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The Retirement Income Quiz You Can’t Afford to Fail

The answers can help you retire more comfortably

John Waggoner

AARP

En español

Published September 17, 2020

10 Questions

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Perhaps the biggest financial challenge of retirement is making sure you don’t run out of money. Social Security is a key source of income, as is a pension if you have one, but many retirees will need additional income from investments to enjoy a more comfortable retirement. Test your knowledge of retirement income to learn how to build and manage your retirement savings.

The Retirement Income Quiz You Can’t Afford to Fail

[ {
  "question" : "If you have a well-diversified portfolio of 50 percent stocks and 50 percent bonds, how much of your portfolio can you spend each year with little worry of running out of money in retirement?",
  "answers" : [ {
    "answer" : "4 percent",
    "correctAnswer" : true
  }, {
    "answer" : "8 percent",
    "correctAnswer" : false
  }, {
    "answer" : "12 percent",
    "correctAnswer" : false
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: A. According to the 4 percent rule, if you start with a 4 percent withdrawal in your first year of retirement, you can increase that amount for inflation each subsequent year over 30 years with little fear of running out of money, based on historical rates of return and computer-based modeling.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "What percentage of the income of older Americans comes from Social Security?",
  "answers" : [ {
    "answer" : "12 percent",
    "correctAnswer" : false
  }, {
    "answer" : "25 percent",
    "correctAnswer" : false
  }, {
    "answer" : "33 percent",
    "correctAnswer" : true
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: C. Social Security was never meant to be all of your retirement income. Even so, 21 percent of married couples and about 45 percent of unmarried people rely on Social Security for 90 percent or more of their income.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "Some publicly traded companies make regular cash payouts to their shareholders. This payment is called a stock dividend. Companies can — and often do — raise their dividends. What is the average dividend yield of the stocks in the Standard and Poor’s 500 stock index?",
  "answers" : [ {
    "answer" : "1 percent",
    "correctAnswer" : false
  }, {
    "answer" : "4 percent",
    "correctAnswer" : false
  }, {
    "answer" : "2 percent",
    "correctAnswer" : true
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: C. Although 2 percent isn’t a fortune, companies often raise their dividends. It’s not a sure bet that your dividends will rise every year, but S&P counts 66 companies that have raised their dividends every year for the past 25 years.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "A pension from an employer can provide a steady stream of income in retirement. What percentage of nonunion workers have access to a pension plan today?",
  "answers" : [ {
    "answer" : "A. 17 percent",
    "correctAnswer" : true
  }, {
    "answer" : "B. 36 percent",
    "correctAnswer" : false
  }, {
    "answer" : "C. 63 percent",
    "correctAnswer" : false
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: A. More and more employers have shifted away from pensions, also known as defined benefit plans, in favor of defined contribution plans such as 401(k)s. Defined contribution plans put the responsibility of saving on the employee, so it’s critical to contribute regularly to build up a nest egg. In contrast, nearly 4 out of 5 union workers (79 percent) have access to a pension plan.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "This is a big reason retirees invest in municipal bonds for income in retirement.",
  "answers" : [ {
    "answer" : "Yields on muni bonds are typically higher than on any other bonds.",
    "correctAnswer" : false
  }, {
    "answer" : "Interest payments are usually free of federal income taxes. ",
    "correctAnswer" : true
  }, {
    "answer" : "All interest payments are guaranteed by the FDIC.",
    "correctAnswer" : false
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: B. Municipal bonds or munis, are issued to fund public projects such as the building of roads or schools. Typically, interest payments are free of federal income taxes, and in some cases free of state taxes if you reside in the state that issues the bond. Because munis are tax-free their interest rate is usually lower than the rate on comparable taxable bonds. In general, munis are backed by revenue generated by a project (such as tolls to use a road) or the full faith and credit of the issuer.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "Claiming Social Security at this age would entitle you to the maximum retirement benefit allowed.",
