Financial Future Quiz

The threat of unexpected financial turmoil is something that hunts almost everyone and we naturally want to avoid it at all cost. Broadly, an unknowable twist of fate can affect your bank balance adversely and, like reasonable person, you know you need a plan to prepare and protect yourself financially. Relying on some outdated advise or overly general rule of thumb will make you to have the false belief that you have accounted for every possible contingency – a very dangerous financial move. An open question here is whether you have actually charted the right path to financial security? Answering that question requires that you test your financial knowledge and measure your progress by taking this financial future quiz. This quiz will enable you to transform your financial future from solid to impregnable.

The Quiz

1.  How many Americans have at least six months of expenses in an emergency fund?

A. 17 per cent             B. 45 per cent             C. 85 per cent

Answer: B

According to bankrate.com, another incidence of job loss or financial blow will have a very catastrophic effect on Americans because more than half of them have not earmarked a six-month pot of money to tide them over if they lose their   job or when such financial blow occurs.  That is really risky. It is important to note here that you will be fine with a three-month financial cushion  if you are in a high-demand profession(for instance, if you are an engineer, a programmer or a pharmacist) or if you are a retiree collecting a pension and Social Security. However, you will need to save up to a year’s expenses if you work in an unstable industry – or if you are  50 years or older – which adds three more months to the average time it takes to find a new job.

2. What is the likelihood that my money will last until I hit 95 if I save 10% of my income every year and retire at 65?

A. 40 per cent

B. 75 per cent            

 C. 95 per cent, unless I developed a taste for Rolex watches and Faberge eggs.                                                                                    

Answer: A

You will be ahead of the typical 401(k) participant(who contributes  8 percent) if you save at least 10 percent  of your income(not including your company match). But, of course, you will like your savings to reach the finish line. The bottom line here is that the likelihood that your savings(or funds) will last until you turn 95 increases to 83% if you bump savings to 15 per cent of your income.

3. I will continue to receive paychecks for a very  long time because there’s a high chance I’ll keep working until I’m:

A. 62 years                  B. 65 years                  C. 72 years                  D. Six feet under.

Answer: A

The median age of retirement is approximately 62 years, even though as much as 37 percent of workers think they will call it quits after age 65. The gap between this expectation and reality is mainly cause by health problems, lack of relevant job skills, or the possibility of being laid off.

4. My bills should not consume this percentage of my income.

A. Trick Question. Any Debt is too much

B. 21 percent

C. 30 percent

D. 36 percent

Answer: C

If your payment for a loan will exceed 36 percent, banks will typically turn you down for the loan. The best thing for you is to maintain a debt-to-income ratio of about 30 percent. It is also important to start cutting your spending now if you exceed the 30 percent mark with respect to your debt-to-income ratio. Note that you will get better terms for mortgages, loans and credit cards if you minimize your debts significantly. So use any extra funds you have to ramp up payments on your debts.

5. My contributions to my 401(k) is just enough to get a full match. What is the best thing to do with a new income if I have a raise?

A. Put it in my 401(k)             

B. Open a Roth IRA

C. Buy lottery tickets

Answer: A or B

Check out a Roth IRA if it is still early in your career. With a Roth, you will pay taxes on contributions. However, you can make tax-free withdrawals. This feature makes the Roth IRA  a good fit for anyone who is paying a lower tax rates now than they will in retirement. But if you are in a high income bracket, then it is best to stick with the 401(k).

6. I am all set if my life insurance would replace eight to 10 times my salary.

A. True                        B. False

Answer: B

It is true only if you have no kids, is retired  or have no dependents. Otherwise, you may need up to 20 times your salary, depending on your circumstances. See the calculator at lifehappens.org to get a personalized estimate.

7. If my spouse and I are typical, how much should we plan to spend out of pocket on health care in retirement?

A. $0. That’s what Medicare is for.

B. $177,000

C. $240,000

D. $443,000

Answer: C

Excluding long-term care, today’s average 65-year old couple will need an average of $240,000 to pay out-of-pocket  health care costs in retirement.  It is best to create a designated  account for health care costs  if you are already  maxing out your 401(k) or IRA.

Reference

Rosato, D.(2013, January/February): Shore Up Your Financial Future. Money Magazine  - Special Double Issue.