Use the following scenario to answer questions 1 10

Paul and Linda Reynolds (ages 57 and 56 respectively) have determined that they will require retirement income of $63,000 in todays dollars. They plan to retire in 8 years and wish to assume an after tax return on their investments prior to retirement of 8%. They plan to readjust their asset allocation after retirement and believe their return will drop to 6%. Pauls parents are both in their late eighties and Lucindas parents are both in their seventies. Paul and Linda assume that retirement will last for 30 years. Inflation will average 2% over their life times. They plan to withdrawal their income at the beginning of each year during retirement.

1. What are Pauls and Lindas work life expectancy and retirement life expectancy? (WLE and RLE)
2. What will be Pauls and Lindas income requirement for their first year of retirement?
3. What will be Pauls and Lindas income requirement at life expectancy? (Final year)
4. What is the amount of capital required to support their income need? (assume the annuity model)

1

1. If the Reynoldss decided to count their projected Social Security benefits of $14,251 per year, what would be the capital amount necessary at retirement? (Annuity Model)
2. How much capital would be required under the Annuity Model if in addition to the Social Security retirement benefit of $14,251/per year they also expect to receive a small pension benefit of $8,000 per year at retirement? (assume not adjusted for COLA)
3. Using the same information from #6, how much would the Reynolds have to save per month in order to reach their retirement capital goals?
4. What is the amount of annual savings required to accumulate the capital required under each of the annuity model? Assume that Paul and Linda have $250,000 of capital already saved.

9. Explain the differences between the Annuity, Capital Preservation, and Purchasing Power Preservation models in simple terms that Paul and Linda would understand? Why should they target a model that has a higher capital requirement?

2

1. What methods might you use to help Paul and Linda understand the potential impact on their plan of changing variables such as: inflation rate, investment returns, and life expectancy?
2. If Mr. and Mrs. King have an AGI of $42,000 excluding Social Security, and $3,000 in tax exempt interest, and receives $9,000 in Social Security benefits, how much of the Social Security benefits will be included in taxable income if they file jointly?
3. Which of the following statements concerning reduction of Social Security retirement benefits is correct if full retirement age is 65 for this individual?
   1. a) Benefits are reduced $1 for every $3 dollars earned over $15,480 this year for ages 62 to 64.
   2. b) Benefit are reduced only for benefits received after age 65
   3. c) Benefits are reduced 5/9 of 1% per month for early retirement between ages 59 12 to 65
   4. d) Benefits are not reduced regardless of income once the worker reaches age 65
4. For an insured worker who was born in 1950 and wants to retire at age 64, under current law, how much will his or her primary insurance amount be reduced? a) 13.3% b) 15.3% c) 20.0% d) 25.0%

3

1. Which of the following statements are correct with regard to retirement planning for Social Security?
   1. 1) Retiring at age 55 will make a client ineligible for Social Security retirement benefits at any time.
   2. 2) Only amounts up to the social security wage base for each year are used in calculating benefits.
   3. 3) The percent of average monthly earnings that is paid as retirement benefits depends on the level of income.
   4. 4) Retirement benefits are not available to spouses of covered workers unless the spouses have Social Security earnings themselves
      1. (1) and (2) only
      2. (1) and (3) only
      3. (2) and (3) only
      4. (2), (3), and (4) only
      5. (1), (2), (3), and (4)
2. Which of the following statements are correct concerning disability coverage that is part of the Social Security program?
   1. 1) Those covered must wait 6 months before receiving benefits
   2. 2) The definition of disability is quite restrictive
   3. 3) Workers compensation benefits received may reduce the social security disability benefits
   4. 4) To be considered eligible a worker must be fully insured, blind or disabled age 31 or older, or have a total of at least 20 quarters of coverage during the 40-quarter period ending with the quarter in which the worker became disabled
      1. (1) and (2) only
      2. (1) and (4) only
      3. (1) and (3) only
      4. (1), (2), and (4) only
      5. (1), (2), (3), and (4)
3. Which of the following persons will be entitled to Social Security benefits?
   1. 1) A retired workers spouse, age 45, who cares for the workers child age 14
   2. 2) The child, age 17, of a worker who retired at age 62
   3. 3) The surviving spouse, age 55, who cares for the 17 year old child of the deceased worker
   4. 4) The surviving spouse, age 58, of a deceased worker
      1. (1) and (2) only
      2. (2) and (3) only
      3. (1) and (4) only
      4. (1), (2), (3), and (4)

4

1. In order for a divorced spouse to receive retirement benefits based on a workers PIA, which of the following requirements apply?
   1. 1) The divorced spouse must have been married for 14 years to the worker
   2. 2) The divorced spouse may have remarried
   3. 3) The worker must be entitled to retirement of disability benefits
   4. 4) The divorced spouse must be age 62 or older
      1. (1) and (2) only
      2. (2) and (3) only
      3. (3) and (4) only
      4. (1), (2), (3), and (4)
2. John will earn $175,000 in income this year as an employee for the ABC Steel Corporation. How much will he have to pay in Social Security taxes? How much will he pay in in Medicare taxes?
3. Mary will earn $175,000 in self-employment income this year. How much will she have to pay in Social Security taxes? How much will she pay in Medicare taxes?
4. A 25 year old worker can expect to receive her lowest, highest, and full Social Security retirement benefits at what ages?