The American College of Financial Services periodically conducts a retirement literacy quiz for prospective retirees. The 2020 quiz consists of 38 questions covering all-important retirement issues. Unfortunately, 8 out of 10 individuals taking the 2020 quiz failed to get a passing grade.
More than half of respondents underestimated the life expectancy of a 65-year-old man. Only 31% have a plan in place to fund long-term-care. Only 8% considered it likely they would need long-term care. However, the reality is that 70% will need some form of this care. Only 33% of respondents report having a written retirement plan, and of those who do have a plan, only 47% feel prepared for a market downturn; 35% of those without a written plan feel prepared to deal with a market downturn.
You can take the test at: theamericancollege.edu/retirement-income-literacy-survey. Here are some of the questions contained in the survey, along with answers.
1. If you had a well-diversified portfolio of 50% stocks and 50% bonds worth $100,000 at retirement, based on historical returns in the U.S., what is the most you can afford to withdraw each year (not inflation adjusted) to have a 95% chance your assets will last 30 years?
a. $2,000
b. $4,000
c. $6,000
d. $8,000
2. 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 increase
d. For a single person
3. A deferred variable annuity with guaranteed lifetime withdrawal benefits:
a. Ensures that the investment will not lose value
b. Only offers investment alternative 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.
4. True or False: A retiree who is working part-time can generally continue to contribute to an IRA or a Roth IRA
5. Sarah is single, aged 65, and takes a reverse mortgage with a lump-sum payment. When does the loan have to be repaid?
a. At age 75
b. Whenever she takes another loan
c. When she permanently leaves the home
d. Whenever the mortgage company wants it back
6. Nationally, who pays the majority of long-term-care expenses provided in nursing homes?
a. Medicare
b. Private payment
c. Medicaid
d. Insurance purchased by individuals
7. Converting a portion of a traditional IRA into a Roth IRA is a good idea, 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 has remained the same for 10 years.
8. Which of the following types of long-term bonds typically has the highest yield?
a. U.S. Treasury bonds
b. AAA rated corporate bonds
c. BBB rated corporate bonds
9. To maximize the safe withdrawal rate from a portfolio over a 30-year retirement period, it is best to hold what percentage of assets in equities throughout retirement.
a. 0-10%
b. 25-35%
c. 50-60%
d. 90-100%
Answers: 1 b; 2 a; 3 d; 4 True; 5 c, 6 c; 7 b; 8 c; 9 c
The quiz encompasses a comprehensive set of questions and answers including investing, withdrawal options, annuities, Social Security and long-term care. I recommend that you take the quiz to determine which areas you should consider learning more about important retirement topics.
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