How many of the following seven retirement questions can you get right? Answer key with explanations at the bottom. Don’t cheat by looking the answers up on the internet.
1. If you are already receiving your social security benefit and are not yet 66 years old, how much money can you make each year without being penalized?
- There is no limit to income.
2. What percentage of retirees spend five years or more in a nursing home? (source)
- Men- 10%, Women- 15%
- Men- 25%, Women- 35%
- Men- 5%, Women- 8%
- Men- 2%, Women- 7%
3. What has the stock market returned, on average, over the past 80 years? (source)
4. True or false? You need at least one million dollars in your retirement savings to retire comfortably.
5. If you receive $2000 a month in social security and your spouse receives $1500 in social security, how much would your spouse receive if you passed away?
6. True or false? It’s a good idea to use your 401k or IRA to pay off your mortgage once you retire.
7. Which is the smartest investment strategy for retirees?
- Gold bars stashed away in a safe
- A diversified portfolio of stocks and bonds
- A savings account paying .1% interest
- All of your money in a single stock, such as Apple or AT&T
Ready to see how you did?
1. (2) You can earn up to $18,960 and continue to receive your social security benefit without penalty. Once you turn 66 you can make as much money as you want. Want to make a million bucks a year AND collect social security at 67? Go for it!
2. (4) Surprised? You’re not alone. It can feel like a foregone conclusion that you will end up — at some point in your retired years — living in a nursing home. But the data doesn’t support this fear. Only 2% of retired men and 7% of women end up spending five years or more in a nursing home. Which means you shouldn’t hoard every penny of your retirement savings after you retire just in case you need to go into long-term care. Do you really want to live in your fears like that?
3. (11%) Here’s why this matters. Retirement planning is about the long game. It’s about having a plan and sticking to it. Don’t let normal, even seemingly dramatic, fluctuations in the market scare you away from your plan. Historically speaking, if you stay in the market instead of pulling out every time someone on TV tells you the market is tanking, you’ll have a better chance of retiring with way more money in the bank.
4. False. The average retiree spends just $3700 a month. And most retirees receive some income from benefits such as social security, 401ks, and pensions. If you plan ahead and work to keep your budget reasonable, there is no reason why you would need that much money.
5. (3) Social security is actually a lot more complex than people think. For example, if you are married and you pass away, your spouse will receive whichever is the larger of the two benefits. In the example above, your spouse would start to receive the larger social security benefit, $2,000, if you passed away. If your spouse passed away, you would continue to receive your $2,000. That’s true even if you are no longer married. If you were married for ten years or more and did not remarry, you may receive your ex-spouse’s benefit once he or she passes.
6. False. You pay federal income taxes on 401k or IRA distributions. If you use $200,000 of your $500,000 401k account to pay off your house, you will have to pay taxes on that money. A large distribution like this can put you in a much higher tax bracket, so you end up paying more taxes.
Instead, create a budget to determine how much you can safely withdraw each year — it should be around 4 or 5% — and pay down debts slowly, while using the remainder of your distribution to do things like take a cruise, spend more time with family and friends, or whatever you have on your retirement bucket list.
7. (2) Just because you’re no longer working doesn’t mean your money shouldn’t be! Putting your money in a low-yield savings account, or hiding it in mayonnaise jars in the backyard, limits the potential of your retirement portfolio and therefore the potential of your retirement.
You also don’t want to gamble it all on one “sure-thing” stock. The truth is there’s no such thing as a guarantee in the stock market. Even really big names can crash quickly. The safest and smartest strategy is to invest in a diversified portfolio of stocks and bonds, with at least half of the money in stocks.
Pass or Fail, here’s what you should do next.
Start planning for retirement now. A great first step is to sit down with your current household budget. How much do you spend each month? What is your total household income? Then, consider what might change in the years leading up to and after your retirement.
Most retirees actually spend considerably less than they did in their 50s, so it’s a good idea to check in on your budget as your retirement approaches. Finally, plan for what you want your retirement to look like. Do you want to travel? Start a non-profit? Volunteer? Retirement is about more than the golf course and early bird specials. Define your retirement on your terms, then make sure your investment strategy will get you there.