How much do you really know about saving for retirement? Below are five questions that test your knowledge. The answers follow — they may surprise you.
1) What percent of your final annual income do financial planners generally suggest you will need to maintain your standard of living during your retirement years?
a. 20 percent – 40 percent
b. 40 percent – 60 percent
c. 60 percent - 80 percent
d. 80 percent - 100 percent
2) What percent of a typical retiree’s income comes from Social Security and pension payments, according to the Social Security Administration?
a. less than 20 percent
b. 20 percent - 40 percent
c. 40 percent - 60 percent
d. more than 60 percent
3) According to a study by Merrill Lynch & Co., how much more should the average baby boomer family save than it currently does to maintain its standard of living during retirement?
a. twice as much
b. three times as much
c. four times as much
d. current savings levels are adequate
4) After 30 years, how much more would a person who contributes $100 each pay period to his deferred compensation plan earn compared to a person who makes, before taxes, an equivalent contribution in a traditional savings account, assuming both individuals earn a fixed interest rate of seven percent and are in a federal income tax bracket of 28 percent?
a. about 10 percent
b. about 25 percent
c. about 50 percent
d. about double
5) Who would have more in their deferred compensation account, assuming an annual fixed interest rate of eight percent: a woman who starts contributing $100 each month to her account at age 25, then, after 10 years, stops contributing (but her account continues to earn interest) and retires at age 60; or a man who begins making a $100 monthly contribution at age 35 and continues to do so for the next 25 years until he retires at age 60?
a. the woman
b. the man
c. both would have about the same account balance
1) While a number of factors affect the amount of retirement income that an individual will need (e.g., income level, number of dependents, etc.), experts in the financial planning field generally agree that a retiree will need between 60 percent –80 percent of their final annual income each year to maintain their lifestyle during their retirement years. The answer is (c).
2) On average, only 40 percent –60 percent of a retiree's income comes from their pension and Social Security checks. Retirees generally rely on other sources of income, including their personal savings. The answer is (c).
3) The study found that the average baby boomer family needs to save three times as much as it does today to ensure that it will not have to sacrifice its standard of living during retirement. The study further found that the same families will have to save five times as much if Social Security benefits decline even moderately. The answer is (b).
4) Given the assumptions described in the example, Mr. A, who used a deferred compensation plan to save for his retirement, would have $234,882 in his account at the end of the 30 year period. In contrast, Mr. Z, who relied on a traditional, after-tax savings account, would have $118,600 over the same period. Thus, Mr. A would have almost double the savings as that of Mr. Z. Why? Because of taxes. While Mr. Z paid taxes over the 30 years on both his contributions and investment earnings, Mr. A did not (payment of taxes are postponed for him until he begins withdrawing his money at retirement). Consequently, Mr. A would have postponed more than $46,000 in income taxes and would have earned more than $70,000 more in investment income. This example demonstrates the effect of taxes on one’s savings, and how a deferred compensation program can help reduce their impact. The answer is (d).
5) At age 60, the woman, who we’ll call Jill, would have accumulated $134,300 in her deferred compensation account, whereas the man, who we’ll call Jack, would have an account balance of $95,100. This seems counterintuitive, since Jack contributed $18,000 more and invested for an additional 15 years. But because Jill started investing earlier, her savings had a longer time to grow. This example shows the dramatic effects that time and compounding have on one’s savings. The answer is (a).