Do You Know Your Retirement IQ? Take This Test


By Walter Updegrave, RealDealRetirement @RealDealRetire

Do you know what you’re doing when it comes to retirement planning? Or are you winging it?  To see how much you really know about preparing for retirement—and pick up some tips that can help you improve your retirement prospects—check out this 10-question quiz.

You don’t have to be a retirement-planning savant to accumulate adequate savings and manage your nest egg after retiring. But a little knowledge doesn’t hurt. To get a sense of where you stand when it comes to preparing for retirement—and find areas where you can improve—answer the 10 questions below. Then compare your answers to the correct ones at the end of the story to see how you scored on my highly scientific grading system

Ready? Go! The clock is now officially running.

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1. The biggest obstacle to you achieving financial security in retirement is…

a. You don’t earn enough to buy everything you want and  save 10% to 15% a year.

b. The stock market’s inability to churn out uninterrupted double-digit annual returns.

c. Failing to create a retirement plan built around regular saving and a disciplined investing strategy.

2. You can retire quite comfortably on your Social Security benefits alone as long as…

a. Your idea of retiring in comfort is living on a couple thousand dollars a month or less.

b. You can get by without luxuries like food, a decent place to live and health care.

c. You don’t mind having your retirement security dependent on a program any future Congress can change at will.

d. All of the above.

3.  As you near retirement, the best way to estimate how much money you’ll need to cover living expenses is to…

a. Guesstimate it.

b. Assume that the “70% rule”—i.e., you’ll need 70% of your pre-retirement salary—is spot on.

c. Check out an interactive calculator like the Retirement Income Planner in RDR’s Retirement Toolbox.

 4. True or false: Getting even a small head start on saving can make a big difference in the eventual size of your retirement nest egg.

a. True

b. False

c. TrueFalse (Sounds like this might be some kind of trick question.)

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5. The best retirement investing strategy is to…

a. Build a diversified portfolio of stocks and bonds that reflects the returns you need and your tolerance for risk.

b. Stick to federally insured CDs and Treasury bills. After all, you don’t want to take any chances with your retirement money.

c. Stick your money under your mattress—Hey, banks sometimes fail and you never know about those politicians down in Washington.

 6. If you have the opportunity to contribute to a 401(k) or other tax-advantaged retirement savings plan, you should…

a. Think about it for a few years and then decide whether to join the plan.

b. Sign up immediately, but contribute just enough to get the maximum employer match, assuming there is one.

c. Sign up immediately, and contribute at least 10% to 15% of salary.

7.  You’ve just switched jobs. What should you do with the $50,000 you accumulated in your previous employer’s 401(k) plan?

a. Ask the plan administrator to send you a $50,000 check, and then use it to fund a well-deserved shopping spree.

b. Ask the plan administrator to send you a $50,000 check that you will then deposit in your new employer’s 401(k) plan or an IRA Rollover account within 60 days.

c. Explain to the plan administrator that you would like to do a direct rollover to an IRA Rollover account.

d. Explain to the plan administrator that you would like to do a direct rollover to your new employer’s 401(k) plan.

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8. Investing a big chunk of your 401(k) balance in your company’s stock is…

a. A good idea because you should invest in companies you know.

b. A lousy idea because concentrating too much of your money in any single stock is a risky.

c. A good way to suck up to management, although you know you’ll be out of there the second another company offers you more dough.

 9. “Monte Carlo” simulations in retirement planning refers to…

a. Trying to double the value of your nest egg by betting it on black or red on the roulette wheel at Monaco’s Monte Carlo casino.

b. A forecasting technique that generates hundreds of computerized scenarios of investment performance assuming a variety of economic conditions.

c. A forecasting technique that estimates the probability you’ll spend your retirement years at Monaco’s Café de Paris sipping espresso and eating mousse au chocolat.

 10. If you’re nearing retirement age but have accumulated little to nothing in retirement savings, you should…

a. See 9a above.

b. Start buttering up rich relatives.

c. Develop a “Catch-Up” plan that includes ramping up savings, delaying retirement and other strategies that can improve your retirement prospects even if you’re seriously behind.

