Even financial professionals were stumped by several questions on the American College Retirement Income Quiz (to try the complete quiz, click here).
Here’s two sample questions selected by Wealth Management contributor John Kador that test how well you understand how to prepare for retirement and manage retirement income flows.
Question #1: Please choose the response below that best completes this statement: If you had a diversified portfolio of 50 percent stocks and 50 percent bonds that was worth $100,000 at retirement, the most you can afford to withdraw is ____ plus inflation each year to have an 85 percent chance that your assets will last for 30 years, based on historical returns in the U.S.
Answer #1: B – $4,000. This question reflects the well-publicized 4 percent safe withdrawal rule, based on research that looks back on investment returns in the 20th century. Most people are surprised to learn they should withdraw under 5% per year if they want their money to last.
Question #2: Which of the following strategies is least likely to improve retirement security?
A. Saving an additional 3 percent of salary in the five years prior to retirement.
B. Deferring Social Security benefits for two years longer than originally planned.
C. Working for two years past the planned retirement date.
D. Don’t know.
Answer #2: A – Saving 3 percent. Working longer and deferring Social Security are the two best ways to improve financial security. Saving a little bit more in the years just prior to retirement will not have a big impact on retirement savings, as the money does not have a lot of time to grow. This is why it’s so important to start saving early for your future, starting in your 20s if at all possible, even if you can’t save much.