Test your retirement savings IQ

How much do you know about saving for a long, financially secure retirement? Fidelity Investments recently prepared a Retirement IQ test that includes three questions to help workers of all ages test their knowledge about retirement savings. 

1) Roughly how much money do investment professionals estimate you should save by the time you retire?

Fidelity’s answer is “at least 10 times the amount of one’s last full year’s income.” According to Fidelity’s survey, 74 percent of respondents underestimated the amount they’ll need to save for retirement.

Retirement analysts vary widely regarding the amount of savings needed to retire because the answer depends significantly on your personal circumstances. For instance, you might be able to retire on less than Fidelity’s target if you can reduce your spending in retirement or if you’re able to work longer.

One-quarter of the survey respondents expected to need to save only two to three times an amount equal to their last full year’s pay, which is most likely way too low for anyone, no matter their circumstances.

No matter what your answer was, it’s more important to focus on your retirement cash flow rather than the total amount of your retirement savings. You’d do best to first establish a retirement spending budget and then assess if the income you’ll generate from Social Security, a pension (if you have one) and your savings can cover that budget.

Then analyze if your retirement savings are on track to cover your expected living expenses. Several retirement calculators can help you with this task, including useful tools prepared by Fidelity. If you don’t have the time or patience for using a calculator, try using retirement savings guidelines prepared by the Boston College Center for Retirement Research.

2) Over the past 35 years, how many years do you think the stock market has had positive annual returns?

The correct answer is 30 years. Historically the U.S. stock market has gained about 7 percent annually, so it’s important for workers and retirees to invest some money in stocks for the potential to build up their savings. Only 8 percent of respondents answered correctly, with those aged 55-65 faring a little better at 14 percent.

It’s instructive to realize workers of all ages have a long retirement investing horizon that should enable them to ride out stock market declines. Even workers in their 50s and 60s might be invested for another 20 to 30 years, so it’s important to have a long-term perspective.

3) If you set aside $50 each month, how much could that end up becoming 25 years from now, including interest, if it grew at the historical stock market average?

The correct answer is about $40,000, which 16 percent of respondents selected as their answer. Nearly half underestimated the power of making small savings over time. 

One smart move you can make is to immediately increase your retirement savings amount by 1 percent of your salary -- most likely you won’t miss the money on a daily basis, but it’ll help your savings add up more quickly.

For more information, see Fidelity’s colorful guide titled “5 Retirement Facts You Probably Don’t Know (But Should!).”

If you have a thoughtful savings plan, you’ll feel better now, knowing that you’re building the foundation for a long, happy, secure retirement.

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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.