What’s Your Retirement IQ?
A new survey seeks to gauge how much American workers know about several key retirement questions, and while it’s not really a gauge of financial literacy, it could provide an interesting opening to discuss the subject with a participant, group of participants — or even a plan sponsor.
See how you do with this eight-question Fidelity survey:
1. Roughly how much do investment professionals estimate people save by the time they retire?
Fidelity acknowledges that there remains some debate among professionals around how much the average person needs to save, but claims that nearly three-quarters (74%) of respondents underestimated how much is needed, while a quarter of respondents expected to only need to save two to three times the amount of their last full year’s income. (Fidelity says the “correct” answer is at least 10 times the amount of one’s last full year’s income.) A full one-in-five (19%) of respondents aged 55-65 answered just two to three times — suggesting they might think they are closer to the “finished” line than they actually are.
2. How often over the past 35 years do you think the market has had a positive annual return?
Most survey respondents (about 8% overall) were unaware that the market (more precisely the S&P 500) has enjoyed a positive annual return in 30 out of the past 35 year years. Historically the U.S. stock market has gained about 7% per year, though arguably that includes a wide variety of annual results.
3. If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest if it grew at the historical stock market average?
While individuals are often inclined to underestimate the magic of compounding, only about 16% correctly answered about $40,000, while nearly half (47%) underestimated how big an impact relatively small savings can have over time. About a quarter (27%) calculated the answer to be about $15,000 (this hypothetical estimate assumes the individual or household sets aside $50 a month for 25 years, with a rate of return of 7% annual interest, compounded monthly).
4. Given the current average life expectancy, if you want to retire at age 65, about how long would you need your retirement savings to last?
While a lot of factors enter into this, Fidelity notes that the average life expectancy is about 87 (85 for males, 87 for females, according to the Social Security Administration’s life expectancy calculator), meaning the answer is approximately 22 years — a number that one-third of respondents got right. Thirty-eight percent of Americans estimated they would only need to make their savings last for about 12-17 years.
5. Approximately how much was the average monthly Social Security benefit in 2016?
More than 4 in 10 (43%) of respondents got this right — about $1,300 — as did half of pre-retirees.
6. About what percentage of your savings do many financial experts suggest you withdraw annually in retirement?
As with other aspects of the survey, there remains some disagreement at present on this subject, though as a general rule of thumb, Fidelity suggests limiting portfolio withdrawals to no more than 4% to 5% of retirement assets, adjusted each year for inflation, over the course of the individual’s retirement horizon. While 4 out of 10 (42%) pre-retirees answered correctly, nearly as many (38%) of those over the age of 55 said they could withdraw 7% or more of their savings annually — and 15% of this group felt they could withdraw 10% to 12% annually.
7. What do you think is the single biggest expense for most people in retirement?
Did you guess health care? If so, you’d have meshed with the 69% of survey respondents who thought so. In fact, for most Americans, housing, health care and transportation are typically the largest expenses in retirement, but housing by far tops that list. In fact, for many retirees, housing can make up nearly half of their expenses, according to the Bureau of Labor Statistics. Fidelity notes that (just) 17% of respondents answered this correctly (and only 13% of those aged 55-65).
Of note, health care was also the No. 1 item respondents were most worried about being able to afford — including 63% of pre-retirees.
8. About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?
Fidelity has estimated that the average 65-year-old couple retiring in 2016 will spend $260,000 to pay for out-of-pocket health care expenses over the course of retirement, but only 15% of the survey respondents were on the mark. Nearly three-quarters (72%) underestimated those costs — including 19% of pre-retirees, by about $200,000.