Most people don’t know nearly as much about retirement as they imagine, which suggests retirement issues should be a signature aspect of any financial education program—especially in the workplace, were pension planning typically begins. But retirement concepts are important for youngsters too. After all, the biggest asset of the young is the decades of compound growth still ahead of them—if they get started saving early.
A recent Fidelity Investments Retirement IQ Survey sheds light on how little most of us understand. Take a stab at this multiple choice quiz and see how you (or your students) stack up.
These are tough questions. I live with this stuff everyday and got only two of eight correct. But I was close on most of them, and the exercise showed me that we all have much to learn. Think of this quiz as an awareness drill. In most cases, being close is good enough. Yet it is the details that educate us.
Question#1: What multiple of your salary do investment professionals advise you to save before you retire?
Three quarters in the survey got this wrong. Usually they underestimated. For example, 25% thought the correct answer was 2-3 times the amount of your last year’s full income, and that included 19% of people in their pre-retirement years, ages 55-65.
The answer? At least 10 times the amount of your last full year’s income. That was one I got right!
Question #2: How often over the past 35 years did the stock market post a positive annual return?
Just 8% in the survey got it right, including just 14% of the pre-retirement group, despite the fact that this is mission-critical information for retirement planning.
The answer? The stock market has had positive annual returns in 30 out of the past 35 years, with an average gain of 7% per year.
Question #3: If you invested $50 each month in stocks, how much would you have in 25 years assuming the market returns its historical average?
Just 16% got this one right—and about half underestimated the total. One in four underestimated by a wide margin, saying the total would be only $15,000. This highlights the degree to which people misunderstand the power of compound growth.
The answer? $40,000.
Question #4: Given current average life expectancy, if you want to retire at age 65, about how long would you need your retirement savings to last?
The answer by 38% of respondents was 12-17 years, which falls way short of the mark. And worse, it means you might have a tendency to underestimate how many years in retirement you need to prepare for, increasing the possibility of outliving your money.
The answer? 22 years, based an average life expectancy of 87 at age 65. Only one-third of survey respondents got this one right.
Question#5: About how much did the average monthly Social Security benefit pay in 2016?
I thought this one would stump most people. But I was wrong. About half got it right, the singe highest score in the quiz.
The answer: $1,300.
Question #6: What percentage of your savings do many financial experts suggest you withdraw annually in retirement?
Although 42% got this question right, a nearly equal percentage got it wrong. In fact, 38% of respondents over 55 said 7%, which is way over the mark. Another 15% thought it was as high as 10% to 12%.
The answer? 4% – 5%. At that withdrawal rate, your retirement savings will likely last the rest of your life.
Question #7: What is the single biggest expense for most people in retirement?
Only 17% got this right, including just 13% of those ages 55 to 65. A whopping 69% answered healthcare, a testament to our national obsession with that issue.
The answer? Housing. For many retirees, rent or a mortgage payment consumes up to 50% of their household budget.
Question #8: About how much will a couple retiring at age 65 spend on out-of-pocket costs for healthcare over the course of retirement?
This was the question that got the most wrong answers. Only 15% got it right—and 72% underestimated it. Nearly one in four underestimated by $200,000.
The answer? $260,000.
Again, these are tough questions. But they may help you understand, or deliver, an important message.