You’ve been planning for retirement for years and have managed to save a large nest egg. Hopefully you have a plan for the day you trade your work badge for the freedom to do whatever you’ve been dreaming about.
But are you ready for retirement? Our retirement quiz will test your knowledge of a few key financial concepts you’ll need to know in retirement.
1. WHAT’S FRA?
A. Full Retirement Age
B. Full Retirement Account
C. Foth Retirement Account
D. Full Roth Account
Answer: A – Full Retirement Age. FRA is a critical consideration when it comes to claiming your Social Security, which is a primary way most Americans generate reliable retirement income. Full retirement age varies depending on when you were born, but it’s generally somewhere between 66 and 67. While you can claim Social Security starting from age 62, you can’t claim your full benefit until you reach your full retirement age. If you claim at 62, your monthly benefit could be about 30 percent lower than if you wait until you reach your FRA. On the flip side, you can wait to claim all the way to age 70. Waiting will increase your monthly benefit by 8 percent each year that you wait.
2. EVERY DOLLAR YOU PULL OUT OF YOUR TRADITIONAL 401(K) IS YOURS TO KEEP.
Answer: B – False. The great thing about a 401(k) is that your contributions were never taxed. In theory, that let you put more money away while you were saving. But when you get to retirement, the government wants its money. As you make withdrawals (known as distributions), you will owe ordinary income tax on the money you take out.
Creating income in retirement is a bit of a science when it comes to taxes. Ideally, you have a mix of taxable and non-taxable sources of income that you can draw from each year; this allows you to be more tax-efficient. For example, you might choose to withdraw money from your taxable sources first until you get close to crossing into a higher tax bracket, after which you could switch to your non-taxable sources.
3. WHAT’S AN RMD?
A. Real Money Decision
B. Required Maximum Distribution
C. Rollover Money Dollars
D. Required Minimum Distribution
Answer: D – Required Minimum Distribution. Not only will you owe tax on money you withdraw from a traditional IRA, 401(k) or similar account, the government actually requires that you take a certain amount of money out each year after you turn 72 so that it can collect those taxes (Note, RMDs are suspended for 2020). Those required minimum distributions are commonly referred to as RMDs. Make sure you know how much to withdraw each year because failing to take the proper RMD can result in a 50 percent IRS penalty. The IRS has worksheets that you can use to calculate how much your RMD should be.
4. YOU ARE REQUIRED TO ENROLL IN MEDICARE PART C WHEN YOU TURN 65.
Answer: B – False. While everyone is required to file for Medicare (the health program that covers all seniors) at age 65, part C is optional coverage that takes the place of parts A and B. Often times, a part C plan (often referred to as Medicare Advantage) can get you more coverage than you can get with the more traditional parts A and B.
As you approach retirement, it’s good to familiarize yourself with the basics of Medicare as health care costs will be a significant expense during your retirement.
5. IF I DON’T HAVE A PENSION, SOCIAL SECURITY IS THE ONLY GUARANTEED INCOME I CAN GET IN RETIREMENT.
Answer: B – False. While pensions are largely a thing of the past, there is another way to guarantee yourself a monthly check that you can’t outlive (in addition to what you get from Social Security): an annuity.
Many people use a portion of their retirement savings for an annuity so they can be sure they will have regular income to fund their fixed expenses (food, utilities, housing) in retirement. Then they use another portion of their savings for investments to continue to grow their money and keep up with inflation.
6. THE 4 PERCENT RULE COMMONLY DESCRIBES:
A. The amount you need to save each year while you’re working to have enough for retirement.
B. The amount of your savings you can safely withdraw each year in retirement.
C. The amount of your retirement savings that you should set aside as cash for emergencies.
D. That fact that 4 percent of people outlive their retirement savings.
Answer: B – The 4 percent rule suggests that if you withdraw 4 percent of your savings during the first year of retirement and then continue to withdraw the same amount (adjusted for inflation) each following year, you are unlikely to run out of money in retirement.
While the 4 percent rule can be a good estimate for how much you can safely withdraw from your savings, it’s not a guarantee. It was created at a time when interest rates were historically higher. Retirement income plans that include income from a variety of sources, like annuities and cash value life insurance in addition to investments, can give you more confidence in your ability to make your money last through a very long retirement.