  "answers" : [ {
    "answer" : "62",
    "correctAnswer" : false
  }, {
    "answer" : "67",
    "correctAnswer" : false
  }, {
    "answer" : "70",
    "correctAnswer" : true
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: C. You are entitled to receive 100 percent of your Social Security retirement benefit when you reach your full retirement age (67 for those born in 1960 or later). You can claim your Social Security retirement benefit early, starting at age 62, but the amount will be reduced. If you hold off until age 70 to claim your benefit, you will be eligible for the maximum amount thanks to delayed retirement credits accrued for waiting beyond your full retirement age. Delayed retirement credits stop accruing at age 70, so there’s no financial incentive to wait longer.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "What type of annuity can give you a regular fixed payment during retirement in exchange for a lump-sum investment?",
  "answers" : [ {
    "answer" : "Indexed annuity",
    "correctAnswer" : false
  }, {
    "answer" : "Variable annuity",
    "correctAnswer" : false
  }, {
    "answer" : "Immediate annuity",
    "correctAnswer" : true
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: C. While annuities can be complicated, a basic immediate annuity is one of the simplest to understand: You give an insurance company a lump sum of cash, and soon it starts sending you regular payments, usually for the rest of your life. The fixed payment, which never changes, depends on such things as your age (the younger you are, the less you’ll get), gender (women tend to live longer) and the amount of your lump-sum investment.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "True or false: You shouldn’t have stocks in your portfolio when you retire.",
  "answers" : [ {
    "answer" : "True",
    "correctAnswer" : false
  }, {
    "answer" : "False",
    "correctAnswer" : true
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: B. At 65, you can expect to live another 20 years or more, and that’s a long time. Even if inflation is a relatively tame 2 percent, a dollar will have the buying power of 68 cents after 20 years. Allocating a portion of your portfolio for the long term will give it the chance for growth needed to help offset inflation.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "When is an opportune time to convert a traditional IRA to a Roth IRA?",
  "answers" : [ {
    "answer" : "During a leap year",
    "correctAnswer" : false
  }, {
    "answer" : "When your portfolio has taken a significant loss",
    "correctAnswer" : true
  }, {
    "answer" : "When income tax rates have risen sharply",
    "correctAnswer" : false
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: B. A traditional IRA is funded with pretax dollars and grows tax-deferred, but you’ll need to pay the taxes when you start withdrawing the money in retirement. A Roth IRA is funded with after-tax dollars, so no taxes are due when you start making withdrawals. Roths also aren’t subject to required minimum distributions (RMDs) like traditional IRAs. Assuming you have the cash to foot the tax bill, converting a traditional IRA to a Roth is advantageous after a big market decline because you are paying taxes on a smaller amount of money.",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
}, {
  "question" : "A 25 percent loss in a single year in a retirement portfolio will have the biggest impact on long-term retirement security if it occurs:",
  "answers" : [ {
    "answer" : "15 years prior to retirement",
    "correctAnswer" : false
  }, {
    "answer" : "At retirement",
    "correctAnswer" : true
  }, {
    "answer" : "15 years into retirement",
    "correctAnswer" : false
  }, {
    "answer" : "The timing doesn’t matter",
    "correctAnswer" : false
  } ],
  "multiSelect" : false,
  "explanation" : "Correct answer: B. Withdrawals bring your account level down further when investments are falling, and reduce any subsequent gains. Taking a big hit to your nest egg at the precise moment you stop work and start making withdrawals would have the biggest impact. Many advisers say you should keep a year’s worth of withdrawals in cash to avoid having to sell stocks during a downturn",
  "hint" : "",
  "hintLink" : "",
  "questionImgCaption" : "",
  "questionImgCredit" : ""
} ]

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John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and  USA Today and has written books on investing and the 2008 financial crisis. Waggoner's  USA Today investing column ran in dozens of newspapers for 25 years.