RETIREMENT AND ESTATE PLANNING ANSWERS TO CONCEPT CHECKS, PROBLEMS,
QUESTIONS, INTERNET CONNECTION, AND CASES
Concept Check 14-1 (p. 445)
1. The three assets you should review on a regular basis during retirement are:
Housing, Life Insurance, and Other Investments
2. What expenses are likely to increase during retirement?
Recreation, Health Insurance, and Medical expenses
3. What expenses are likely to decrease during retirement?
Transportation, clothing, federal income taxes
Concept Check 14-2 (p. 453)
1. What are four major sources of retirement income?
Public pension plans; employer pension plans; personal pension plans; and annuities
2. What are the two basic types of employer pension plans?
Defined-contribution plan and defined-benefit plan
3. What are the most popular personal retirement plans?
IRAs and Keogh accounts
4. What is the major difference between a regular IRA and a ROTH IRA?
Contributions to a regular IRA may or may not be tax-deductible. Contributions to a ROTH-IRA are
not tax-deductible, but earnings accumulate tax-free.
5. What might you do if your expenses during retirement are higher than you expected?
Convert assets, work part or full-time; and dip into the nest egg.
Concept Check 14-3 (p. 454)
1. What is estate planning?
Estate planning is a process of creating plan for managing your assets so you can make the most of
them while you’re alive and ensure that they’re distributed wisely after your death.
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2. What are the two stages in planning your estate?
Building your estate and estate distribution.
3. List some important documents you will need to collect and organize?
Birth and marriage certificates; military service records; Social Security and Veteran’s documents;
insurance policies; automobile registration; and titles to stock and bond certificates. Concept Check 14-4 (p. 460)
1. What is a will?
A legal declaration as to the disposition of one’s property after death.
2. What are the four basic types of wills?
Simple will; exemption trust; traditional marital share; and stated dollar amount.
3. What are responsibilities of an executor?
Preparing an inventory of assets; collecting any money due, and paying off the deceased’s debts.
4. Why should you name a guardian?
To care for your children in the event that you and your spouse die at the same time.
5. What is the difference between a revocable and an irrevocable trust?
In a revocable trust you have the right to end the trust or change its terms during your lifetime; but
you cannot do so in an irrevocable trust.
6. What are the four major types of trusts?
Credit-shelter; living trust; disclaimer, and testamentary trust.
7. What are the four major types of taxes to consider in estate planning?
Estate tax; estate and trust federal income tax; inheritance tax; and gift tax. PROBLEMS (p. 462)
1. Janine is 25 and has a good job at a biotechnology company. She currently has $5,000 in an IRA, an
important part of her retirement nest egg. She believes her IRA will grow at an annual rate of 8
percent, and she plans to leave it untouched until she retires at age 65. Janine estimates that she will
need $875,000 in her total retirement next egg by the time she is 65 in order to have retirement
income of $20,000 a year (she expects that Social Security will pay her an additional $15,000 a year).
a. How much will Janine’s IRA be worth when she needs to start withdrawing money from it when
she retires? (Hint: Use Exhibit A-1 in the appendix to chapter 1. Time Value of Money.)
Years to retirement = 40
Her current IRA = $5,000
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Annual growth rate = 8%
Future Value (compounded sum) after 40 years @ 8% growth = $5,000 x 21.725 = $108,620
b. How much money will she have to accumulate in her company’s 401(k) plan over the next 40
years in order to reach her retirement income goal?
Total nest egg required by age 65 = $875,000
Money she’ll have to accumulate in her company’s 401(k) = $875,000 - $108,620 = $766,380
2. Gene and Dixie, husband and wife (ages 45 and 42), both work. They have an adjusted gross income
of $40,000, and they are filing a joint income tax return. What is the maximum IRA contribution they
can make? How much of that contribution is tax deductible?
In 2008, they can contribute a total of $10,000 (all tax-deductible).
3. Assume your gross pay per day period is $2,000 and you are in the 33 percent tax bracket. Calculate
your net pay and spendable income in the following situations.
a. You save $200 per pay period after paying income tax on $2,000.
After-tax saving method:
Gross Pay Tax Net Pay After-Tax Savings Spendable Income
$2,000 $660 $1,340 $200 $1,140
b. You save $200 per pay period in a tax-sheltered annuity.
