CRPC EXAM WITH QUESTIONS AND VERIFIED ANSWERS WITH RATIONALE
|ALREADY GRADED A+
Cindy wants to have an annual retirement income of $50,000 protected against 3%
inflation. Assuming an 8% after-tax rate of return and a retirement period of 25 years, how
much money does Cindy need in order to provide the inflation-protected $50,000 at the
beginning of each retirement year? - (ANSWER)BEG Mode
-> of Periods (1 P/YR in this example)
C ALL
50000, PMT
4.8544, I/YR [(1.08 ÷ 1.03) - 1] × 100 = 4.8544 I/YR
25, N #$
PV %
Solution: $749,812.61 ^
&*
Frank will retire in 14 years, and he needs to save an additional $380,000 to provide the ()_
retirement income that he wants. Assume that inflation is 4% and after-tax earnings are +
10%. How much will Frank need to save at the end of each year to reach his goal? -
(ANSWER)END Mode
-> of Periods (1 P/YR in this example)
C ALL
380000, FV
10, I/YR
14, N
PMT
Solution: $13,583.56 (The answer is actually -$13,583.56, as this represents an outflow to
savings.)
In this case, we do not need to make the inflation adjustment. This problem asks how much
Frank needs to save at the end of each year, so the savings will be level. Remember, when
the payment is level, the inflation adjustment is not called for. Inflation should have already
been taken into account to calculate the need for an additional $380,000.
Dan and Barbara have saved $850,000. Assume that inflation is 3% and after-tax earnings
are 9%. Also assume that their retirement will last 26 years. How much annual retirement
income, protected against inflation, can the $850,000 provide for 26 years with payments
made at the beginning of each year? - (ANSWER)BEG Mode
-> of Periods (1 P/YR in this example)
C ALL
850000, PV
5.8252, I/YR [(1.09 ÷ 1.03) - 1] × 100 = 5.8252 I/YR
,CRPC EXAM WITH QUESTIONS AND VERIFIED ANSWERS WITH RATIONALE
|ALREADY GRADED A+
26, N
PMT
Solution: $60,721.17
The Smiths are a 50-year-old couple with an annual retirement budget of $75,000 (in
today's dollars). They want to plan for a retirement life expectancy of 25 years (starting at
age 65), and assume a 3.5% average inflation rate and a 7% long-term rate of return. How
much money will they need at age 65 to fund their retirement? - (ANSWER)Step ->1: Find
the inflated value of $75,000 in 15 years -> of Periods (1 P/YR in this example) #$
C ALL %
75000, PV ^
3.5, I/YR &*
15, N ()_
FV +
Solution: $125,651.16 (This becomes our starting income payment in Step ->2.)
Step ->2: Calculate the PVAD of 25 years of payments, using a first payment amount of
$125,651, and factoring both inflation (3.5%) and the rate of return (7%) (i.e., a serial
payment).
BEG Mode
-> of Periods (1 P/YR in this example)
C ALL
125651, PMT
3.3816, I/YR [(1.07 ÷ 1.035) - 1] × 100 = 3.3816 I/YR
25, N
PV
Solution: $2,168,715.58
John Bennett wants to receive the equivalent of $40,000 in today's dollars at the beginning
of each year for the next nine years. He assumes that inflation will average 5% over the long
run and that he can earn a 10% compound annual after-tax return on investments.
What lump sum does John need to invest today to fund his needs? - (ANSWER)BEG Mode->
of Periods (1 P/YR in this example)
C ALL
40000, PMT
9, N
4.7619, I/YR [(1.10 ÷ 1.05) - 1] x 100 = 4.7619
PV
Solution: $301,035.15
,CRPC EXAM WITH QUESTIONS AND VERIFIED ANSWERS WITH RATIONALE
|ALREADY GRADED A+
Karen Troy, age 51, wants to quit working in six years. In terms of today's dollars, she needs
an additional $400,000 in six years to have sufficient funds to finance this goal. She
assumes that inflation will average 5% over the long run and that she can earn an 8%
compound annual after-tax return on investments.
What serial payment should Karen invest at the end of the first year to fund this goal? -
(ANSWER)END Mode
-> of Periods (1 P/YR, in this example)
C ALL #$
400000, FV %
6, N ^
2.8571, &*
I/YR [(1.08 ÷ 1.05) - 1] x 100 = 2.8571 I/YR ()_
PMT = $62,061.19X 1.05= $65,164.25 +
Solution: $65,164.25 (This answer is actually -$65,164.25 as it represents an outflow to
savings.)
Sean Kelley wants to save $50,000 in today's dollars for a future goal. He will need that sum
by the end of 10 years. He plans to fund this goal by investing a serial payment at the end of
each year. Sean believes that his after-tax earnings on investments will be 7% annually and
that inflation will average 4% over the long term.
