Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 6, 1990 TAG: 9005070174
SECTION: BUSINESS PAGE: D-1 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
That's the scenario that can be drawn from a nationwide retirement quiz Fidelity Investments recently gave.
Fidelity found that most Americans don't know much about retirement planning. The average grade on its 10-question quiz was a dismal D+, or 67 percent.
"It tells us there is a dangerous gap in Americans' understanding of the financial realities of retirement," said Fidelity Vice President Kathryn Hopkins.
Conducted by The Gallup Organization for Fidelity, the quiz was given to 724 people age 25 or older with household incomes of at least $25,000. There was a possible error factor of 3.7 percent in either direction.
Almost two-thirds of the quiz takers either underestimated or didn't know how much money they would need when they retired.
But about half said they expected to live as well during retirement as they do now. And about 45 percent said they expected to retire before age 62, the earliest age for collecting Social Security benefits.
Such expectations, coupled with ignorance, easily could lead to an income shortfall.
Fidelity figures that people need 60 percent to 80 percent of their peak income when they retire. Using this guide, a couple with a $50,000 income would require $30,000 to $40,000 annually. Some financial planners say the amount easily could be higher if the couple plans to travel, for example.
With the maximum Social Security benefit for the couple at $17,550, they need to make up $12,450 in some way.
The survey results improve with age. But if people were more knowledgeable about retirement planning at an earlier age, saving enough money would be easier for them.
"It's a sad thing," said Lynn Conant, manager of Fidelity's Los Angeles operation. "When you're younger you can save less money per month than when you're older." Through compounding and tax deferral, people can end up with the same amount.
Baby boomers have been notorious about living for the moment and spending all their money. But those spendthrift days may be over.
The savings rate, which bottomed at less than 0 percent in debt-ridden 1987, has rebounded to almost 6 percent in March, according to Fidelity. It is still less than the historical norm of about 10 percent.
"It was the age of opulence. Yuppies were buying houses, cars and second houses," said Michael Hines, Fidelity's vice president of marketing. "There has been a dramatic change."
So, what should people who are concerned about retirement do?
Financial planners agree that people should take advantage of tax-deferred savings as much as possible.
"You can't control inflation," said Mitch Keil, a certified financial planner for IDS Financial Services Inc.'s Irvine, Calif., office. "The bottom line is that you should control the one thing you can. And that's taxes."
First, people should put all the money they can into tax-deferred plans provided by employers. They reduce current taxes while compounding tax-deferred savings.
"Even a bad 401K plan will provide a good return," Keil said.
Then, people should look to tax-deferred savings plans, such as IRAs. Although tax deductions have been limited for many people with corporate retirement plans, IRAs still provide a good way to build savings.
For higher-income families, tax-deferred annuities also are an attractive option.
"They are a tremendous advantage, because you can make an unlimited amount of dollar contributions," Conant said. They also may provide a long-term income stream.
THE QUIZ CONDUCTED BY THE GALLUP ORGANIZATION FOR FIDELITY INVESTMENTS (For use by NYTimes News Service clients) c.1990 Los Angeles Daily News
1 - Including Social Security and all other sources of income, in general, about what percentage of their income would you say most people need to maintain their lifestyle after retirement?
a) Less than 20.
b) 20 but less than 40.
c) 40 but less than 60.
d) 60 but less than 80.
2 - In general, about what percentage of their total retirement income do you expect that most people will receive from Social Security and pension plans?
a) Less than 20.
b) 20 but less than 40.
c) 40 but less than 60.
d) 60 but less than 80.
3 - Your monthly Social Security benefits may be reduced below what they may otherwise be if you retire before the age of 65.
a) True.
b) False.
4 - Do you happen to know the earliest age an individual can collect Social Security benefits, assuming they are not handicapped or disabled?
a) 59-1/2.
b) 62.
c) 65.
d) 67.
5 - Aside from those who are either handicapped or disabled, only those who have had a paying job are entitled to a Social Security check.
a) True.
b) False.
6 - What phrase best describes what Medicare is?
a) A health program for poor people.
b) A private health insurance program.
c) An HMO or health maintenance organization.
d) A federal health insurance program for the elderly.
7 - If a person switches jobs often during the working years, the pension benefits ultimately received may be reduced below what they may otherwise be.
a) True.
b) False.
8 - If a person retires early, that person's monthly pension benefits from an employer pension plan may be reduced below what they may otherwise be.
a) True.
b) False.
9 - A person's pension plan benefits from an employer pension plan may be reduced if he or she also has an IRA account.
a) True.
b) False.
10 - Anyone under the age of 70-1/2 with earned income is allowed to contribute to an IRA.
a) True.
b) False.
BC-ANSWERS-RETIRE-LADN ANSWERS TO THE RETIREMENT QUIZ (For use by NYTimes News Service clients) c.1990 Los Angeles Daily News
1 - d. 60 but less than 80.
2 - c. 40 but less than 60.
3 - a. True.
4 - b. 62.
5 - b. False.
6 - d. A federal health insurance program for the elderly.
7 - a. True.
8 - a. True.
9 - b. False.
10 - a. True.
SCORING
9-10 correct: Excellent.
8: Good.
7: Average.
6: Below average.
5 and under: Very low.
by CNB