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February 2, 2022
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.
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.” And, absolutely NOBODY got ALL the questions correct – on a multiple choice quiz. And, the highest overall grade was a mere 79%.
Can you do better? (Originally given in 2017, we have updated the answers to reflect the reality in 2022.)
Here are 9 sample questions from the Fidelity quiz. How many can you get right? (Answers below… Don’t scroll to 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.)
In order to maintain living standards in retirement, what percentage of annual income do financial professionals think people should save? About:
Roughly how much do many financial experts recommend people save by the time they retire? About:
Stock markets go up and down. How often over the past 40 years do you think the market has had a positive annual return? The annual return was positive:
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?
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?
Approximately how much is the average monthly Social Security benefit paid in 2022 to a retired worker? About:
About what percentage of your savings do many financial experts recommend you withdraw annually in retirement?
Which of the following do you think is the single biggest expense for most people in retirement?
About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?
Here are the answers to the retirement financial literacy 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 right 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 correct strategy for you, your goals, priorities, resources and values.
As a rule of thumb, financial planners usually recommend saving about 15% of your annual income. Although, more are now recommending 20%.
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, your goals for retirement, how long you will live, and much more. (Use the NewRetirement Planner to find out how much you actually need to save.)
It might be perfectly okay if you are young and saving a smaller percentage of your salary, so long as you make up the difference later. (Although, it is much easier to build wealth when you save and invest early. One thousand dollars saved when you are 25 can compound over a longer period of time and be worth much more at 60 than $1,000 saved at 50.
However, if you are older and are trying to catch up on retirement savings, then you probably need to be saving a much higher percentage of your salary. Learn more about Catch Up Savings for people over 55.
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.
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.
The stock market (the S&P 500 to be exact) has yielded a positive annual return in 33 out of the past 40 years – so the answer, was more than 30 out of 40 years – 82.5% of the time.
That is not to say that there have not been ups and downs. 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.
What is important to note is that the markets have always trended up. The index has returned a historic annualized average return of around 10.5% since its 1957 inception through 2021.
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.
If 25 years ago you started saving $50 each month, you would now have $40,000. This assumes a 7% annual rate of return.
The answer to this question is just math.
However, for your own retirement, you’ll want to make sure that you:
You may want to consider creating an Investment Policy Statement to help customize your retirement asset allocation strategies.
According to the Social Security Administration, the average life expectancy for someone who has reached 65 in 2021 is around 84 for men. So, if you are a male and single, then you need your savings to last about 18.5, almost 19 more years.
There is a pretty good chance you are not the average above. To start, women live longer than men. If you are an average 65 year old woman, then you can expect to live till 86.5, another 21 years – 3 years longer than the average male.
And, 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.
The average Social Security benefit in January of 2022 is about $1,657. This reflects the sizable COLA increase given in 2021. (The average benefit in 2021 was $1,555.)
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. Use the Social Security Explorer in the NewRetirement Planner to figure out when to start benefits to get the highest lifetime payout for you and your spouse, if applicable.
Many financial experts suggest that you can safely withdraw 4% each year from your savings. This practice is referred to as the 4% rule. People like it because it is easy to follow and provides predictable retirement income.
However, it has become somewhat controversial.
The 4% rule is now widely questioned and may not be as relevant today as it was a few years ago. It was developed for a certain set of financial conditions that may or may not be true today generally or for you specifically.
It can be a useful rule of thumb, but relevance depends on a lot of factors, including: adherence to the rule, investment returns, inflation, your spending, how early you retire, your longevity and more.
And, there are a lot of different possible retirement income strategies you could use for retirement. Explore these 18 ideas for lifetime wealth and peace of mind.
Withdrawal Calculations: Wondering what is right for you? Use the NewRetirement Planner to experiment with different withdrawal rates and you can now even discover your maximum withdrawal rate. (The Withdrawal Strategy Explorer is in the Money Flows section of My Plan.)
Housing is the biggest retirement expense. (Followed by healthcare and transportation.)
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 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?
According to Fidelity, who has been tracking this cost since 2002, an average 65-year old couple retiring today will spend $300,000 to pay for out-of-pocket health care expenses in retirement.
This number is probably a good benchmark. However, you can get a more accurate estimate by using the NewRetirement Planner which uses your health status, age, location, the type of Medicare you will have and more to give you a more personalized estimate.
You can also use the Planner to explore ways to cover the potential costs of long term care – which could add more than another $100,000 to your expenses, over and above the $300,000 for healthcare.
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.
How is your retirement financial literacy? Forget how many of the multiple choice answers you got correct, what is important is whether or not you have a written financial plan and are using tools to make decisions that are right for you and your future.
Planning does not need to be scary or complicated. The NewRetirement Retirement Planner makes it easy to get answers yourself. 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 best retirement calculator by the American Association of Individual Investors (AAII) and was called, “a new approach,” by Forbes Magazine.
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