What will be the dollar amount of Sean's first payment, to be made at the end of this year? -
(ANSWER)FV, 50000
10, N
2.8846, I/YR
PMT = $4,384.75x 1.04 = $4,560.14
Solution: $4,560.14 (The answer is actually -$4,560.14, as it represents an outflow to
savings.)
Cheryl Cooper wants to receive the equivalent of $30,000 in today's dollars at the
beginning of each year for the next seven years. She assumes that inflation will average 4%
over the long run and that she can earn a 9% compound annual after-tax return on
investments.
What lump sum does Cheryl need to invest today to achieve her goal? - (ANSWER)BEG
Mode
30000, PMT
4.8077, I/YR [(1.09 ÷ 1.04) - 1] x 100 = 4.8077 I/YR
7, N
, CRPC EXAM WITH QUESTIONS AND VERIFIED ANSWERS WITH RATIONALE
|ALREADY GRADED A+
PV
Solution: $183,211.73
Laurie and Sam Simpson are ready to retire. They want to receive the equivalent of $25,000
in today's dollars at the beginning of each year for the next 20 years. They assume that
inflation will average 6% over the long run and that they can earn a 9% compound annual
after-tax return on investments.
What lump sum would Laurie and Sam need to have to fund this retirement benefit? -
(ANSWER)BEG Mode #$
25000, PMT %
20, N ^
2.8302, I/YR &*
Solution: $388,537.73 (This answer is actually -$388,537.73 as it represents an outflow, or ()_
deposit to savings.) +
Joanna Kopps, age 45, wants to quit working in three years. In terms of today's dollars, she
needs an additional $500,000 in three years to have sufficient funds to finance this
objective. She assumes that inflation will average 3% over the long run and that she can
earn a 9% compound annual after-tax return on investments.
What serial payment should Joanna invest at the end of the first year? - (ANSWER)END
Mode
500000, FV
5.8252, I/YR
3, N
PMT = $157,324.20
Solution: $157,324.20 x 1.03 = $162,043.92
Identify three current trends in retirement planning. - (ANSWER)businesses today are less
likely to offer defined benefit (DB) plans
increased focus on planning for longevity
expansion of employer sponsored financial wellness initiatives
expansion of plan distribution options
Discuss challenges associated with the shift from defined benefit to defined contribution
plans. - (ANSWER)With defined contribution plans, risks are borne by plan
participants/employees rather than by plan sponsors/employers (as with defined benefit
plans). Many of these employees have little or no financial expertise.
|ALREADY GRADED A+
Cindy wants to have an annual retirement income of $50,000 protected against 3%
inflation. Assuming an 8% after-tax rate of return and a retirement period of 25 years, how
much money does Cindy need in order to provide the inflation-protected $50,000 at the
beginning of each retirement year? - (ANSWER)BEG Mode
-> of Periods (1 P/YR in this example)
C ALL
50000, PMT
4.8544, I/YR [(1.08 ÷ 1.03) - 1] × 100 = 4.8544 I/YR
25, N #$
PV %
Solution: $749,812.61 ^
&*
Frank will retire in 14 years, and he needs to save an additional $380,000 to provide the ()_
retirement income that he wants. Assume that inflation is 4% and after-tax earnings are +
10%. How much will Frank need to save at the end of each year to reach his goal? -
(ANSWER)END Mode
-> of Periods (1 P/YR in this example)
C ALL
380000, FV
10, I/YR
14, N
PMT
Solution: $13,583.56 (The answer is actually -$13,583.56, as this represents an outflow to
savings.)
In this case, we do not need to make the inflation adjustment. This problem asks how much
Frank needs to save at the end of each year, so the savings will be level. Remember, when
the payment is level, the inflation adjustment is not called for. Inflation should have already
been taken into account to calculate the need for an additional $380,000.
Dan and Barbara have saved $850,000. Assume that inflation is 3% and after-tax earnings
are 9%. Also assume that their retirement will last 26 years. How much annual retirement
income, protected against inflation, can the $850,000 provide for 26 years with payments
made at the beginning of each year? - (ANSWER)BEG Mode
-> of Periods (1 P/YR in this example)
C ALL
850000, PV
5.8252, I/YR [(1.09 ÷ 1.03) - 1] × 100 = 5.8252 I/YR
,CRPC EXAM WITH QUESTIONS AND VERIFIED ANSWERS WITH RATIONALE
|ALREADY GRADED A+
26, N
PMT
Solution: $60,721.17
The Smiths are a 50-year-old couple with an annual retirement budget of $75,000 (in
today's dollars). They want to plan for a retirement life expectancy of 25 years (starting at
age 65), and assume a 3.5% average inflation rate and a 7% long-term rate of return. How
much money will they need at age 65 to fund their retirement? - (ANSWER)Step ->1: Find
the inflated value of $75,000 in 15 years -> of Periods (1 P/YR in this example) #$
C ALL %
75000, PV ^
3.5, I/YR &*
15, N ()_
FV +
Solution: $125,651.16 (This becomes our starting income payment in Step ->2.)
