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Are you retirement planning-literate?

Created date

January 22nd, 2015

Just one in five retirement-age Americans can pass a basic quiz on how to make their nest eggs last through their retirement, according to a recent survey conducted by The American College of Financial Services (theamericancollege.edu). The survey found that many older adults have a flimsy understanding of retirement planning concepts like the “4%” rule, the relationship between interest rates and bond values, average life expectancy, and what should be included in a comprehensive retirement plan.

“At age 25 or 35, these responses would be problematic but forgivable because there’s plenty of time to make up for any mistakes,” says Professor David Littell, director of the Retirement Income Program at The American College. “But at 65 or 70, poor investment decisions can be almost impossible to bounce back from. Even worse, bad decisions can damage both the future growth of a nest egg and the retirement income it can generate over time.” 

Take charge of your financial future

Harrine Freeman is the CEO of H.E. Freeman Enterprises (hefreemanenterprises.com), a financial literacy education and advocacy organization. She recommends the following books to educate yourself on financial planning in retirement: The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad by Julie Jason, How to Retire Happy, Wild, and Free by Ernie Zelinski, The Wall Street Journal Complete Retirement Guidebook by Glenn Ruffenach and Kelly Greene, and Kiplinger’s Worry Free Retirement from the editors of Kiplinger’s magazine.

David Bakke, a financial contributor for the financial blog Money Crashers (moneycrashers.com), says all retirees should understand the “4%” rule, which dictates that you should withdraw just 4% of your nest egg each year to ensure you don’t outlive your money. He also recommends learning about the ins and outs of both Roth and traditional IRAs and the effect of expense ratios on your portfolio. He says it’s also important to understand the ramifications of when you begin collecting social security, keeping in mind that deferring even a few years can mean more money in your pocket down the road.

“If you don’t get your head around some of the key concepts regarding retirement planning, you might find yourself significantly behind the eight ball as you grow older and that will make it a lot more difficult to catch up,” Bakke says. “You might also be missing out on tremendous ways to boost your retirement savings.”

Of course, you don’t have to go it alone. A trusted financial advisor can help you make wise decisions about your retirement income. However, Littell says it’s important to choose an advisor who can help you create a comprehensive financial plan for your retirement that includes long-term care and tax planning. 

 “People need to know what they are getting from an advisor and whether it’s a comprehensive plan because an ‘advisor’ could be someone selling you a product,” Littell says. “As consumers, we can always protect ourselves better if we understand the basic issues.”

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