current contribution limit is only $10,800, calculated as ($60,000 × 18%), and her new RRSP contribution room will be even less because the $10,800 will be further reduced by a pension adjustment. So, even if she came up with the cash, Anna could not meet the retirement savings targets by making the specified contributions to her own RRSP.

13 Refer to Schedule 8, RRSP Savings Plan. The schedule indicates that Nicholas has been considering contributing to a spousal RRSP. As the Biscuits' planner, what would be your primary consideration in determining whether this is the best allocation of their RRSP contributions? Correct The correct answer: Income splitting during retirement. Your answer: Income splitting during retirement. Solution: In determining the best allocation of their contribution room, your first consideration is to achieve income splitting during retirement. The objective is to reduce their total income taxes to a minimum by equalizing to the extent practical their taxable incomes during retirement. This is possible because of the progressive nature of the Canadian tax system. Please note that you cannot tell from the Biscuits' plan whether they have achieved a good income split because there are no additional savings required. If there were, you would have a good income split if the amounts of additional savings in RRSPs were the same for each spouse. The allocation has no bearing upon minimization of income tax in the year of the contribution because it is always deductible to the contributor. The allocation has little bearing upon equalization of estates to minimize probate fees; upon death there are ways that probate fees can be avoided.

14 Refer to Schedule 11, Projections of Retirement Incomes. The schedule indicates that in her first year of retirement at age 60, Anna will draw $15,587 from her non-locked-in RRSP and $36,219 from her LIF. As the Biscuit's financial planner, why would you not draw all of the funds required from her LIF? Correct The correct answer: The maximum that she can withdraw from her LIF is the amount that a term certain annuity would pay to her age 90. Your answer: The maximum that she can withdraw from her LIF is the amount that a term certain annuity would pay to her age 90. Solution: The maximum that she can withdraw from her LIF is the amount that a term certain annuity would pay to her age 90. There will be the same tax in the year of withdrawal if it is drawn from either or both sources of funds. There is no minimum withdrawal required from her non-locked-in RRSP. The maximum that she could withdraw from an LRIF is the previous year's investment income. https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp

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15 Donnie is 73 years of age and the owner and only shareholder in his own company. He has almost no significant assets apart from these shares. He is preparing for retirement and plans to pass on control of the company to his son, Ron. However, he will still own 40% of the company shares. As his financial planner, in preparing a financial plan for Donnie, you would take into consideration all of the following EXCEPT: Correct The correct answer: how much of the proceeds from the sale can be sheltered in an RRSP. Your answer: how much of the proceeds from the sale can be sheltered in an RRSP. Solution: You would not consider contributions to an RRSP because Donnie is 73 years of age and therefore inelligible to make any more contributions to an RRSP.

16 Eldar has been purchasing shares in private Canadian corporations, instead of investing in RRSPs. His financial planner informs him of the tax consequences of his actions. All of the following statements are true, EXCEPT: Correct The correct answer: Eldar can consider his shares to be part of his RRSP savings because of the shares tax deduction and tax deferral features. Your answer: Eldar can consider his shares to be part of his RRSP savings because of the shares tax deduction and tax deferral features. Solution: Shares of most private corporations are not RRSP eligible, and therefore the purchase of these shares does not give rise to a tax deduction. However, capital gains on shares of qualifying small business corporations may be exempt from taxation.

17 Elaine is about to commit to a formal savings plan to accumulate funds for her retirement. The least expensive and painful way to save the money is to: Correct The correct answer: invest a fixed percentage of income annually in a registered plan. Your answer: invest a fixed percentage of income annually in a registered plan. Solution: Elaine will find it least expensive and painful to save funds for retirement by committing a fixed percentage of her income to a registered plan. By using a registered plan, she will receive a tax deduction and by committing to a fixed percentage of income, she will have a lighter burden in her earlier years.

18 Tammy is calculating the "additional savings required" for the Wilsons' retirement savings plan. Regarding additional savings required, which of the following statements is TRUE? Correct The correct answer: Additional savings required can be defined as the present value of the shortfalls of income over the retirement period. Your answer: Additional savings required can be defined as the present value of the shortfalls of income over the retirement period. Solution: "Additional savings required" is the present value at retirement of the shortfalls of income over the retirement period. The amount of additional savings will be different if it is saved in a registered plan or as non-registered savings because the income tax rates are different. The amount will also be different for each spouse if they have different amounts of taxable income in any year, as most couples do.

19 When Michael, a financial planner, prepared a retirement savings plan for his client, Yassin using his company's retirement planning software, he determined that Yassin needs $70,000 in additional tax-paid capital to meet his retirement objectives. The $70,000 that Yassin needs represents: https://virtualuniversity.cifp.ca/TestScore/English/Assessment/AssessmentFormalAsResult.asp

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Correct The correct answer: the present value at the time of his retirement of shortfalls in funds. Your answer: the present value at the time of his retirement of shortfalls in funds. Solution: The additional savings required as calculated in a retirement plan is the present value of the shortfall in funds required at the time of retirement. The shortfall is an after-tax amount.

20 Marie and Henry are discussing various strategies for the use of their savings now that they have retired. Knowing that Henry has a higher taxable income than Marie, which of the following forms of savings should they use FIRST? Correct The correct answer: Henry's non-registered savings Your answer: Henry's non-registered savings Solution: When savings must be used to pay for lifestyle expenditures, certain strategies should be followed to defer taxation of income as long as possible. First, use the higher income spouse's non-registered funds. Second, use the lower income spouse's non-registered funds. Third, use the lower income spouse's registered funds. Finally, use the higher income spouse's registered funds. This is a general rule of thumb that assumes at retirement, most non-registered savings are income-producing, causing a heavy tax burden for interest and dividends paid. In practice, you should examine the exact nature of the non-registered funds. If they are primarily in equity with unrealized cap...