Answering Some Common, But Important, Retirement Questions

Common Financial Retirement QuestionsWe’ve discussed the financial literacy gender gap in this blog before, but a new survey by Fidelity Investments shows just how bad financial literacy has become among all Americans, no matter their gender.

In a recent report, MarketWatch outlined some questions and results from the survey, and we’ll examine a few of them in this blog and provide our input.

Q: Roughly how much do investment professionals estimate people should save by the time they retire?

Nearly three in four of us (74%) guessed wrong here, and an amazing 25% chose “two to three times my last full-year income.”

The correct answer is at least 10 times your last full year of income. If you make $75,000 a year at your expected retirement age, that means you will need $750,000 in your retirement accounts.

How much you need to have saved at retirement is often nebulous for many investors. And while MarketWatch provides a good goal to reach here (10x your last full-year income), that amount could very well be higher depending upon the lifestyle you want to live during retirement.

That’s why it’s important to work with a wealth advisor who can help you set goals, create an investment strategy, and manage your capital over your lifetime.

Q: If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest if it grew at the historical stock market average?

The time value of money due to compounding interest is widely misunderstood by Americans. Just 16% were able to correctly estimate the result of modest but steady saving over years.

The correct answer is $40,000. Saving $50 a month and getting the average stock market return is not a matter of adding up the months and years and multiplying by $50. Yet that’s exactly what an astounding 27% of respondents did, getting $15,000 as their answer.

The $15,000 guess is correct only if the stock market returns zero over the next quarter-century, an extremely unlikely outcome.

The time value of money is a wonderful asset to your retirement savings, and the earlier you begin saving, the better.

For example, if you invested $5,000 annually from age 25 to 35 and then stopped, with a hypothetical eight percent annual return rate, you would almost double what you end up with than if you had invested the same amount of money beginning at age 35 and then stopped a decade later.

We look at this in greater detail in one of our blogs.

Q: Given the current average life expectancy, if you want to retire at age 65, about how long would you need your retirement savings to last?

Only one in three of us got this one right, and nearly four in 10 (38%) underestimated by up to 10 years. Those later years could be painful indeed if your money is not invested for growth.

The correct answer is 87, or 22 years after a retirement age of 65, according to Social Security Administration data. Younger people should assume 30 years or more, Fidelity advised.

It’s great that people are living longer, and yes, they need to save more if they anticipate a longer retirement. However, another benefit of a longer lifespan not mentioned in the article is the ability to delay retirement if needed (and if possible).

Let’s face it, many of us waited too long to start our savings (sometimes through no fault of our own), so we may need some extra time to build our savings and catch up. However, that may also require additional patience for some.

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