If you put $100 per month in an IRA that earns 6% annually, how much money will you have after 40 years?
$50,000
$150,000
$200,000
$360,000 View Answer
Correct Answer: $200,000
In order to ensure you will have enough income at retirement, it is critical that you begin saving early in life. If you started saving 4 years earlier (contributing $4,800 more), at retirement you would have accumulated $258,400—that’s $58,000 more for an early $4,800 investment. If, instead, you invested an additional $10 per month, (which totals the same $4,800), your retirement money goes up by just $20,000. Saving more is important, but saving early is more important.
What percentage of American households have money invested in the stock market?
10%
15%
25%
50% View Answer
Correct Answer: 50%
More than ever, Americans are realizing the benefits of investing in the stock market. Over the long term, stocks grant the largest return of any investment. When investing in stocks, however, it is important to invest for the long-term, as values do move up and down in the short-term. Despite these fluctuations, stocks remain the best long-term investment, particularly for young Americans saving for retirement.
If you leave $50 in a savings account that pays 5% per year, how long does it take to double your money?
1 year
8 years
14 years
50 years View Answer
Correct Answer: 14 years
A good rule of thumb regarding potential investment opportunities is called the Rule of 72. If you want to know how long it will take your money to double, simply divide 72 by the interest rate of the investment. In this case 72 divided by 5 is 14.4.
For which of the following purposes can you withdraw money without penalty from your Roth IRA retirement account?
First home purchase
Retirement spending
Education
All of the above View Answer
Correct Answer: All of the above
While the Roth IRA is mainly thought of as a retirement account, money in these accounts can be used for a variety of important life events. Under certain restrictions, you can withdraw money from these accounts, without penalty, to pay for qualified higher education expenses and the purchase of your first home. This makes Roth IRA’s an important savings tool for more than just retirement.
From 1995 to 2005, average personal income has:
Increased by 20%
Increased by 50%
Stayed the same
Declined by 5% View Answer
Correct Answer: Increased by 50%
Despite the ups and downs of the economy, personal income grew 50% in the decade between 1995 and 2005. Even adjusting for inflation, personal income grew by 23%. This means that personal incomes have grown significantly faster than the cost of living. In essence, compared to 1995, Americans received 2 month’s additional income in 2005.
If you work summers during high school for minimum wage, and invest $2,000 of your earnings each summer in a mutual fund, how much will you have at age 67?
$50,000
$100,000
$500,000
$1,000,000 View Answer
Correct Answer: $1,000,000
The most important factor in building a nest egg for retirement is starting early. Because the interest on these savings is compounded (which means you earn interest on your accumulated interest), saving early can lead to dramatically more money at retirement. In this example, a total of $8,000 invested at a young age could lead to $1,000,000. If, instead, you saved $2,000 per year from age 40-67 ($54,000 total), you would have less than $250,000 at retirement—a difference of $750,000.
Which of the following government agencies insures against losses in the stock market?
Securities and Exchange Commission
Federal Deposit Insurance Corporation
Federal Reserve
None of the above View Answer
Correct Answer: None of the above
While stocks are by far the best long-term investment, they do have risk. Unlike savings accounts, which are insured up to $100,000 by the Federal Deposit Insurance Corporation, no government agency insures losses in the stock market. The Securities and Exchange Commission regulates publicly traded companies to ensure fair business practices, but does not refund money lost in stock investments.
What percentage of adults have no life insurance?
6%
32%
45%
59% View Answer
Correct Answer: 32%
Nearly 75% of Americans think life insurance is the best way to protect against the hardships of a premature death of a primary wage earner. Nevertheless, over one-third of adults have no life insurance. Of those adults who own life insurance, 40% believe they should own more. If a primary wage earner died, 12% of households would immediately have trouble meeting daily expenses and another 15% would have trouble within a few months. Life insurance is designed to meet these expenses when a primary wage earner dies.
If you put $5,000 in a savings account earning 3% interest per year, you would have $22,000 in 50 years. How much would you end up with if the money were invested in an IRA earning 6%?
$44,000
$66,000
$80,000
$90,000 View Answer
Correct Answer: $90,000
Albert Einstein is alleged to have said “The most powerful force in the universe is compound interest.” Compound interest literally causes wealth to grow exponentially. This is because with compounding, you earn interest on interest. Here we see that doubling the rate of interest (from 3% to 6%) increased the end product by more than 4 times. Compounding is also very sensitive to the length of time. In the example with 6% interest, if the saving only continued for 25 years, the accumulation would have been only $21,000 instead of $90,000.
If you are currently smoking one pack of cigarettes per day, and you quit smoking and instead invest the money you were spending in an IRA, how much would you have in 40 years?
$50,000
$150,000
$250,000
$500,000 View Answer
Correct Answer: $250,000
Smoking is not only unhealthy, it is very costly. The money smokers are currently spending on cigarettes could be extremely valuable in retirement. In fact, if a 25-year-old smoker saved the money they were spending on cigarettes, they would have over one-quarter of a million dollars more for retirement.
In 1990, American saved 7% of their personal income. How much did Americans save in 2005?
0%
7%
15%
33% View Answer
Correct Answer: 0%
The savings rate has trended down for the past thirty years. In 2005, Americans, on average, took more from savings than they deposited. That is, the savings rate was actually a little below zero. Because of this low savings rate, American investment is dependent on foreign savings.
On December 1, someone gives you a nickel and keeps doubling that gift every day for a month (so you get 10 cents on Dec. 2, and 20 cents on Dec. 3, etc.). How much will you have in total on New Year’s Eve?
$100
$10,000
$100,000
$100,000,000 View Answer
Correct Answer: $100,000,000
While a nickel may not seem like much money, the cumulative effect of doubling the number makes it grow exponentially (literally). This growth is often called the “miracle” of compound interest. You will see a similar (though less dramatic) effect on the money you contribute to a 401 (K) plan. For example, if you contribute just $2 per day (the price of a cup of coffee) into a retirement account earning 6% interest, you will have nearly $120,000 after 40 years.
View Answer