Can You Do Better than Average on this Quiz of Your Retirement Financial Literacy?

Retirement financial literacy is low. Most of us do not know very much about the fundamentals of how personal finance works. Just look at the average retirement income and you will realize that most people are unprepared and unaware of what is needed for a secure retirement.
retirement financial literacy
However, a survey suggests that financial literacy is lower than even most people might expect. Fidelity asked more than 2000 people — half who were between the ages of 55 and 65 and not retired — questions in eight different retirement categories.

The average that people got right was a mere 30 percent — a solid “F.” Absolutely NOBODY got ALL the questions correct and the highest overall grade was 79%.

Can you do better? (Originally given in 2017, we have updated the answers to reflect the reality in 2020.)

How Will You Do on the Sample Retirement Financial Literacy Quiz?

Here are nine sample questions from the Fidelity quiz. How many can you get right? (Answers below… Don’t cheat!)

TIP 1: Here is a tip for finding the right answers — don’t think of your own situation, think about what would be true for an average do everything right worker.

TIP 2: Each answer requires a wide range of assumptions that may or may not be true for your particular situation. (For example, in the first question, the answer largely depends on how much you’ll spend in retirement, how long until you retire, how much you already have saved and much more. Use the NewRetirement Planner to get real answers for your own situation.)

QUESTION 1: Percent of Annual Income to Save: In order to maintain living standards in retirement, what percent of annual income do financial professionals think people should save? About:

  • 3%
  • 6%
  • 9%
  • 12%
  • 15%

QUESTION 2 — Savings Compared to Pre Retirement Income: Roughly how much do many financial experts recommend people save by the time they retire? About:

  • 2-3 times the amount of your last full year income
  • 4-5 times the amount of your last full year income
  • 6-7 times the amount of your last full year income
  • 8-9 times the amount of your last full year income
  • 10-12 times the amount of your last full year income

QUESTION 3 — Average Stock Market Returns: Stock markets go up and down. How often over the past 35 years do you think the market has had a positive annual return? The annual return was positive:

  • Fewer than 12 out of 35 years
  • About 12 out of 35 years
  • About 18 out of 35 years
  • About 26 out of 35 years
  • More than 26 out of 35 years

QUESTION 4 — Savings Growth: If you were able to set aside $50 each month for retirement, how much would that end up becoming 25 years from now, including interest if it grew at the historical stock market average?

  • About $15,000
  • About $30,000
  • About $40,000
  • About $60,000
  • More than $60,000

QUESTION 5 — How Long Should Savings Last: Given the current average life expectancy, if you were a male retiring today at age 65, about how long would you need your retirement savings to last?

  • 10 years (or until you are 75)
  • 14 years (or until you are 79)
  • 19 years (or until you are 84)
  • 27 years (or until you are 92)
  • 35 years (or until you are 100)

QUESTION 6 — Average Social Security Benefit: Approximately how much is the average monthly Social Security benefit paid in 2020 to a retired worker? About:

  • $1,000
  • $1,200
  • $1,500
  • $1,800
  • $2,100

QUESTION 7 — Percent to Withdraw in Retirement: About what percentage of your savings do many financial experts recommend you withdraw annually in retirement?

  • 1-3%
  • 4-6%
  • 7-9%
  • 10-12%
  • 13-15%

QUESTION 8: Biggest Retirement Expense: Which of the following do you think is the single biggest expense for most people in retirement?

  • Housing
  • Health care
  • Taxes
  • Food
  • Discretionary expenses

QUESTION 9: Out of Pocket Healthcare Expense: About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?

  • $50,000
  • $100,000
  • $160,000
  • $285,000
  • $350,000

How’d You Do? Here Are the Retirement Financial Literacy Answers

Here are the answers to the quiz. Don’t worry too much if you don’t get them all correct. As we mentioned before, the “right” answers may not always be the correct thing for you. The best way to assess your own situation is to use a highly detailed retirement planning calculator or consult with a retirement advisor.

With that in mind, here are the quiz answers and how to assess what might be the right answer for YOU.

1. Percent of Annual Income to Save:

As a rule of thumb, financial planners usually recommend saving about 15% of your annual income.

Right Answer for You:
The right answer for you depends largely on how old you are and how your retirement expenses might differ from expenses while you work, how long you work and much more.

It might be perfectly okay if you are young and saving less, so long as you make up the difference later. Conversely, if you are older and are trying to catch up on retirement savings, then you probably need to be saving more.

Learn more about Catch Up Savings!

2. Savings Compared to Pre Retirement Income:

The experts say that you should have saved 10-12 times the amount of your last full year of work income. So, if you were earning $100,000 the year before you retired, you should have $1 – $1.2 million in savings.

