There's a good chance you won't be able to answer this basic question about retirement investing correctly.
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This is evident from a study published earlier this week by the American government TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC). More than half of the respondents got the answer wrong.
The question is below; the correct answer is at the end of this column:
Latisha plans to start saving for retirement by putting $2,000 aside this year. Her employer offers a 401(k) plan that fully matches an employee's contributions, up to $5,000 per year. In which scenario will Latisha have the largest amount of pension savings at the end of the year?
This question was one of five retirement fluidity questions included in the TIAA/GFLEC survey. Another focused on how Social Security benefits are calculated, and even fewer (42%) answered this correctly:
Which statement about Social Security is incorrect?
The purpose of these questions is not to make us feel bad about ourselves. The study authors found that financial literacy in practice can make a big difference in how well we are prepared for retirement.
This is illustrated in the diagram below. Of those who answered at least four out of five retirement flow questions correctly, 75% were “very” or “somewhat” confident that they will have enough money to live comfortably during their retirement years. That compares to just 41% of those who answered none of the five questions correctly.
Furthermore, note that there is a monotonic relationship between the number of correctly answered questions about pension flow and pension confidence.
Happiness versus literacy
Some of you may still be wondering if it's worth it. Financial planning requires mastery of a number of different fields, ranging from econometrics to human psychology. Just deciding when to claim Social Security benefits is a complex calculation involving nearly a hundred separate variables.
Achieving this mastery can be lengthy and difficult, and the potential benefit can be offset by one or two setbacks. As legendary investor Benjamin Graham, author of The Intelligent Investor, admitted near the end of his illustrious career as an investment advisor (and as a mentor to Warren Buffet): 'One stroke of luck, or one extremely smart decision – we can tell them apart. ? – can count for more than a lifetime of efforts by a journeyman.”
However, it would be a mistake to view happiness and literacy as in tension with each other. Opportunity knocks at the door of those who are ready.
Graham continued his quote above with this point: “Behind the luck or crucial decision, there must usually be a background of preparation and disciplined ability. Someone must be sufficiently established and recognized so that these opportunities come knocking on his or her door. You must have the resources, judgment and courage to take advantage of it.”
Fortunately, you don't have to become a master of all aspects of retirement planning. You can seek the help of a qualified financial planner who has acquired this mastery. Just don't think it's not worth it.
Answers
The correct answer to the first question is #1, because this leads to a retirement portfolio that is twice as large as #2: $4,200 at the end of the year, as opposed to $2,100.
The correct answer to the second question is also No. 1, since the amount you receive in Social Security benefits is a function of your 35 best-paid years – not just the last two.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be reviewed. He can be reached at
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