AFC Investment and Retirement Planning 2

Question 1

A client contributing 3% to their 401(k) has a 50% employer match on up to 6%. What should the counselor recommend?

Accepted Answer

Increase contributions to at least 6% to capture the full employer match

Answer

The employer match represents an immediate 50% return on investment. Contributing 6% captures the full match.

Question 2

What is the key difference between a Traditional IRA and a Roth IRA regarding tax treatment?

Accepted Answer

Traditional IRA contributions may be tax-deductible with taxable withdrawals, while Roth contributions are after-tax with tax-free withdrawals

Answer

Traditional IRA contributions may be deductible now with taxes on withdrawals; Roth contributions are after-tax with tax-free qualified withdrawals.

Question 3

A 28-year-old asks whether to invest aggressively or conservatively for retirement. What principle should guide the recommendation?

Accepted Answer

Time horizon is critical - longer horizons generally support higher equity allocations

Answer

With approximately 37 years until retirement, the client's long time horizon allows them to weather volatility and benefit from higher equity returns.

Question 4

What is dollar-cost averaging and why do counselors recommend it?

Accepted Answer

Investing a fixed dollar amount at regular intervals regardless of market conditions

Answer

Dollar-cost averaging involves investing a fixed amount at regular intervals, automatically buying more shares when prices are low and fewer when high.

Question 5

A client nearing retirement has 90% of their portfolio in employer stock. What risk should the counselor highlight?

Accepted Answer

Concentration risk: both income and savings depend on one company

Answer

Both employment income and retirement savings depend on one company's performance, creating dangerous concentration risk.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Investment and Retirement Planning 2