March 17, 2015 — In our book you can’t just be too prepared for retirement – it’s just too important to take a chance on not enjoying it. This is Part II of our Retirement Preparation Quiz, here is where you can find the Part I Quiz.
This version of the quiz is more about the financial side of retirement. It is inspired by a recent survey by the American College of Financial Services, an educational organization for financial professionals. That study found a dismally low level of preparation on several key questions about financial literacy. A majority thought they were doing a good job of saving to live comfortably in retirement, yet only 2 in 10 had a passing grade; no one got an A. The questions on their financial literacy quiz had questions relating to Social Security, taxation of retirement income, long term care, annuities, portfolio risk, life expectancy, and the impact of inflation on purchasing power. In the quiz below we have developed a few of our own questions that relate to each of these areas.
Take the quiz and keep track of your answers. Then go the bottom for the correct answers and see if you get a passing grade – you get to set the grade curve yourself! Let us know how you did in the Comments section. The important thing is to use this quiz as a learning tool, use it to get yourself ready!
1. At what age are you required to take Required Minimum Distributions from your IRA and/or 401(k)?
a. __ 65
b. __ 66
c. __ 70 and 1/2
2. Once established, which retirement plan is better from a tax standpoint?
a. __IRA or 401(k)
b. __Roth IRA
3. True or False: If you had a year where your income was much lower than normal for you, it would be a good time to convert to a Roth IRA.
a. __ True
b. __ False
c. __ No difference
4. If you defer taking your Social Security, what is the age when you get the maximum benefit?
a. __ 62
b. __ 65
c. __ 66
d. __ 70
e. __ 75
5. Assuming Congress continues to do nothing to solve the problem, what will happen if the Social Security fund runs out of reserves in 20 or so years?
a. __ No one will get any more benefits
b. __ The fund has enough to pay about 70% of promised benefits
c. __ No one new coming into the system will get any benefits
6. Which of these strategies is the least effective in helping you have enough money for a comfortable retirement:
a. __ Saving 3% more in each of the 5 years preceding retirement
b. __ Working 2 years longer
c. __ Deferring Social Security 2 years
7. Which of these investment options provides the best guarantee of future income?
a. __ An annuity
b. __ Individual growth stocks
c. __ A diversified mutual fund
8. On the day you retire, which of these hypothetical investment mixes would provide the best chance that you will not run of out money during your lifetime (we are not recommending any of these, just trying to make a general point)
a. __ 90% bonds/cash, 10% equities
b. __ 50% bonds/cash, 50% equities
c. __ 10% bonds/cash, 90% equities
9. Have you calculated how much money you need every year for a comfortable retirement, including a theoretical expense budget?
10. What is the average life expectancy of a male aged 65 years?
a. __ 80
b. __ 85
c. __ 90
11. What percentage of the population will need long term care at some point in their lives?
The study that inspired us
The online survey was conducted among 1000+ respondents ages 60-75 during June, 2014. The respondents had to have at least $100,000 in investable assets, not including their primary residence. The Study was done by the American College: New York Life Center for Retirement Income. It provides a number of interesting questions and facts that could improve anyone’s financial literacy.
For further reading:
Squared Away – Winging It in Retirement
Are You Ready for Retirement Quiz – Part I
The Worst Case Scenario About Social Security: Surprise
Our Social Security Quiz: A Learning Curve for All
How Much Should You Take from Your Retirement Funds Every Year
The Answers (no cheating!)
1. c. 70 and 1/2
2. b. Roth IRA
3. a. True. Converting a traditional IRA to a Roth IRA has tax consequences, so doing it in a low income year is often a good time to do it.
4. d. 70. The benefit stops increasing at that age, although it is indexed for inflation.
5. b. The fund has enough reserves to pay 70% of benefits, assuming nothing is done before then to remedy the situation.
6. a. Saving 3% more is less effective than working longer or delaying 2 years.
7. a. A good annuity has the best guarantee of future income. Individual stocks have the greatest degree of risk.
8. b. 50/50. You can also give yourself a correct answer if you chose 90 bonds/cash, because you have eliminated a lot of risk. Who knows what the magic balance is, but in general, experts believe you should reduce risk (equities) as you age, as a major downward move in the market could hurt you. However, if you eliminate all equities you run the risk that inflation will wipe out your ability to keep up with the cost of living. Ask your investment advisor what he or she thinks is the best balance for your situation.
9. a. This might be the most important question on the quiz. Without knowing how much you need to live on and what your income will be, it is just about impossible to be prepared. Give yourself a bonus if you have done this important step.
10. b. 85. But remember, this is the average. If you die before then the silver lining is you had less chance of running out of money. But if you live longer than that there is the possibility of bad news; does your budget have enough give to keep you living comfortably?
11. d. 70% of the population will need long term care at some point in their lives, according to the survey. Thanks to Ed for this link at Longtermcare.gov
Comments? How did you like these questions? Any you thought were unfair or off the mark. Any surprises? Please share your thoughts in the Comments section below.