How to Pass the Retirement Income Literacy Test
December 17, 2014“Americans flunk retirement quiz.” That was a headline in the December 3, 2014 edition of USA Today. In a recent survey conducted by the American College of Financial Services, 80% of surveyed Americans age 60 to 75 with at least $100,000 in household assets received a failing grade when given a basic retirement-income literacy test.
The lack of retirement preparedness is not unique to early Boomers. Our own research found that less than one in five employees is on track to reach their income-replacement goals in retirement. With all of the challenges this and future generations face, i.e., longer life expectancy, fewer company-paid retirement benefits, and a depleting Social Security trust fund, we cannot afford to idly sit by and let ignorance cause our dream of better days to wither away.
Here are five questions from the survey that fewer than 1 in 3 respondents answered correctly, along with the percentage of respondents that did answer correctly (given in parenthesis).
The answers follow each question, so if you’d like to test your own knowledge, only scroll far enough to see the possible answers to each question.
Question: If you had a well-diversified portfolio of 50% stocks and 50% bonds that was worth $100,000 at retirement, based on historical returns in the United States the most you can afford to withdraw is ____ plus inflation each year to have 95% chance that your assets will last for 30 years. (31%)
A. $2,000
B. $4,000
C. $6,000
D. $8,000
Answer:
B. $4,000
As a rule of thumb, financial planners generally say that you can safely withdraw about 4% of the value of your nest egg each year, plus inflation, as income in retirement.
Question: Which of the following strategies is least likely to improve retirement security? (30%)
A. Saving an additional 3% of salary in the five years prior to retirement
B. Working for two years past the planned retirement date
C. Deferring Social Security benefits for two years longer than originally planned
Answer:
A. Saving an additional 3% of salary in the five years prior to retirement
While saving an extra 3% of salary in and of itself is not a bad idea, doing so five years prior to retirement simply does not provide enough time for the value to compound enough to make a substantial difference to your retirement income. To see the effect each would have on your retirement income, use this retirement plan estimator.
Question: If a large public company sponsoring a 401(k) plan files for bankruptcy, employees are: (27%)
A. At risk of losing their 401(k) benefits because trust assets will pay creditors first
B. At no risk of losing their 401(k) benefits because the plan is outside the claims of creditors
C. Only at risk of losing their 401(k) benefits if the plan document says the creditors have the right to trust assets
D. Only at risk of losing their 401(k) benefits if a judge decides that the creditors should be paid first
Answer:
B. At no risk of losing their 401(k) benefits because the plan is outside the claims of creditors
Thanks to the Employee Retirement Income Security Act (ERISA) of 1974, creditors may not claim assets held in 401(k) plans.
Question: An immediate income annuity that pays income of $1,000 a month is generally going to be more expensive: (26%)
A. The younger the owner is when the annuity begins
B. For a man rather than for a woman
C. If interest rates rise.
D. For a single person than for a couple
Answer:
A. The younger the owner is when the annuity begins
Because an immediate income annuity pays a guaranteed income for life, the longer the life expectancy, the more expensive the policy will be. The cost of the annuity would be expected to be less under options B, C, and D.
Question: Please choose the response below that best completes this statement:
According to the Social Security Administration, in 2033 they will only have funds to pay for approximately ___ of promised benefits. (23%)
A. 0%
B. 25%
C. 50%
D. 75%
Answer:
D. 75%
According to the latest OASDI Trustees Report, this is the percentage of benefits that is projected to be funded by tax revenue by the year 2033.
So how’d you do? Think you could pass the full test? Find out for yourself. Here are the 38 questions, along with the answers at the bottom. Don’t peek!