Gross Pay Tax Net Pay After-Tax Savings Spendable Income
$2,000 $200 (TSA) $1,800 $594 (Tax) $1,206
4. You have $50,000 in your retirement fund that is earning 5.5 percent per year, compounded quarterly.
How many dollars in withdrawals per month would reduce this nest egg to zero in 20 years? How
many dollars per month can you withdraw for as long as you live and still leave this nest egg intact?
(Hint: Use Exhibit 14-5.)
Students will find that at a withdrawal rate of $340 a month, the nest egg of $50,000 will be reduced
to zero in 20 years.
But at 5.5 percent interest, compounded quarterly, one can take $230 a month indefinitely and still
leave the $50,000 nest egg intact.
5. In 2008, Joshua gave $11,000 worth of Microsoft stock to his son. In 2010, the Microsoft shares are
a. What was the gift tax in 2008?
Copyright ? 2008 The McGraw-Hill Companies, Inc. All rights reserved. 375
Gift tax in 2008 is zero
b. What is the total amount removed from Joshua’s estate in 2010?
$11,000 + $12,000 = $23,000
c. What will be the gift tax in 2010?
Gift tax in 2010 is zero
6. In 2008, you gave a $12,000 gift to a friend. What is the gift tax?
There is no gift tax. You are allowed to give up to $12,000 each year to any person without
incurring gift tax liability.
7. Barry and his wife Mary have accumulated over $4 million during their 45 years of marriage. They
have three children and five grandchildren. How much money can they gift to their children and
grandchildren in 2009 without any gift tax liability?
Barry and Mary each can gift $12,000 to anyone of their choosing. For eight recipients (3
children and 5 grandchildren), each can gift $96,000. Therefore, Barry and Mary can give
$192,00 ($96,000 x 2) to their children and grandchildren in 2009.
8. The date of death for a widow was 2008. If the estate was valued at $2,129,000 and the estate was
taxed at 47 percent, what was the heir’s tax liability?
Value of the estate = $2,129,000
Exemption in 2008 = $2,000,000
Taxable estate = $129,000
Tax @ 47 percent = $129,000 x 0.47 = $60,630
9. Joe and Rachel are both retired. Married for 50 years, they’ve amassed an estate worth $2.4 million.
The couple has no trusts or other types of tax-sheltered assets. If Joe or Rachel dies in 2006-2008,
how much federal estate tax would the surviving spouse have to pay, assuming that the estate is taxed
at the 47 percent rate?
If Joe or Rachel dies in 2006-2008, there will be no federal estate tax liability since there is an
unlimited marital deduction for the surviving spouse. Only when both die there will be an estate
tax liability over the $2 million exemption amount.
QUESTIONS (p. 463)
1.. How will your spending patterns change during your retirement years? Compare your spending
patterns with those shown in Exhibit 14-2.
Spending patterns will probably change. A study conducted by the Bureau of Labor Statistics on how
families spend money shows that retired families use a greater share for food, housing, and medical
care than non-retired families. Refer students to Exhibit 14-2 on page 444.
Copyright ? 2006 The McGraw-Hill Companies, Inc. All rights reserved. 376
2. Obtain form SSA-7004 from your local Social Security office. Complete and mail the form to receive
a personal earnings and benefits statement. Use the information in this statement to plan your
The answers will vary.
3. Prepare a written report of personal information that would be helpful to you and your heirs. Be sure
to include the location of family records, your military service file, and other important papers,
medical records; bank accounts; charge accounts; location of your safe-deposit box; U.S. savings
bonds, stocks, bonds, and other securities; property owned; life insurance; annuities; and Social
The purpose of this activity is to organize important information before it is needed.
4. Visit Metropolitan Life Insurance Company’s Web page at http://www.lifeadvice.com. Using this
information, prepare a report on the following: (a) Who needs a will? (b) What are the elements of a
will (naming a guardian, naming an executor, preparing a will, updating a will, estate taxes, where to
keep your will, living will, etc.) (c) How is this report helpful in preparing your own will?
The student’s responses will vary.
5. Make a list of criteria you will use in deciding who will be the guardian of your minor children if you
and your spouse die at the same time.
You should take great care in selecting a guardian for your children. You should choose a guardian
whose philosophy on raising children is similar to yours and who is willing to accept the
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