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Conceptual Questions

1. 1. Difference between retirement planning and estate planning
      • Retirement planning = preparing financially for when you stop working (ex. saving in a 401(k)).
      • Estate planning = deciding how assets are distributed after death (ex. writing a will).
   2. Compound growth
      • Growth on both the original investment and accumulated interest/returns.
      • Starting early matters because money has more time to compound.
   3. 401(k) vs. IRA
      • 401(k): employer-sponsored, higher contribution limits, often employer match.
      • IRA: individual account, lower limits, no employer match.
   4. Traditional vs. Roth IRA
      • Traditional: pre-tax contributions, taxed at withdrawal.
      • Roth: after-tax contributions, tax-free withdrawals.
      • Roth is better if you expect to be in a higher bracket later.
   5. Social Security
      • Government retirement benefit based on work history. Provides a base, but usually not enough alone.
   6. Beneficiary designation
      • Person named to receive assets (retirement accounts, life insurance). Ensures direct transfer without probate.
   7. Estate planning for modest wealth
      • Avoids probate, reduces delays, ensures wishes are followed, protects loved ones.
   8. Will vs. Trust
      • Will: legal document, goes through probate.
      • Trust: avoids probate, can reduce taxes, provides control.
   9. Portfolio rebalancing in retirement
      • Shifting from stocks to bonds reduces risk and provides income. Retirees need stability over growth.
   10. Updating estate plans

Life changes (marriage, kids, divorce) affect who should inherit. Keeps documents current.

Problem-Solving

1. 1. Early Retirement Saver
      

• • PMT = $200; r = 0.08; n = 40 (age 25–65).
  • FV = 200 × [((1.08)^40 – 1) ÷ 0.08]
  • FV ≈ 200 × 259.057 = $51,811
    

1. 2. Waiting to Save
      

• • PMT = $200; r = 0.08; n = 30 (age 35–65).
  • FV = 200 × [((1.08)^30 – 1) ÷ 0.08]
  • FV ≈ 200 × 113.283 = $22,657
    
  • Difference vs. Maria: $51,811 – $22,657 = $29,154 less
    

1. 3. 401(k) Employer Match
      

• • Contribution = 6% × $50,000 = $3,000
  • Match = 50% × $3,000 = $1,500
  • Total = $4,500 per year

1. 4. Roth vs. Traditional
      

• • Roth IRA: withdrawals are tax-free → $40,000 not taxable
    

1. 5. Estate Planning Costs
      

• • Probate = 4% × $400,000 = $16,000
  • Heirs = 400,000 – 16,000 = $384,000
    

1. 6. Trust Benefit
      

• • Probate avoided = 5% × $600,000 = $30,000 saved
    

1. 7. RMD at 73
      

• • 4% × $250,000 = $10,000
    

1. 8. Inheritance Split
      

• • $300,000 ÷ 3 = $100,000 each
    

1. 9. College Savings (529 plan)
      

• • PMT = $250; r = 0.06; n = 18 × 12 = 216 months
  • Using annuity formula (monthly): FV ≈ $96,000
    

1. 10. Net Estate After Taxes
       

• • 10% × $1,000,000 = $100,000 tax
  • Heirs = $900,000
    

Interactive Challenge

1. 1. Quick Quiz: Will or Trust?

• • Will → directs assets through probate.
  • Trust → avoids probate, may reduce taxes.

1. 2. Risk Spectrum in Retirement
      Lowest → Highest: Savings account → Treasury bonds → Stock index fund → Cryptocurrency.
   3. Rebalance or Not?
      Yes, rebalance. Otherwise the retiree has more stocks (risk) than planned.
   4. Liquidity Check
      Most → Least: Checking account → Retirement account → House.
   5. Mistake Hunt
      Wrong: Without a will, family may face delays, costs, and disputes in probate.