Getting retirement right is a big deal. The data varies from survey to survey, but we know for a fact that far too many Americans have saved little (or nothing) and most of the rest of us probably haven’t saved enough.
Fidelity Investments decided to tackle this problem with a short but in-depth survey based on retirement assumptions people make. Perhaps unsurprisingly, most Americans missed these eight key retirement questions — and some were way, way off!
Here they are, with the percentage who got them wrong and the correct answers:
Q: Roughly how much do investment professionals estimate people 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.
Q: How often over the past 35 years do you think the market has had a positive annual return?
Less than one person in 10 (8%) guessed this right, improving slightly to 14% in the 55 to 65 age group.
The correct answer is 30 years. The stock market, as measured by the S&P 500 Index, is up most years and historically has averaged a 7% annual gain.
As a result, retirement investors dramatically underestimate the power of stocks in a portfolio and their investment choices often are too conservative. That really hurts their retirement prospects.
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.
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.
Q: Approximately how much did the average monthly Social Security benefit pay in 2016?
We did a lot better here, a testament to the availability of Social Security data that’s personalized to each recipient who asks for it. More than four in 10 (43%) guessed right.
The correct answer is about $1,300 a month. Remember, however, that your number is based on your personal work history and the age at which you apply for benefits for the first time.
In fact, you will collect 8% more money for each year you delay up to your full retirement age.
Q: About what percentage of your savings do many financial experts suggest you withdraw annually in retirement?
Four in 10 (42%) answered this one right, but a surprising number of people overestimated wildly.
The correct answer, according to Fidelity, is between 4% and 5%. (There has been some newer research that suggests a more cautious approach.)
But there’s no way you can make a typical retirement account balance last while taking out 10% to 12% each year, a withdrawal rate an astounding 15% of respondents over the age of 55 thought “safe.”
Q: What do you think is the single biggest expense for most people in retirement?
This was a stumper for sure. Nearly seven in 10 (69%) said healthcare, a reasonable response for sure but totally wrong.
The correct answer is housing, accounting for as much as half of our expenses in retirement.
Sure, we spend a lot on health in retirement, but much of that spending is toward the end of life. In comparison, housing costs are constant over many years of retirement, unless you own your home outright.
Q: About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?
A troubling seven in 10 (72%) of us underestimated the cost of healthcare in retirement, and just 15% got it right.
The correct answer is $260,000, according to Fidelity data going back to 2002 and based on out-of-pocket spending for the average 65-year-old couple. More than one in five (22%) underestimated this cost by $200,000.
The takeaway from the poor showing by most people in this retirement quiz is that you do not have to be “most people.” All it takes is a willingness to engage your retirement saving and investing discipline on a realistic basis and to stick with it.
That starts with understanding the numbers.
