Seven ways to boost your retirement IQ

Increase your retirement knowledge with a few easy tips.

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When it comes to Americans’ knowledge about finances and retirement, there’s good news and bad. Results from the Fidelity Investments Retirement IQ Survey* revealed a somewhat limited understanding of several important retirement concepts—on everything from Social Security and Medicare options to savings strategies and outliving retirement savings.

The good news: Boosting your retirement knowledge is easy. Here are the seven questions (along with answers and tips) that can help you stay on track for your retirement.

1. How much do I need to save for retirement?

When we asked, “Roughly how much do many financial professionals suggest people save by the time they retire?” two-thirds of our survey respondents underestimated how much they need to save for retirement.

Correct answer: Fidelity defines this savings target as an amount equal to ten times your final salary by the time you retire. Read Viewpoints: “How much do I need to save for retirement?

To get there, Fidelity believes that investors should save 15% of their income each year until retirement. While 15% may seem like a lot, if you have a 401(k) or other workplace retirement account, any employer match or profit-sharing contribution should be counted as part of this annual savings rate goal.

Of course, 15% is just a guideline. The appropriate annual savings rate for your situation may be higher or lower, depending on when you want to retire, how you invest, and how you want to live in retirement. Read Viewpoints: “How much should I save each year?

Tip: Answering six simple questions from the Fidelity Retirement ScoreSM will help you measure what portion of your expenses1—particularly estimated essential expenses —you are on track to cover in retirement.

2. Can saving an additional $50/month really add up?

If you were able to set aside $50 each month into your retirement savings, how much could that end up growing to in 25 years?

Correct answer: About $40,000 including interest, if it grew at the historical market average of 7%.2 Of our preretiree survey respondents, aged 55–65, nearly half (48%) underestimated the power that a small incremental savings lift could mean to their retirement, while about one quarter (24%) overestimated the impact. Only 14% got it right.

While it’s never too late to save more, the younger you start the better. Even small savings amounts can have a big impact if you start early.

Tip: Think about saving just 1% more and see how it can add up. Read Viewpoints: “Just 1% more can make a big difference.”

3. How much do most people receive every month from Social Security?

You may have friends or family members getting Social Security, but asking how much they get in Social Security benefits is not usually something that comes up naturally in ordinary conversation. We asked.

Correct answer: The average monthly Social Security benefit paid in 2016 was about $1,300 per month. About half of preretirees got it right. Some 30% believe they will receive less than average and 20% overestimated how much they would collect from Social Security each month.

Social Security is a key part of retirement income for most Americans. But it’s complicated— there are over 75 claiming options. In general, it can pay to delay claiming your benefit until age 70. Consider how long you may live and your financial capacity to defer benefits as you develop your own strategy.

Tip: Read the Viewpoints Special Report: “How to get the most from Social Security?

4. How much monthly income can my retirement savings generate?

According to government estimates3, the average head of household, aged 55–64, had a median retirement savings of $104,000. We asked how much could be generated by converting this into a guaranteed stream of monthly income.

Correct answer: $310 per month. The results were mixed. Only 23% of preretirees got it right. More than half of those surveyed overestimated the monthly income from the median retirement savings. An overly optimistic 13% thought the monthly income generated from an annuity would be nearly three times the correct amount.

Some new retirees make the mistake of withdrawing too much too fast. We suggest covering essential expenses with guaranteed income sources (like Social Security, pensions, and annuities), and paying for “nice-to-haves” (like travel or gifts to loved ones) with withdrawals from your investment portfolio.

As a rule of thumb, Fidelity research suggests holding portfolio withdrawals to no more than 4% to 5% of your initial retirement assets, adjusted each year for inflation, over the course of your retirement horizon. Of course, your particular withdrawal rate will depend on a variety of factors, including your anticipated life span, your asset allocation, and market performance.

Tip: Read Viewpoints: “How to build a diversified income plan” and “How can I make my savings last?

5. What is the single biggest expense for most people in retirement?

If you are like most Americans, housing, health care, and transportation are typically your largest expenses in retirement. But which of those three is the largest? An overwhelming majority of respondents (81%) thought that health care would be their largest expense in retirement.

Correct answer: Housing. Only 13% of preretirees said that housing would be their single biggest expense in retirement. Trailing the pack behind health care were taxes, food, and discretionary expenses, which the survey described as transportation and entertainment-related expenses.

