Test Your Retirement IQ

How much do you know about retirement planning? Test your awareness of some basic issues with this quiz.

Senior couple eating breakfast together

by NEA Member Benefits

Decisions you make today about your retirement—including how much to save, where to invest, when to claim Social Security and how much to budget for expenses—can make a big difference tomorrow.

So how much do you really know? Test your awareness of some basic issues by identifying whether the following statements are true or false.

True or False? Most people claim Social Security benefits before reaching full retirement age. 

True: Most people claim early. In fact, about 46% of workers take the benefit as soon as they are eligible, at age 62, according to an analysis by the Consumer Financial Protection Bureau. What’s more, the CFPB reports that 75% of retirees take benefits before full retirement age—currently 66, for workers born between 1943 and 1954.

If you take benefits as early as possible, you’ll receive about 25% to 30% less each month in benefits than you’d get at full retirement age. If you wait, you’ll receive 8% more in benefits for each year you delay beyond your full retirement age, until age 70.

True or False? To support your lifestyle in retirement, you’ll need the same annual income you had before you retired.

False: You’ll probably spend less in retirement. Once you stop working, you won’t be paying payroll taxes or socking away income for retirement savings. Other expenses, everything from commuting to dry cleaning costs, may go down or disappear. You may even save money on food, because you’ll have more time to compare prices in the grocery aisles and to prepare meals at home.

Retirement planners generally recommend saving enough to cover 70% to 85% of your preretirement income. But you’ll want to estimate your own retirement income and expenses to come up with a formula that’s right for you.

True or False? Your total nest egg should be twice as big as your final, annual salary.

False: Most people will need much more. Assuming you intend to retire at age 67, aim to accumulate savings equal to 8 to 10 times your final annual salary. Together with Social Security benefits, that should be enough to replace about 85% of your preretirement income.

If you have other sources of income—such as a traditional pension or a part-time job—or if you plan to significantly reduce your spending in retirement, you can get by with saving less.

True or False? The longer you delay taking Social Security, the more likely you’ll be cheated of your fair share.

False: Quite the opposite. Whether you take benefits early or wait until 70, you’ll end up with the same dollar amount before you die, assuming you die at your projected life expectancy (as determined by Social Security actuaries).

As mentioned above, if you claim benefits at 62, the earliest you are eligible, you’ll receive a 25% to 30% reduction to account for the actuarial reality that you’ll be receiving benefits for a longer stretch of time. If your full retirement age is 66, but you wait until 70, your benefit will be 32% higher because, actuarially, you’ll be collecting over a shorter period.

Of course, if you die before you reach your projected life expectancy, you’ll collect a lower total payout, but if you delay claiming until 70 and live well beyond your life expectancy, the wait will be more than worthwhile.

True or False? Once you file for Social Security, you can change your mind.

True: You have a short window to stop your benefits. Within 12 months of claiming your benefit, you can withdraw your application by filing Form SSA-521. You’ll need to repay all of the money you received, including any spousal benefits. You can then restart benefits in later years, for a bigger amount.

True or False? If you get a public pension, your Social Security benefit could be slashed by hundreds of dollars a month.

True: If you receive a public pension, two important federal laws could reduce your benefit. The Windfall Elimination Provision (WEP) could cut up to one-half of any benefit based on your own earnings record, and the Government Pension Offset (GPO) could slash up to two-thirds of a spousal or survivor benefit.

It’s a good idea to determine now whether you’ll be subject to the WEP and GPO and how they could affect you. The Social Security Administration provides an online WEP calculator and GPO calculator to get you started.

True or False? If you’re covered by a public pension, you can’t invest in an Individual Retirement Account.

False: You can invest in an IRA even if you’re covered by a public pension. An IRA allows you to contribute pretax dollars—up to $5,500, or $6,500 for people age 50 and older, in 2016—and keep the money tax-free until retirement age. Just be aware that the tax deductibility of those contributions is restricted if your adjusted gross income exceeds certain limits.

True or False? In retirement, you should keep some stocks in your portfolio.

True: Don’t give up on stocks entirely. Given today’s longer life spans (a 65-year-old can expect to live about another 20 years on average), you’ll need to invest for growth well into retirement.

A conservative approach: You could start with a mix of, say, 50% stocks and 50% bonds and gradually adjust the proportion to favor bonds as you age.

True or False? You and your spouse should plan on spending more than $200,000 out of pocket to cover health costs in retirement.

True: Medicare doesn’t cover everything—far from it. Recent estimates for total retirement health costs range from $245,000 to $264,000 for a couple who are each 65 and live to their average life expectancies. That’s 84 for a man and 86 for a woman, according to SSA data.

The good news for retirement savers: Those costs are baked in to formulas for how much you need to save for retirement (for example, eight times your final salary). Just be sure to keep the costs in mind as you plan how to spend your nest egg.

True or False? If you’re short on savings, you can always work longer.

False: You may not be able to stay on the job even if you want to. Health problems are the biggest reason people find themselves retiring ahead of schedule, according to the Center for Retirement Research at Boston College, followed by involuntary job loss. That’s because older workers generally have more trouble finding work after a layoff than younger workers.

Changes in family circumstances also play a role in retiring sooner rather than later. If your spouse retires before you or a parent moves into your home, the chances increase that you’ll leave the workforce before your scheduled departure.