Step ->2: Calculate the PVAD of 25 years of payments, using a first payment amount of
$125,651, and factoring both inflation (3.5%) and the rate of return (7%) (i.e., a serial
payment).
BEG Mode
-> of Periods (1 P/YR in this example)
C ALL
125651, PMT
3.3816, I/YR [(1.07 ÷ 1.035) - 1] × 100 = 3.3816 I/YR
25, N
PV
Solution: $2,168,715.58
John Bennett wants to receive the equivalent of $40,000 in today's dollars at the beginning
of each year for the next nine years. He assumes that inflation will average 5% over the long
run and that he can earn a 10% compound annual after-tax return on investments.
What lump sum does John need to invest today to fund his needs? - (ANSWER)BEG Mode->
of Periods (1 P/YR in this example)
C ALL
40000, PMT
9, N
4.7619, I/YR [(1.10 ÷ 1.05) - 1] x 100 = 4.7619
PV
Solution: $301,035.15
,CRPC EXAM WITH QUESTIONS AND VERIFIED ANSWERS WITH RATIONALE
|ALREADY GRADED A+
Karen Troy, age 51, wants to quit working in six years. In terms of today's dollars, she needs
an additional $400,000 in six years to have sufficient funds to finance this goal. She
assumes that inflation will average 5% over the long run and that she can earn an 8%
compound annual after-tax return on investments.
What serial payment should Karen invest at the end of the first year to fund this goal? -
(ANSWER)END Mode
-> of Periods (1 P/YR, in this example)
C ALL #$
400000, FV %
6, N ^
2.8571, &*
I/YR [(1.08 ÷ 1.05) - 1] x 100 = 2.8571 I/YR ()_
PMT = $62,061.19X 1.05= $65,164.25 +
Solution: $65,164.25 (This answer is actually -$65,164.25 as it represents an outflow to
savings.)
Sean Kelley wants to save $50,000 in today's dollars for a future goal. He will need that sum
by the end of 10 years. He plans to fund this goal by investing a serial payment at the end of
each year. Sean believes that his after-tax earnings on investments will be 7% annually and
that inflation will average 4% over the long term.
What will be the dollar amount of Sean's first payment, to be made at the end of this year? -
(ANSWER)FV, 50000
10, N
2.8846, I/YR
PMT = $4,384.75x 1.04 = $4,560.14
Solution: $4,560.14 (The answer is actually -$4,560.14, as it represents an outflow to
savings.)
Cheryl Cooper wants to receive the equivalent of $30,000 in today's dollars at the
beginning of each year for the next seven years. She assumes that inflation will average 4%
over the long run and that she can earn a 9% compound annual after-tax return on
investments.
What lump sum does Cheryl need to invest today to achieve her goal? - (ANSWER)BEG
Mode
30000, PMT
4.8077, I/YR [(1.09 ÷ 1.04) - 1] x 100 = 4.8077 I/YR
7, N
, CRPC EXAM WITH QUESTIONS AND VERIFIED ANSWERS WITH RATIONALE
|ALREADY GRADED A+
PV
Solution: $183,211.73
Laurie and Sam Simpson are ready to retire. They want to receive the equivalent of $25,000
in today's dollars at the beginning of each year for the next 20 years. They assume that
inflation will average 6% over the long run and that they can earn a 9% compound annual
after-tax return on investments.
What lump sum would Laurie and Sam need to have to fund this retirement benefit? -
(ANSWER)BEG Mode #$
25000, PMT %
20, N ^
2.8302, I/YR &*
Solution: $388,537.73 (This answer is actually -$388,537.73 as it represents an outflow, or ()_
deposit to savings.) +
Joanna Kopps, age 45, wants to quit working in three years. In terms of today's dollars, she
needs an additional $500,000 in three years to have sufficient funds to finance this
objective. She assumes that inflation will average 3% over the long run and that she can
earn a 9% compound annual after-tax return on investments.
What serial payment should Joanna invest at the end of the first year? - (ANSWER)END
Mode
500000, FV
5.8252, I/YR
3, N
PMT = $157,324.20
Solution: $157,324.20 x 1.03 = $162,043.92
Identify three current trends in retirement planning. - (ANSWER)businesses today are less
likely to offer defined benefit (DB) plans
increased focus on planning for longevity
expansion of employer sponsored financial wellness initiatives
expansion of plan distribution options
Discuss challenges associated with the shift from defined benefit to defined contribution
plans. - (ANSWER)With defined contribution plans, risks are borne by plan
participants/employees rather than by plan sponsors/employers (as with defined benefit
plans). Many of these employees have little or no financial expertise.
