5 Retirement Questions Every American Should Answer

Source: Thinkstock

Source: Thinkstock

For so many Americans, retirement planning is a complete mystery. For some people, they’d have an easier time deciding who shot first (Han Solo or Greedo?) than making decisions about their retirement savings. When CBS News asked consumers a while back how much they’d need to save for retirement, the median answer among Americans was $300,000.

Sure, everyone is different. We all need different amounts of money to live, survive, and thrive. But, regardless, $300,000 is way off the mark. Unless you’re planning to work until you’re 80 years old, which 30% of people in a Wells Fargo survey said they intended to do, you will run out of money before the end of your lifespan.

Helga Cuthbert is a certified financial planner and the principal of Cuthbert Financial Guidance in Decatur, Georgia. We spoke to her about retirement planning to gain some additional insight on the subject. She says this 30% group is taking a big risk, as this plan assumes there will be a job available and that they will physically be able to work at the age of 70, 75, or 80.

Just because dynamos like Alex Trebek and Morgan Freeman can pull it off, this doesn’t mean the rest of us can. So, this means we should have a plan. So, why isn’t everyone saving for retirement?

With all the monthly bills, combined with the unplanned expenses people have, extra money is often in short supply, and retirement may be something people plan to simply worry about later. Young people, in particular, place retirement on the back burner — probably because it seems so far down the road. “The earlier [people] start, they place themselves in a better position … and don’t have to save as much later… They don’t have to play catch up in their 30s and 40s,” says Cuthbert.

How would you rate your retirement knowledge? Find out by answering these questions.

1. At what age should you start saving for retirement?

What do you think? Does 25 sound about right? Maybe 30?

Well, the real answer to that question is: as early as possible. Cuthbert suggests you start saving “as soon as you have earned income [from a career].” Say, for instance, you begin placing $5,000 per year into a traditional IRA at age 25. By age 65, your IRA will be worth nearly $1.1 million before taxes — a pretty large chunk of change (over 500% of your contributed amount).

On the other hand, if you wait until age 40 to contribute the same amount, you end up with an IRA worth around $340,000 (before taxes) — around 275% of your total contributed amount.

“Young people seem to understand financial independence, but for many, retirement is an alien concept. … Starting early allows time for interest to compound,” says Cuthbert.

Source: Thinkstock

Source: Thinkstock

2. How much should you contribute to an employer-matched 401k?

You should contribute at least as much as your employer will match. The matched portion is basically free money. “Some employees don’t understand the concept of match significance. … When an employer matches your contributions, it’s like getting a 100 percent return on your match,” says Cuthbert. “Employers [these days, however,] are doing a fairly good job of explaining this to employees,” she adds.

3. What risks do you face with a 401k?

As a portfolio, your 401k carries market risk and market volatility can impact your investments. Remember the recession? Millions of retirement plans were negatively impacted by the down economy. You also face company risk – values of stocks and bond fluctuate as a company performs well, launches a new product or service, or goes through changes in public image. Factors, such as inflation, currency, and interest rates may also impact your 401k.

4. If you are in a low tax bracket, are you better off with a traditional or a Roth IRA?

Those in a lower tax bracket are often good candidates for a Roth IRA. With a Roth IRA, you’re having contributions come out of money you already paid taxes on so you do not have to pay taxes on the accumulated earnings in the future. You are therefore assuming you will be in a higher tax bracket at retirement than you are today.

Source: Thinkstock

Source: Thinkstock

5. What is a myRA?

A myRA was new for 2014, and it’s set-up in a similar manner to a Roth IRA in that your contributions are made with after-tax earnings. The primary benefit of a myRA is that it is risk-free. Your contributions go into treasury securities that are government backed. You also can set up a myRA with a small amount of funds and your principal investment on this type of IRA is considered to be safe. On the other hand, you are unlikely to earn any substantial return on your investment.

So, how much of this information did you know?

  • 4-5 questions correct: If you knew four or five of the answers to the questions, you have a pretty high retirement IQ. You pay attention enough to know your stuff, and you’ve certainly got the basics down pat. You’re in good shape to start or continue (hopefully continue) planning for retirement. Even though you may be a retirement whiz, you may still benefit from speaking to a financial adviser about retirement.
  • 2-3 questions correct: If you knew the correct answers to two or three of the questions, you’re retirement IQ is about average. You’ve picked up knowledge here and there, but you may still be a little fuzzy in some areas. It would be prudent to meet with a financial professional to discuss your financial future.
  • Less than 2 questions correct: If you answered less than two of these questions correctly, you’re retirement IQ is poor. Perhaps retirement talk is boring to you, or maybe you just see it as “so far down the road” that you’ll worry about it later. In any case, it’s a good idea to brush up on the basics and discuss your goals with a financial professional.

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