Americans Are Flunking This Retirement Quiz. Can You Pass It?

Source: Thinkstock

Source: Thinkstock

If an investment in knowledge pays the best interest, many Americans are headed to the poor house for retirement. Excuses are plentiful when trying to justify why we don’t save more for the future, but the foundation for the nation’s retirement predicament appears to be a lack of education.

A new survey from the American College of Financial Services finds that the majority of Americans are clueless about retirement planning. Eight out of 10 retirement-age Americans with at least $100,000 in assets failed a basic quiz on how to make their nest eggs last throughout retirement, and only about 7% of respondents scored a C or better. Yet more than half consider themselves well-prepared to meet their income needs in retirement, while almost all are at least moderately confident in their ability to achieve a secure retirement.

“No one liked getting Fs back in school, but retirement income literacy is a test Americans simply cannot afford to fail,” said David A. Littell, Retirement Income Program Director at The American College, in the report:

When you’re working, you can plan, save, and prepare for a retirement target date. But once you’re in retirement, there is no set target date for how long your savings must last – and little room for error. Workers are increasingly on their own when it comes to making financial decisions and a dwindling few have access guaranteed income from pension plans.

The survey finds a lack of financial knowledge in several areas, including effective actions to build financial security, different types of investment products, and preservation strategies. Among the most concerning issues, only a third of respondents realize that exchange-traded funds have lower fees than actively managed funds, and more than half have only given their retirement length a moderate amount of thought. Paying higher fees than needed can result in thousands of dollars wasted, while people tend to underestimate their own life expectancy — raising the odds of depleting retirement funds too quickly.

Why are so many Americans financially illiterate? Somewhere between pride and embarrassment, money became a taboo subject. In a Wells Fargo survey earlier this year, 44% of Americans said the most difficult subject to discuss was personal finance, beating out death (38%), politics (35%), and religion (32%). A lack of personal responsibility and an inadequate education system is also to blame. In fact, American adults are more likely to take a vacation each year than review their own finances.

Evaluating where you currently stand on financial literacy is a good place to start. The questions from the American College of Financial Services survey are listed on the next page, with the answers at the bottom. Even if you avoid flunking the quiz, you should remember that educating yourself on the changing world of finance is a lifelong endeavor.

1. A 65-year-old man has an average life expectancy of approximately an additional:

A.10 years
B. 15 years
C. 20 years
D. 25 years

2. Sarah is single, age 65, and takes a reverse mortgage with a lump sum payment. When does the loan have to be repaid?

A. When she attains age 75
B. When she takes on any other loan
C. When she permanently leaves the home
D. Whenever the mortgage company wants it back

3. A single person who is likely to live to age 90 is generally going to be better off claiming Social Security benefits at age ___.

A. 62
B. 66
C. 70
D. 75

4. Social Security workers’ monthly benefits are increased for each year that benefits are deferred from age 62 to age___.

A. 65
B. 66
C. 70
D. 75

5. Please choose the response below that best completes this statement:

According to the Social Security Administration, in 2033 they will only have funds to pay for approximately ___ of promised benefits.

A. 0%
B. 25%
C. 50%
D. 75%

6. Continuing care retirement communities (CCRC’s) are different than a 55-plus housing development in that CCRCs always offer:

A. A range of care from independent living to nursing care
B. The opportunity to participate in social events
C. The opportunity to have relatives move onto facility grounds
D. A range of housing options

7. Traditional Medicare will cover which of the following medical expenses?

A. Routine dental care
B. Wellness visits
C. Hearing aids
D. All of the above

8. True or false: Medicare supplement insurance policies are most commonly purchased to cover the deductibles and copays that are charged under Medicare Parts A and B.


9. True or false: The total out of pocket medical costs for married couples in retirement is relatively consistent from retiree to retiree.


10. What is the proportion of the population that is going to need assistance with activities of daily living (need long-term care) at some point?

A. 10%
B. 25%
C. 50%
D. 70%

11. Who pays for the majority of long-term care expenses?

A. Medicare
B. Private payment by individuals
C. Medicaid
D. Insurance purchased by individuals

12. Who provides the majority of long-term care?

A. Family members
B. Nursing homes
C. Assisted living facilities
D. Hospitals

13. Long-term care insurance is intended to cover:

A. Custodial care and any post surgical care
B. Custodial care and any life sustaining measures such as IVs
C. Custodial care and semi-skilled nursing care
D. Only custodial care

14. True or false: Medicare typically pays for the costs of a nursing home for one year.


15. In order to avoid a penalty tax, distributions from an IRA must begin for the year in which you attain age___.

A. 55
B. 59 1/2
C. 65
D. 70 ½

16. Which one of the following statements concerning the federal income tax treatment of distributions to a 65-year-old retiree is true?

A. All distributions from a Roth IRA that has been maintained for more than five years will be tax-free
B. All distributions from a traditional IRA created with tax deductible contributions will be taxed as long-term capital gains
C. Distributions from a traditional IRA prior to age 70 1/2 will be subject to an additional 10% penalty tax

17. True or false: An individual who is age 75 can still make a Roth IRA contribution if he or she has earnings from work and does not exceed the earnings limit.


