Test your retirement readiness IQ

How much do you know about planning for a long, financially secure retirement? Fidelity Investments recently prepared a two-part quiz that can help you answer that question. The first part concerns retirement savings and asks three key questions about how to put enough money away for a secure future. 

The second part of the quiz includes five questions about how prepared older workers approaching their retirement years are. If you’re within 10 years of retirement, this quiz can help you can assess your knowledge and help you get started planning for a healthy, happy, secure retirement.

1) 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?

The average life expectancy for 65-year-olds is about age 85 for men and 87 for women, so you might conclude that you need to plan for a retirement of about 22 years. About one-third of respondents answered correctly regarding the expected life expectancy, but that would be the wrong answer when planning your retirement. 

The fact is, you could live a lot longer than 22 years, and if you’re married, chances are good that one of you might survive well into your 90s. Life expectancies also depend on your family history, lifestyle, educational attainment and level of income.

The smart move is to plan to make your money last well into your 90s. For help with that, the Society of Actuaries and the American Academy of Actuaries sponsor a helpful longevity illustrator that will help you assess how long your money might need to last.

2) Approximately how much did the average monthly Social Security benefit pay in 2016?

Last year, that amount was about $1,300 per month, an answer selected by 43 percent of survey respondents. This amount is for an individual worker and doesn’t include potential benefits to a spouse. It’s also just an average -- your benefit will depend on your earnings history and at what age you start taking your benefits. 

For most people, the optimal strategy is to delay the start of benefits as long as possible but no later than age 70. If you’re approaching retirement, it’s highly recommended that you estimate your Social Security benefit and devise a strategy for optimizing your income.

3) About what percentage of your savings do many financial experts suggest you withdraw annually in retirement?

Fidelity suggests you withdraw no more than 4 percent to 5 percent of your initial retirement assets, adjusted each year for inflation. About four out of 10 respondents got this answer right. But disturbingly, more than one-third said they could withdraw 7 percent or more each year, which will actually put them at risk of outliving their savings.

One effective retirement income strategy is to cover your basic living expenses with guaranteed sources, such as Social Security, a pension (if you have one) and low-cost income annuities. Then invest the rest of your savings and make periodic withdrawals to cover your discretionary living expenses. With these remaining savings, the best retirement income strategies adjust your withdrawal amount each year to reflect how well your savings have performed since you retired.

4) What do you think is the single biggest expense for most people in retirement?

For most Americans, housing, health care and transportation are typically the three largest expenses in retirement, but housing tops that list -- by far. For many retirees, the cost of housing can make up nearly half of their expenses. While 17 percent of respondents answered this question correctly, a much larger group -- 69 percent -- thought health care would be the largest expense.

For many Americans, their home equity is their biggest asset. You’d be wise to explore all of your options for housing in retirement to help manage your overall spending budget.

5) About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of their retirement?

Fidelity estimates that in 2016 such a couple will spend $260,000 over the course of their retirement. Only about 15 percent of survey respondents gave this answer, with 72 percent underestimating it.

You’d do best by making sure your savings and retirement income can cover your health care expenses throughout your life. Keep in mind that you can pay for your out-of-pocket health care costs from your monthly cash flow, such as Social Security and other sources of retirement income. So it’s not necessary to set aside $260,000 and dedicate that amount only to paying for medical expenses. Nevertheless, that’s not a reason to ignore planning for your health care costs in retirement.

Also, remember that $260,000 is for medical costs and doesn’t reflect the potential expense of long-term care -- another important retirement planning topic.

If you’re intimidated by all these questions, you’re not alone. Many people feel they don’t know enough to make the right decisions. But plenty of help is available, including a free online guide at CBS MoneyWatch and a study guide prepared by Fidelity. 

If you do a good job of assessing your retirement resources and potential expenses, you might conclude you need to work longer, which is reasonable for many people. However, you’ll need to take steps to make sure you can continue working as long as you need.

Nobody promised it would be easy to enjoy the gift of a 20- to 30-year retirement. Consider it your job to learn how to live that long and plan for your financial security.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.