CLU Retirement and Wealth Management 5

Question 1

A business owner wants to maximize retirement contributions for herself while minimizing contributions for part-time employees who work 500 hours per year. Which plan type best achieves this goal?

Accepted Answer

Defined Benefit Pension Plan

Answer

A defined benefit plan can be structured to heavily favor long-tenured key employees, and part-time employees working under 1,000 hours per year can generally be excluded from participation.

Question 2

The 'Monte Carlo simulation' method in retirement planning is primarily used to:

Accepted Answer

Assess the probability of portfolio success across thousands of randomized return scenarios

Answer

Monte Carlo simulations run thousands of random market scenarios to estimate the probability that a given retirement portfolio and withdrawal strategy will sustain income throughout retirement.

Question 3

Which technique allows a high-income earner who exceeds Roth IRA income limits to still fund a Roth IRA each year?

Accepted Answer

Backdoor Roth IRA using a nondeductible traditional IRA contribution followed by conversion

Answer

The backdoor Roth strategy involves making a nondeductible traditional IRA contribution (no income limit) and then immediately converting it to a Roth IRA.

Question 4

Under the 'income floor' approach to retirement income planning, what assets are typically used to fund the income floor?

Accepted Answer

Social Security, pensions, and annuities that provide guaranteed lifetime income

Answer

The income floor is built from guaranteed, predictable income sources — Social Security, defined benefit pensions, and income annuities — to cover essential living expenses.

Question 5

A qualified plan must pass the ADP test to ensure it does not discriminate in favor of Highly Compensated Employees (HCEs). What is the IRS definition of an HCE for 2024?

Accepted Answer

An employee earning more than $150,000 in the prior year or owning more than 5% of the business

Answer

For 2024, an HCE is defined as someone who earned more than $150,000 in the prior year or who owns (or is family of someone who owns) more than 5% of the employer.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Retirement and Wealth Management 5