Right Answer for You:
If you have not saved quite that much, don’t worry. You can make up the difference by working a little longer, delaying the start of Social Security, tapping home equity and more.

Use the NewRetirement Retirement Planner to identify strategies that can help you have a secure retirement even if you have not saved quite enough.

3. Average Stock Market Returns:

The stock market (the S&P 500 to be exact) has yielded a positive annual return in 27 out of the past 35 year years — so the answer, was more than 26 out of 35 years.

The biggest loss was in 2008 when the market closed down 38.49% at the end of the year. The biggest gain was in 1995 when it was up 34.11% over the previous year.

Right Answer for You: 
This answer makes it seem like the stock market is an almost sure bet and perhaps a great spot for your retirement savings. The reality can be a little more complicated. Stocks are a great place to put your money when you have a long time to weather the ups and downs of any bull or bear market. However, in retirement, you sometimes need your money in assets that are guaranteed to be there when you need them — though you also want to enjoy positive returns on your investments.

Learn more about asset allocation here.

4. Savings Growth:

If 25 years ago you started saving $50 each month, you would now have $40,000. This assumes a 7% annual rate of return.

Right Answer for You:

The answer to this question is just math.

However, for your own retirement, you’ll want to make sure that you:

  • Invest your money. (Too many people keep assets as cash.)
  • Get a reasonable rate of return with a risk profile that is appropriate for your situation.
  • Be prepared to adjust your investments as you age and your goals change.

You may want to consider creating an Investment Policy Statement to help customize your retirement asset allocation strategies.

5. How Long Should Savings Last:

According to the Social Security Administration, the average life expectancy for someone who has reached 65 in 2019 is 84 for men and 86.5 for women, meaning if you are a male and single, then you need your savings to last about 19 years

Right Answer for You: 
Average life expectancy should not really matter very much to your own plan. The key is in estimating how long YOU and your spouse will live — which is likely much longer than the average.

And, if you are married, you really want to think about both your own AND your spouse’s longevity. You need your savings to last as long as each of you live.

You might want to use a life expectancy calculator to help estimate how long you will live. And, use a retirement planning tool like the NewRetirement Planner that enables you to enter your own number for how long you want your money to last.

6. Average Social Security Benefit:

The average Social Security benefit in 2020 is about $1500.

Right Answer for You:
You don’t need to know the average benefit, you need to know YOUR benefit.

Better yet, you need to know the difference between your benefit if you start Social Security at age 62 vs starting at your full retirement age (usually around 67).

Your monthly check is much larger for every month you delay starting benefits. You can even figure out your break even Social Security age — the optimum time to take Social Security given your estimated life span.

7. Percent to Withdraw in Retirement:

Fidelity and other experts suggest that you withdraw 4% each year from your savings.

Right Answer for You: 
The 4% rule has been widely questioned. It can be a great rule of thumb, but there are a lot of other factors at play.

Learn more about why the 4% rule is less than perfect .

Better yet, use the NewRetirement Planner to experiment with different withdrawal rates and you can now even discover your maximum withdrawal rate.

8. Biggest Retirement Expense:

Housing is the biggest retirement expense. (Followed by healthcare and transportation.)

Right Answer for You: 
The good news here is that while housing is the biggest retirement expense, it is also most people’s most valuable asset — often worth more that the combined total of a person’s savings.

This is great news for retirees. Downsizing can release that equity to bolster your nest egg AND reduce your expenses. Reverse mortgages are another way to tap your home equity if you want to stay in your existing home.

Incorporating housing — as an asset and as a reducible expense — into your retirement plan can be extremely powerful.

The NewRetirement retirement planner let’s you immediately see the impact of these kinds of changes. How much longer will your money last if you tap your home equity?

9. Out of Pocket Healthcare Expense:

According to Fidelity, who has been tracking this cost since 2002, an average 65-year old couple retiring today will spend $285,000 to pay for out-of-pocket health care expenses in retirement.

Right Answer for You:

This number is probably accurate, but it does not include the potential costs of long term care — which could add more than another $100,000 to your expenses.

When planning your retirement, it is very important to include your out of pocket healthcare costs. The NewRetirement Retirement Planner helps you by clearly including this expense in your analysis.

More Retirement Answers Available Here

Planning does not need to be scary or complicated. The NewRetirement Retirement Planner makes it easy. Take two minutes to enter some initial information, then see where you stand today. Next, start adding more details and changing some of your information.

Discover meaningful ways you can improve your retirement finances.

This tool was named a best retirement calculator by the American Association of Individual Investors (AAII).

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