In an effort to understand Americans' knowledge about retirement planning, Fidelity Investments conducted a first-ever Retirement IQ Survey in December.
The response was not encouraging. Many, including those 55 or older, missed the mark on key retirement questions, and adhered to several myths and misconceptions that could be holding them back.
"Although retirement may seem far off for many, there are retirement concepts everyone should know to ensure you're able to fulfill the goals you have for yourself and your family," Ken Hevert, senior vice president of retirement at Fidelity, said in a statement.
"We encourage investors to think about the goals they want to achieve and develop a plan to get there, but it starts with knowing where you stand in order to identify opportunities to improve."
ORC International conducted the online survey in mid-December in two phases: first, among a sample of 1,007 respondents ages 55 to 65 who are not retired; then, among a demographically representative U.S. sample of 1,047 adults comprising 512 men and 535 women 18 and older.
Following are the eight questions Fidelity asked respondents, along with the correct answers and how often respondents got them right:
Question #1: Roughly how much do investment professionals say people should save by the time they retire?
Correct response: At least 10 times the amount of one's last full year's income
Fidelity said that even though professionals disagree somewhat about how much the average person needs to save, 74% of respondents underestimated how much is needed. Not only that, 25% said they needed to save only two to three times the amount of their last full year's income, well below suggested targets.
More concerning, 19% of pre-retirees age 55 to 65 answered two to three times.
Question #2: How often over the past 35 years do you think the market has had a positive annual return?
Correct response: The market has enjoyed a positive annual return 30 out of the past 35 years. Historically, the U.S. stock market has gained about 7% per year.
Only 8% of overall respondents answered correctly. Those between 55 and 65 did slightly better, with 14% responding correctly.
"Even with market volatility, the stock market has performed remarkably well over the long term," Hevert said. "The majority of investors need to have a diversified portfolio that includes equities to enable growth over time. If you're not investing, you're likely losing money due to inflation."
Question #3: 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? Correct answer: About $40,000
Sixteen percent of respondent answered correctly. However, 47% underestimated how big an effect relatively small savings can have over time. Twenty-seven percent calculated the answer to be about $15,000, which undervalues the power of consistent savings and would represent a 0% stock market return vs. the market average of 7%.
Saving regularly, combined with the power of compound interest, shows why it is important to start setting aside money automatically at an early age, Fidelity said, demonstrating with three scenarios. Saving 1% more of salary can add up, it said.
Question #4: 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?
Correct answer: Approximately 22 years, given that the average life expectancy is 87, or 85 for men and 87 for women, and understanding that longevity is influenced by family medical history and lifestyle, among other factors.