18. Converting a portion of a traditional IRA into a Roth IRA is a good idea this year if:

A. You have more taxable income than usual and your marginal tax rate is higher than normal
B. You have a big tax deduction this year and your marginal tax rate is lower than normal
C. The value of the assets in your IRA have remained the same for 10 years

19. If a participant is given the choice of a lump sum or a life annuity from a company sponsored retirement plan, the life annuity is likely to be the better choice if the participant is most concerned about:

A. Leaving money to children
B. Having enough money to meet basic expenses
C. Having flexibility to meet changing income needs
D. Getting an increasing stream of income over retirement

20. If a large public company sponsoring a 401(k) plan files for bankruptcy, employees are:

A. At risk of losing their 401(k) benefits because trust assets will pay creditors first
B. At no risk of losing their 401(k) benefits because the plan is outside the claims of creditors
C. Only at risk of losing their 401(k) benefits if the plan document says the creditors have the right to trust assets
D. Only at risk of losing their 401(k) benefits if a judge decides that the creditors should be paid first

21. Which of the following types of long-term bonds typically has the highest yield?

A. AAA-rated corporate bonds
B. B-rated corporate bonds
C. Treasury bonds

22. Suppose that the interest rate on your savings account was 2% per year and inflation was 4% per year. After one year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

A. More than today
B. Exactly the same as today
C. Less than today

23. Most experts agree that the best way to protect against inflation is to have a:

A. Diversified portfolio of stocks
B. Diversified portfolio of bonds
C. Diversified portfolio of CDs (certificates of deposit)

24. True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.


25. If 100% of a mutual fund’s assets are invested in long-term bonds and the investment climate changes so that interest rates rise significantly, then the value of the mutual fund shares:

A. Increase significantly
B. Decrease significantly
C. Will not change at all
D. May rise or fall depending upon the type of bond

26. Historically, which one of the following generates the highest returns over a long time period?

A. Small company stock funds
B. Large company stock funds
C. Dividend paying stock funds
D. High yield bond funds

27. True or false: Exchange-traded funds generally have higher expenses than actively managed mutual funds.


28. A PE ratio means:

A. Profits to expense
B. Price to earnings
C. Par value to earnings
D. Price to expense

29. If you had a well diversified portfolio of 50% stocks and 50% bonds that was worth $100,000 at retirement, based on historical returns in the United States the most you can afford to withdraw is ____ plus inflation each year to have 95% chance that your assets will last for 30 years.

A. $2,000
B. $4,000
C. $6,000
D. $8,000

30. To maximize the withdrawal rate from a portfolio over a 30-year retirement period, it is best to hold ___ in equities throughout retirement.

A. 0-10%
B. 25-35%
C. 50-60%
D. 90-100%

31. True or false: Taking a portion (20-40%) of a retirement portfolio and buying a life annuity can protect against the uncertainty of life expectancy, ensuring that a basic level of spending is available throughout retirement.


32. Recent research has shown that a person planning to retire at age 65 should take the least amount of investment risk at:

A. Age 50
B. Age 65
C. Age 80

33. Which of the following strategies is least likely to improve retirement security?

A. Saving an additional 3% of salary in the five years prior to retirement
B. Working for two years past the planned retirement date
C. Deferring Social Security benefits for two years longer than originally planned

34. The lifetime income payout rate (the annual annuity payment as a percentage of the purchase price) for an immediate income annuity for a 65-year-old male today is roughly:

A. 3-4%
B. 6-7%
C. 10-12%
D. 14-15%

35. An immediate income annuity that pays income of $1,000 a month is generally going to be more expensive:

A. The younger the owner is when the annuity begins
B. For a man rather than for a woman
C. If interest rates rise.
D. For a single person than for a couple

36. A deferred variable annuity with guaranteed lifetime withdrawal benefits:

A. Ensures that the investment account will not lose value
B. Only offers investment alternatives with fixed returns
C. Pays guaranteed income that varies based on market performance
D. Can pay income even if the investment account goes to zero

37. Which one of the following is true about cash value life insurance?

A. The cash value portion will accumulate tax deferred
B. You typically cannot borrow from the cash value
C. The policy will expire axer a specified period of time
D. The policy will typically cost less than a term insurance policy

38. Which one of the following is false about the federal taxation of life insurance purchased by an individual?

A. The life insurance death benefit is income tax free
B. Earnings in the policy are tax-deferred
C. You can access premiums at any time without income tax consequences
D. Life insurance death benefits are not subject to estate taxes

Answers: 1C, 2C, 3C, 4C, 5D, 6A, 7B, 8T, 9F, 10D, 11C, 12A, 13C, 14F, 15D, 16A, 17T, 18B, 19B, 20B, 21B, 22C, 23A, 24F, 25B, 26A, 27F, 28B, 29B, 30C, 31T, 32B, 33A, 34B, 35A, 36D, 37A, 38D

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