CMPS Retirement and Long-Term Planning 2 — Questions and Answers
Question 1: A 62-year-old client wants to use a reverse mortgage to supplement retirement income. Which statement about Home Equity Conversion Mortgages (HECMs) is accurate?
- The borrower must vacate the home within 12 months of origination
- The loan becomes due when the borrower sells, moves out, or dies (Correct answer)
- HECMs require monthly principal and interest payments
- The FHA guarantees repayment to the borrower, not the lender
Correct answer: The loan becomes due when the borrower sells, moves out, or dies
A HECM becomes due and payable when the last surviving borrower sells the home, permanently moves out, or passes away.
Question 2: Which retirement account allows contributions even after age 72 if the owner is still working, with no required minimum distributions during the owner's lifetime?
- Traditional IRA
- SEP-IRA
- Roth IRA (Correct answer)
- SIMPLE IRA
Correct answer: Roth IRA
Roth IRAs have no required minimum distributions during the original owner's lifetime and allow contributions as long as the owner has earned income.
Question 3: A mortgage planner's client plans to retire in 10 years. How does delaying Social Security benefits from age 62 to age 70 affect the monthly benefit?
- Benefits increase approximately 3% per year of delay
- Benefits increase approximately 8% per year from full retirement age to 70 (Correct answer)
- Benefits double from age 62 to age 70
- Benefits increase only if the client continues to work
Correct answer: Benefits increase approximately 8% per year from full retirement age to 70
Delayed retirement credits increase Social Security benefits by approximately 8% per year for each year delayed past full retirement age up to age 70.
Question 4: When a client uses a cash-out refinance to fund retirement savings, which tax consideration is most important to address?
- Mortgage interest deduction may be limited if proceeds are not used for home improvement (Correct answer)
- Cash-out proceeds are treated as ordinary income in the year received
- The refinanced loan balance must be reported as a capital gain
- Mortgage insurance premiums on the new loan are always deductible
Correct answer: Mortgage interest deduction may be limited if proceeds are not used for home improvement
Under current tax law, mortgage interest is only fully deductible on debt used to buy, build, or substantially improve the home; cash-out for other purposes may not qualify.
Question 5: A 68-year-old retiree has a $400,000 mortgage balance and $600,000 in a Traditional IRA. Which strategy best balances liquidity and tax efficiency?
- Withdraw all IRA funds immediately to pay off the mortgage
- Use annual IRA distributions strategically to pay down the mortgage while managing tax brackets (Correct answer)
- Convert the entire IRA to a Roth IRA in one year
- Stop making mortgage payments and let equity grow
Correct answer: Use annual IRA distributions strategically to pay down the mortgage while managing tax brackets
Systematic IRA withdrawals aligned with lower tax brackets minimize the tax burden while reducing mortgage debt over time.
Question 6: Which Medicare enrollment scenario would result in a late enrollment penalty?
- Enrolling in Part B at age 65 while still covered by an employer group plan with 25 employees
- Enrolling in Part B at age 67 after leaving employer coverage at age 65 (Correct answer)
- Enrolling in Part A at age 65 while receiving Social Security benefits
- Enrolling in Part D during the initial enrollment period
Correct answer: Enrolling in Part B at age 67 after leaving employer coverage at age 65
Failing to enroll in Medicare Part B within the special enrollment period after losing employer coverage triggers a 10% penalty for each 12-month period of delay.
Question 7: In the context of long-term retirement planning, what does the '4% rule' refer to?
- The recommended mortgage-to-retirement-savings ratio
- A safe initial annual withdrawal rate from a retirement portfolio designed to last 30 years (Correct answer)
- The maximum allowable IRA contribution as a percentage of income
- The average annual return assumption used in retirement projections
Correct answer: A safe initial annual withdrawal rate from a retirement portfolio designed to last 30 years
The 4% rule suggests that withdrawing 4% of the initial portfolio value annually (adjusted for inflation) provides a high probability of funds lasting 30 years.
CMPS Retirement and Long-Term Planning 2
A 62-year-old client wants to use a reverse mortgage to supplement retirement income.
Which statement about Home Equity Conversion Mortgages (HECMs) is accurate?