Take the Test to See if You Can Earn Your ‘Retirement Diploma’
If you read our blog or listen to our podcast, you know we’re committed to sharing valuable educational content to help you make better investment decisions and better plan for your financial future. Today that takes the form of a Retirement Readiness Quiz, originally published by the Wall Street Journal in 2013. It’s a great way to start thinking about whether you’re planning for and working toward retirement appropriately since the quiz is chock-full of great information.
Will You Earn Your Retirement Diploma?
Don’t stop reading because there’s a test coming! Think of this retirement readiness quiz like a driving test, but one you have to pass in order to retire instead. It gauges how much you know about savings targets, medical bills, estate planning, and other fundamental issues.
You need a passing grade to get your “retirement diploma” and we consider that 75%. Although some of the information might sound intimidating, remember it can help you set goals appropriately. That’s why we share this educational content with you – too many Americans are unaware of what they need to do to truly prepare for the financial realities of retirement.
Now, let’s jump into the quiz.
Question 1: Research by Fidelity Investments recommends that workers should aim to save what multiple of their ending annual salary at age 67 in order to meet basic income needs in retirement?
A. 4 times salary
B. 6 times salary
C. 8 times salary
D. 10 times salary
Answer: C. The math is based, in part, on a worker beginning to save at age 25 and living to 92. So, a household with an annual income of $100,000 would need a minimum of $800,000 to meet basic income needs in retirement.
The catch: That’s a conservative estimate, according to the National Institute on Retirement Security. By contrast, Aon Hewitt, a human-resources consulting firm, estimates that 11 times your salary is needed at age 65.
2. A popular rule of thumb states that retirees will need 70% to 80% of their pre-retirement income in later life. Some of the best research into “replacement ratios”—by Aon Hewitt and Georgia State University—has found that a good benchmark is:
Answer: C. This is one case where the rule of thumb isn’t far off the mark. In its own study of replacement ratios, the Social Security Administration has noted that households typically need less income in later life because income taxes are lower, people no longer need to save for retirement, and work-related expenses are reduced or eliminated. That said the best way to identify one’s replacement ratio is to draw up a detailed budget for later life. It’s also important to notate in the early years of retirement you may need monthly income replacement closer to 95%. The reason for this, is the one thing all retirees have more of post-retirement is time. This additional time provides opportunities to travel, enjoy hobbies, and complete long overdue home projects. We see a lot of retirees front-loading their monthly retirement income strategy for these reasons. The need for consistent financial planning is critical in order to maintain a sustainable nest egg in retirement.
3. What percentage of surveyed workers age 55-plus said they or their spouse has tried to calculate how much they will need to save to live comfortably in retirement?
Answer: C. Only about half of the workers approaching retirement have done a savings-needs calculation, according to the Employee Benefit Research Institute. One encouraging development: That figure, from January of this year, is up from 42% in 2003.
4. Among workers aged 55-plus, what percentage think they need to save $250,000 or more for retirement—and what percentage have already saved that amount or more?
(Think they need $250,000 or more | Have accumulated $250,000 or more)
A. 24% | 24%
B. 34% | 34%
C. 44% | 44%
D. 54% | 54%
Answers: D and A. About half of the 55-plus demographic thinks a nest egg of at least $250,000—not including the value of their homes or any pensions—is needed for later life, according to the Employee Benefit Research Institute. But fewer than 1 in 4 have reached that goal. More sobering still: 36% of this age group report having saved less than $10,000.
5. What is the average age at which current retirees say they actually retired—and what is the expected retirement age among current workers?
(Average retirement age among current retirees | Expected retirement age among current workers)
A. 59 | 65
B. 60 | 66
C. 61 | 67
D. 62 | 68
Answers: C and B. A Gallup poll published in May found the average retiree stopped working at age 61, up from 57 in 1993. The average worker currently expects to retire at 66, up from 60 in 1995.