According to the Bureau of Labor Statistics, housing is the greatest expense in dollar amount and as a share of total expenditures for households with a person age 55 and older.

Further, when we asked what they are “most worried” about being able to afford in retirement, 63% of preretirees said “health care,” 17% picked “housing,” and 12% answered “discretionary expenses.”

Whether or not to downsize or relocate is a huge decision for many preretirees. If you plan to move, make sure you also consider how that will impact your cost of living, access to health care, and, if you have your eyes on another state, your tax obligations. If you plan to stay put, you'll want to consider how your home equity factors into your plans.

Tip: Consider ways that you can manage your larger expenses in retirement, and ask yourself five key questions. Read Viewpoints: “Retirement countdown.”

6. At what age are most people eligible for Medicare?

When can you join the ranks of some 56 million Americans4 and enroll in Medicare?

Correct answer: Age 65. Of all the survey questions, this one was answered correctly by the highest percentage. However, 2% thought you could tap into Medicare as early as age 55 and another 2% said Medicare benefits would not kick in until age 60.

Having the right Medicare coverage is a key part of your retirement plan. There are many options to explore, so be thorough. Remember, you can enroll in Medicare only for single coverage. Your spouse or partner will not be covered by your plan and is required to enroll on his or her own.

Tip: Among the many factors to consider in your Medicare decision: health status, cost, coverage, and amount of travel you have planned, and access to existing or preferred doctors and hospitals. Watch the webcast, “Are you getting the most out of Medicare?” and read Viewpoints: “Six key Medicare questions.”

7. How much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?

If you are like many Americans, health care is expected to be one of your largest expenses in retirement. But just how much will you need to set aside just to pay for non-Medicare health care expenses?

Correct answer: $260,000 per couple. Fidelity has been tracking this issue for many years and estimates that the average 65-year-old couple retiring in 2016 will spend $260,000 to pay for out-of-pocket health care expenses over the course of their retirement.5 Only 21% of preretirees answered correctly, while 16% overestimated how much they would spend on health care by about $100,000.

Tip: Although an individual’s or couple’s actual spending can deviate significantly from this average value, it is vital that you plan well in advance for the considerable cost of health care by adding it into your overall retirement planning discussions. Read Viewpoints:How to plan for rising health care costs.”

Summary

You may not have been able to correctly answer some of these survey questions, but by brushing up on your retirement education, and taking time to map out your retirement (with or without an advisor), Fidelity can help you boost your retirement IQ and put you on a path to living the life you want in retirement.

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Investing involves risk, including risk of loss.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
*The Fidelity Investments® Retirement IQ Survey is an online survey conducted in two phases: first, among a sample of 1,007 respondents ages 55–65 who were not retired, which was completed December 14–19, 2016; next, among a demographically representative U.S. sample of 1,047 adults comprising 512 men and 535 women 18 years of age and older, completed December 15–18, 2016. Both phases were conducted by ORC International, which is not affiliated with Fidelity Investments. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.
The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pretax and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
1. Assumes that 80% of estimated retirement expenses are essential.
2. This hypothetical estimate assumes the individual or household sets aside $50 a month for 25 years. Rate of return is 7.0% annual interest which is compounded monthly. Estimated increases in retirement monthly income are in today’s dollars. This estimate assumes the $50 deferral amount stays constant through the entire 25-year period and represents a nominal value. It is assumed that the participant took no loans or hardship withdrawals from these savings. All dollars deferred are pretax dollars. Upon distribution, applicable federal, state, and local taxes are due. No federal, state, or local taxes; inflation; or account fees or expenses were considered. If they were, the estimated amount would be lower. Actual realized value may be significantly more or less than this illustration. The assumed rate of return used in this example is not guaranteed. Investments that have potential for a 7% annual rate of return also come with risk of loss.
3. “Report on Retirement Security,” U.S. Government Accountability Office, May 2015.
4. Centers for Medicare & Medicaid Services, quoted in “Total Number of Medicare Beneficiaries” in 2015, Kaiser Family Foundation
5. 2016 Fidelity analysis performed by its Benefits Consulting group. Estimate based on a hypothetical couple retiring in 2016, at 65 years of age, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for “average” retirees but may be more or less depending on actual health status, area of residence, and longevity. The Fidelity Retiree Health Care Costs Estimate assumes that individuals do not have employer-provided retiree health care coverage but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. Life expectancies are based on research and analysis by Fidelity’s Benefits Consulting group and data from the Society of Actuaries, 2014.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

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