 ANSWERS: The correct answers are below. Give yourself 10 points for every question you got right and then see how you fared in my scoring system below.

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1. c   A well-thought-out plan that includes regular saving and sensible investing is the surest route to a secure retirement. People who say they just don’t make enough to save are almost always rationalizing the lack of will to save. And while robust investment gains can help your savings effort, you still have to save to create real wealth.

2. d  The estimated average Social Security payment for all retired workers is roughly $15,500 this year. The max for someone retiring at full retirement age: about $31,700. True, Social Security payments are adjusted for the cost of living, but neither of those amounts would allow most people to live large.

3. c   A rule of thumb like 70% to 80% of pre-retirement income is okay for setting a savings target when retirement is many years away. But once you’re within a decade or so of retirement, you want to get  more accurate assessment of your likely expenses. The Retirement Income Planner tool in RDR’s Retirement Toolbox can help with that.

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4. a   True. No trick question here. A small head start can indeed make for a much larger nest egg in retirement. To see just how much, read “How An Early Start on Saving Can Get You An Extra $250,000 or More.”

5. a   The key is to build a portfolio that’s truly diversified and that gives you a shot at the returns you’ll need without taking too much risk. Or too little risk, which is the problem with huddling in CDs, Treasury bills and the like. They’re just not likely to generate high enough returns to allow you to build an adequate nest egg or assure it will sustain you through a long retirement.

6. c   Signing up as soon as possible and saving at least 10% but preferably 15% is the best way to get on track to a secure retirement. Yes, you do want to take full advantage of any employer matching funds. But in many plans contributing only enough to do that may leave you short of a savings target of 10% to 15%.

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7. c  or d is correct.  If your new employer’s 401(k) has good, low-cost investment options, you can move your old 401(k) stash there. If your new employer doesn’t have a plan or the investment choices aren’t so hot, move the money to an IRA rollover account. The key, though, is to do this via a “direct” or “trustee to trustee” rollover so the money goes directly to your new plan or rollover account. You can have the money sent to you and roll it over to a 401(k) or IRA within 60 days, but that route involves several drawbacks and hassles that you can avoid by going direct. [Note: If you really like the investment options in your old employer’s 401(k), you could decide to keep your money there, although that may not be an option if your account balance is less than $5,000.]

8. b   Concentrating more than, say, 10% of your portfolio in any single stock increases risk more than it does potential return. And having both your job security and retirement security riding on the fortunes of one company just magnifies the potential harm. If you doubt that, I have one word for you: Enron.

9. b   Monte Carlo simulations attempt to give you a more realistic sense of how your retirement strategy might fare by introducing volatility and variability into their projections. You’re still only getting a forecast, not a guarantee, but by changing assumptions (saving more, retiring later, whatever), you can get a better idea of how you might be able to improve your retirement prospects.

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10. c   Granted, “a” may be more fun, but it’s more likely to leave you worse off. You’d be surprised at how much lost ground you can recoup even in the home stretch to retirement by ramping up your savings rate, delaying retirement and focusing on getting the max out of Social Security. You’ll find tools that can help you gauge the effect of all three of these strategies in RDR’s Retirement Toolbox.

SCORING: Give yourself 10 points for each correct answer and see my assessment of your retirement-planning-prowess below.

0-30: No need for you to worry about retirement. Based on this score, you’ll have to work for the rest of your life—unless you start saving and begin doing some serious planning for retirement now.

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40-60: You know more about retirement planning than many Americans. But that’s not saying much. To improve your retirement outlook, start putting some money aside and create a retirement strategy.

70-80: Not bad. You’ve mastered the basics. As long as you stick to what you already seem to know works best, you should do fine.

90-100: Congratulations. Either you obviously know how to create a retirement plan and set it in motion, or I made this quiz too easy.

Walter Updegrave is the editor of RealDealRetirement.comIf you have a question on retirement or investing that you would like Walter to answer online, send it to him at

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