Giving your nest egg a boost isn’t the only benefit of delaying retirement. Gallup also found that individuals aged 60 to 69 who work have slightly better emotional health than those who don’t work.
6. What percentage of surveyed workers say they plan to continue working for pay in later life—and what percentage of current retirees say they have worked for pay?
(Plan to work in retirement | Have worked for pay in retirement)
A. 49% | 25%
B. 59% | 30%
C. 69% | 35%
D. 79% | 40%
Answers: C and A. It’s among the biggest disconnects in retirement planning: the large number of current workers who anticipate earning a paycheck in later life—and the relatively small percentage of retirees who actually have done so.
These figures, from the Employee Benefit Research Institute, highlight the risks of wishful thinking: An expectation of continuing to work, or finding work, in retirement often runs up against the reality of poor health, layoffs, age discrimination, or a dearth of job openings.
7. What percentage of U.S. households are at risk of not having enough savings to maintain their living standards in retirement?
Answer: C. That figure climbed nine percentage points between 2007 and 2010, according to the National Retirement Risk Index, published by the Center for Retirement Research at Boston College.
Among the reasons for the increase are: the bursting of the housing bubble, falling interest rates, and the gradual increase in Social Security’s full retirement age. The approved, if painful, solution for reducing that risk: save more, reduce expenses—and hang on to your current job for as long as possible.
8. If you retire at age 65, what percentage of your life can you expect to live in retirement?
Answer: D. The average life expectancy for a 65-year-old is 19.1 years, which means the average American will spend close to one-quarter of his or her life in retirement.
9. A 65-year-old couple retires in 2013. How much money will they need to cover medical expenses throughout their retirement?
Answer: D. That figure, from Fidelity Investments, is actually down 8% from projections in 2012—but remains significantly larger than most consumers estimate. A Fidelity poll of pre-retirees (ages 55-64) found that nearly half (48%) believe they will need only $50,000 to pay for healthcare costs in retirement.
Also problematic: The estimate of $220,000 doesn’t include the possible cost of over-the-counter medications, most dental services, and long-term care. Speaking of which…
10. The national median monthly charges for assisted living (one bedroom, single occupancy) and a private room in a nursing home are:
(Assisted living | Nursing home)
A. $1,450 | $5,000
B. $2,450 | $6,000
C. $3,450 | $7,000
D. $4,450 | $8,000
Answers C and C. For many, expenses gradually fall in retirement—because people, as they enter their mid-80s, typically spend less on travel and leisure. But there’s a wild card: the potential cost of long-term care. The annual cost of a private room in a nursing home is now $84,000 a year, according to Genworth Financial Inc., up from $67,500 in just the past five years.
11. What percentage of men and women aged 55-64 is considered to be obese?
(Men | Women)
A. 31% | 31%
B. 37% | 37%
C. 43% | 43%
D. 49% | 49%
Answers: B and C. About 4 out of 10 adults are entering retirement with a body-mass index of 30 or higher, the definition of obesity. Excess weight is a contributing cause of heart disease, stroke, diabetes, and some types of cancer.
12. What percentage of participants in defined-contribution savings plans, including 401(k)s, contribute the maximum amount allowed each year?
Answer: A. Only about 1 in 20 savings-plan participants contribute the maximum amount allowed annually (currently $20,500), according to a survey by the Government Accountability Office.
A Vanguard study published in June found that only 11% of participants in Vanguard-administered plans saved the maximum in 2012—and only 15% of those eligible took advantage of “catch-up” contributions (where people 50 or older can save an additional $6,500).
13. A household age 65 is living on $120,000 a year. At 3% inflation, how much money would that household need at 75 and at 85?
(75 | 85)
A. $141,000 | $197,000
B. $151,000 | $207,000
C. $161,000 | $217,000
D. $171,000 | $227,000
Answers: C and C. Put another way, an annual grocery bill of $5,000 today would total just over $9,000 in 20 years.
