Ready to retire?

Retirement can be a lot of fun to think about–right up to the part where you start figuring out how you will afford it. Leave the care and growth of your nest egg to chance, though, and you almost certainly will come up short of what you need to fund the retirement of your dreams. Answer these questions to gauge your knowledge of financial-planning matters.

The answer follows each question, so scroll slowly if you wish to read a question before revealing the answer.

1. Which of the following is not a type of retirement account for the self employed?

   a) SEP-IRA
   b) Self-Employed 401(k)
   c) Coverdell Savings Account
   
   
   c.

 

2. True or false? As a rule of thumb, you will need 75%-80% of the income you make today to maintain your current lifestyle after
   retirement.
   
   
   True. This assumes that you don’t make significant lifestyle changes, like traveling extensively or starting an expensive hobby.

 

3. About what percentage of retirees’ incomes come from Social Security benefits?

   a) 63%
   b) 38%
   c) 49%
   d) 88%

b.

 

4. What is the average monthly Social Security benefit for retired workers?

   a) $899
   b) $1,237
   c) $1,654
   d) $2,193
   
   
   a.

 

5. Assuming a 4% average annual rate of inflation, $1,000 today would be able to purchase the equivalent of how much in 20 years?

   a) $728
   b) $127
   c) $331
   d) $462

   
   d. Inflation has averaged about 4% per year since 1956.

 

6. Which investor will have a bigger nest egg at age 65 (assuming 8% returns on investments)?

   a) Investor A starts investing when she’s 25 and invests $2,000 each year for 10 years, then stops investing
   b) Investor B starts investing when she’s 35 and invests $2,000 a year for 30 years
   
   
   a. Investor A, who invested $20,000 over 10 years, will have $314,870. Investor B, who invested $60,000 over 30 years will have $244,692.

 

7. True or false? Lower-risk investments typically produce lower returns over the long term.
   
   
   True.

 

8. Dollar-cost averaging refers to:

   a) Rebalancing your portfolio to reduce risk
   b) Adding up the total value of your invest- ments and dividing the total by one dollar
   c) Investing the same amount in an invest- ment at regular intervals
   d) Buying and selling on the futures markets
   
   
   c. Dollar-cost averaging tends to lower your average cost per share of an investment compared to the market average price per share over the long term.

9. True or false? After retirement, your money will last longer if you tap tax-advantaged accounts before taxable accounts.
   
   
   False. Generally, the money will last longer the longer you can let the tax-advantaged accounts grow.

 

10. True or false? Studies have shown that the single most important factor in producing good investment returns is asset allocation.
    
    
    True.

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