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The Journey: Test your retirement knowledge

McClatchy-Tribune Information Services

October , 2016


What do you really know about your retirement money? Chances are, not much.

A new global financial literacy survey by the Organization for Economic Co-operation and Development shows just 56 percent of adults can answer five of seven basic questions about financial knowledge. Many couldn’t calculate simple interest, and few reported positive financial behaviors like setting a budget.

The OECD study measured responses from people in 30 countries, echoing similar financial preparedness surveys in the United States.

Typically, lack of financial knowledge translates to retirement insecurity, particularly for retirees without access to traditional pensions.

But even among employers in the nonprofit sector, were mandatory contribution plans for employees and generous employer matches are common, there is concern.

In a survey of 1,500 of its retirement plan participants, plan provider TIAA said 53 percent said they are worried about becoming a burden to others.

"Our retirees are retiring earlier, on their own terms, and fewer than a quarter are worried about running out of money," said Cathy McCabe, a senior managing director for TIAA. "But health care expenses can overwhelm even the best-laid retirement plans."

Getting a realistic picture of health and long-term care costs earlier would go a long way toward helping retirees navigate their later years, McCabe said.

Another common knowledge gap, she said, happens when workers think they don’t have enough assets to justify the time or expense of getting a financial plan going.

"They think they need $50,000 or more before they can seek financial advice, so they never really set a financial direction," she said, though many people have access to free financial help through their workplaces.

What other basic retirement topics are keeping people in the dark?

"Many people think Social Security is going to provide them with adequate income, so why bother saving?" McCabe said. Actually, the average Social Security monthly benefit today is about $1,200.

Think you’re savvier than the average person about retirement? Try your hand at these basic questions:

1. If someone saves $1 million for retirement, how much will he or she be able to spend each year?

A. $40,000.

B. $40,000 in the first year, then $40,000 plus an inflation adjustment the next year, and so on.

C. $50,000 in the first year. Subsequent years are determined by market performance.

Answer: Many people are confused about the 4 percent withdrawal rate rule of thumb first put forward by financial adviser William Bengen. Bengen’s research showed that a withdrawal rate as described in choice B above would safely sustain a portfolio through retirement, but due to low interest rates and other factors, many financial advisers today are recommending retirees should make withdrawals dynamic, meaning they need to be cut back when markets underperform. So an investor may indeed be able to start with taking out 5 percent ($50,000 on a $1 million nest egg), but would need to forego inflation adjustments or even take a pay cut if markets decline substantially.

2. True or False: You’re better off delaying Social Security as long as possible.

Answer: It depends. Benefits are designed to be actuarially equal regardless of when you begin them, assuming you live exactly to your life expectancy. In reality, people who are already sick or who simply need the money right away will be better off taking their benefits sooner than later.

3. How much do I need to save to be able to retire?

Answer: This is the inverse of the first question, and one that pre-retirees tend to focus on most. Old rules of thumb — like amassing 10 times final pay — don’t take into consideration what you’ll actually spend in retirement. A better answer is to calculate how much you’ll need to live on, including an estimate of taxes, and multiply that by 25. So if you need $20,000 a year over and above Social Security, the savings target is roughly $560,000.

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