Perhaps one of the reason so many Americans are unprepared for retirement is because there is a lot of confusion around the subject.
When The American College of Financial Services conducted a 38-question retirement literacy quiz, three out of four retirement-age Americans failed the test. To qualify, respondents had to be between 60 and 75 years old and have at least $100,000 in household assets, not including the worth of their primary residence.
Here's one of the questions that tripped up more than 60 percent of respondents:
If you had a well diversified portfolio of 50 percent stocks and 50 percent bonds that was worth $100,000 at retirement, based on historical returns in the United States the most you can afford to withdraw each year is about ____ plus inflation each year to have a 95 percent chance that your assets will last for 30 years.
- Don't know
The correct answer is $4,000, and only 38 percent of the 1,244 respondents answered correctly. That means the majority of Americans don't have a grasp on the "four percent rule," a formula that helps retirees determine how much money they can withdraw from their retirement savings portfolio each year without running out.
The rule says that, in most cases, you can safely withdraw four percent a year. So, if your portfolio is worth $100,000, you can take out a maximum of $4,000 a year. If your portfolio is worth $200,000, you can withdraw up to $8,000 a year.
As for how substantial your savings should be at every age, here's a handy guide from retirement-plan provider Fidelity Investments:
- By 30: Have the equivalent of your salary saved
- By 40: Have three times your salary saved
- By 50: Have six times your salary saved
- By 60: Have eight times your salary saved
- By 67: Have 10 times your salary saved