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McAtee Personal Finance Final Exam Study Guide (online)

Terms in this set (34)

Bonds
Represent a debt owed by a government unit or corporation
U.S. Treasury Bonds
Most secure bonds and the most secured investment backed by the "full faith and credit" of the U.S. gov't
Convertible bond
Under corporate bond, convert bond into common stock
Corporate bonds
Used to fund large projects like new plants and equipment that has a long, useful life
Secured bonds
Issued by corporations and are tied to physical assets such as real estate or equipment
Debentures
Unsecured bond that is offered on the credit of the corporation and is backed only by reputation of the issuing corporation
General obligation bond
Backed by the taxing authority of the government and is considered less risky because taxes can be raised to cover bond repayment if necessary
Zero coupon bonds
Issued at deep discount and redeemed at full-face value
Junk bond market
Very speculative and not for beginners
Percentage of your current income to cover living expenses in retirement that you should count on needing
80%
Retirement plan
Setting a time frame for retirement is a personal and financial decision. Considerations should be financial security, health care, lifestyle choices
Diversified portfolio
Reduction of risk by spreading investment dollars over numerous stocks and/or bonds to minimize the impact should one of the investments turn bad
Compounding
Earning interest on interest
Inflation and purchasing power
Rise in cost of goods and services with corresponding decrease in the value of money; averages at 3% a year
Social security
Provides a retirement benefit based on the number of years you have worked and contributed through payroll taxes to the system
Medicare
Federal health care program that provides basic services for people age 65 and older
Social security and Medicare...
Were designed to provide a safety net so elderly citizens could count on some income and health care
Defined benefit plans
Calculate retirement benefits using a formula that applies a % to an average salary and adds in a longevity bonus for then number of years worked
Cash balance pensions
Are portable; if you leave a company, the money goes with you in the form of IRA
IRA is an example of...
Qualified retirement account
401(k)
Qualified defined contribution plan offered by employers
403(b)
May use tax-differed annuities or mutual funds; religious, educational, non-profits
Reverse mortgage
If you want to convert equity in your house with cash instead of making monthly payments to a lender; a lender makes payments to you, based on the value of your home; must be 62+
Withholding tax
Income tax withheld from employees' wages and paid directly to the government by the employer, and the amount withheld is a credit against the income taxes the employee must pay during the year
Financial planning concerns for families with dependents
-Asset acquisition
-Debt planning
-Employee benefits
-Insurance benefits
-Insurance planning
-Investment
-Tax planning
Main advantage of 401(k) plan
Allows you to shelter retirement savings from taxation
IRA
An individual retirement account
-provides a tax-deferred vehicle for your investment
-offer a flexible way to save for retirement and use a wide variety of investments products to fund your account
Disadvantages of IRAs
-Limits on the amount you can contribute each year
-Income restrictions that reduce or eliminate the benefits for people in higher income brackets
-Limit on IRA deduction if you are covered by a retirement plan at work
Roth IRA
-No current tax deduction from income tax
-Contributions and earnings grow tax-free
-Withdrawals at retirement are tax-free
-Can withdraw your contributions at any time with no penalty or taxes to pay
Age vs. withdrawals of contributions and earnings tax-free from your Roth IRA account
After age 59 1/2, you can make withdrawals of contributions and earnings tax-free
401(k) age requirements for withdrawal
70 1/2
When can you do an early withdrawal from your IRA without penalty?
Financial hardship
Top professional designation for financial planners
-CFP
-ChFC
-CPA
-CLU
Conservative or fixed-income portfolios
As investors approach retirement age, they are often more interested in conservative, or fixed-income portfolios
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