14. What percentage of households aged 65-74 carry housing debt and credit-card debt?
(Housing debt | Credit-card debt)
A. 21% | 12%
B. 31% | 22%
C. 41% | 32%
D. 51% | 42%
Answers: C and C. The housing figure—from 2010—is up from 25% in 1992, says the Employee Benefit Research Institute. The credit-card figure is unchanged over that period.
It used to be a given: Before retiring, pay off any and all debt. But more families are entering later life with debt—and more of it. The median value of mortgage debt for a household aged 65 to 74 in 2010 was $70,000, according to AARP. That’s up from $15,400 in 1989.
15. What percentage of workers has obtained investment advice from a professional investment advisor (who was paid through fees or commissions)?
Answer: B. Of those, 41% said they followed most of the advice, 27% said they followed all of it, and 27% said they followed some, according to the Employee Benefit Research Institute. Should you get help? As William Bernstein, the prominent financial author is fond of noting: Fractions are a stretch for 90% of the population.
16. Which of the following statements about Social Security benefits is not true?
- A lower-earning spouse can claim a benefit based on his or her own earnings record at age 62—and then switch to 50% of the higher-earning spouse’s benefit when the latter claims Social Security.
- A person at full retirement age who is eligible for a spousal benefit and his or her own retirement benefit may choose the spousal benefit—and switch to his or her own benefit at a later date.
- A person who lives to their average life expectancy will receive about the same amount in lifetime benefits whether he or she first claims Social Security at age 62, age 70, or any age in between.
Answer: Statement 1. Spousal benefits are among the most important—and most complicated—parts of the Social Security program. Most people assume a lower-earning spouse will always get 50% of the higher-earning spouse’s benefit. In this example, though, the lower-earning spouse—because he or she began collecting retirement benefits at age 62—has a reduced “base” benefit; as such, the spousal benefit will likely total less than 50%.
The bottom line: Before filing for Social Security, take advantage of the growing number of tools and services that highlight—and will run the numbers for—various “claiming strategies.”
17. Among the top 20% of household earners, Social Security benefits are projected to replace what fraction of earnings?
Answer: C. Higher earners tend to assume Social Security will play a small role in their retirement finances—but the payouts are larger and more important than most households realize.
18. True or false: The Social Security program is going broke.
Answer: False. At the moment, benefits and expenses exceed taxes collected and other non-interest income. (In short: More money is going out than coming in.) As a result, starting in 2033, the government will be able to pay only about 75% of program costs. Troubled? Clearly. Bankrupt? No.
19. What percentage of couples are completely confident that either partner is prepared to assume responsibility for their joint retirement finances, if necessary?
Answer: A. Fewer than one in three couples believe either spouse could take the reins if needed, according to a recent survey by Fidelity Investments. Prudential Financial Inc. found recently that 73% of husbands report being the main financial decision-maker, but 35% of wives say they share equally in the task.
20. Ninety-four percent of surveyed adults said they think it’s important to talk about their own and their loved one’s wishes for end-of-life care. What percentage have actually done so?
Answer: B. Such conversations are never easy but are increasingly important, given extended life spans, the number of options for long-term care, and the cost of such care.
The figures come from the Conversation Project (theconversationproject.org), a campaign that seeks to spark such discussions and offers tools to help families begin talking. Anxious? Don’t be. Nearly half of surveyed adults said that if a loved one asked about their wishes for end-of-life care, they would be relieved to discuss it.
Final Thoughts on Retirement Readiness
If you scored less than 75% on this quiz, it’s time to get serious when it comes to educating yourself and truly preparing for retirement. Want help building the best investment strategy for your needs? Give us a call today. At Davidson Capital Management, we provide in-house, fee-only investment management to individuals, families, businesses, and endowments in the state of Texas and beyond. Above all, our team of professionals is dedicated to educating clients and offering transparent, goals-based, hands-on portfolio management.