If you’ve gotten this far without knowing how to bungee jump, play the harp, knit or make a fancy French cassoulet, do you really need to learn financial literacy? In a word, yes.

At our ages, all the budgeting, saving and spending habits that we’ve developed over the years are coalescing into the ultimate question, “Do we have enough to last our lifetimes?”

The answer depends on health: our individual health, the economy’s health and the health of our retirement portfolios. We have virtually no control over the economy and only some control over our own health. What’s most controllable is our retirement income and spending. We can make a big difference by making informed decisions. 

The following quiz, culled in part on questions from AARP and CNBC, is a basic assessment of financial literacy. If you don’t score as well as you’d like, consider working through a class offered online or at your local community college. The knowledge learned could prove both interesting and beneficial, particularly if it makes you less susceptible to scammers.

Financial Literacy Quiz

1. Savings and money market accounts are most appropriate for:

a) long-term retirement goals
b) emergency funds and short-term
goals
c) earning a high rate of return

2. If you purchase a bond and interest rates rise, what will happen to the price of the bond?

3. If your assets increase by $15,000 and liabilities decrease by $3,000, how has your net worth changed?

4. If you always pay the full balance on your credit card, which of the following is least important to you?
a) annual interest rate
b) annual fees
c) line of credit

5. On which type of loan is interest never tax-deductible?
a) home equity
b) adjustable-rate mortgage
c) personal vehicle

6. What is the benefit of owning investments that are diversified?

7. The main advantage of a 401(k) plan is that it
a) provides a high rate of return
with little risk
b) allows you to shelter retirement
savings from current taxation
c) provides a well-diversified mix of
investment assets

8. How much will the typical married couple retiring at age 65 spend on out-of-pocket costs for health care throughout retirement in today’s dollars?
a) $50,000
b) $150,000
c) $250,000
d) $350,000

9. If you want some retirement savings that won’t be taxed upon withdrawal, what type of account should you contribute to?
a) IRA
b) Roth
c) 401(k)

10. If you switch to an insurance policy with a higher deductible, will your premium increase or decrease?

11. Which household would typically have the greatest life insurance needs?
a) middle-class retired couple
b) middle-aged working couple with
children in college
c) single-earner family with two young
children in preschool.

12. A typical 65-year-old can expect to live, on average, for how many more years?

Answers

1. B. Emergency fund and short-term goals. Money for long-term goals should be invested for higher returns.

2. Bond prices will fall. Bond purchasers will prefer the new, higher rates, so your old bond will be worth a little less money. Most people get this wrong!

3. $15,000+$3000 = $18,000 increase in your net worth.

4. A. If you pay off your credit card each month, the annual interest rate is not a concern.

5. C. A car loan is not deductible. Mortgages may be deductible depending on circumstances.

6. Diversification reduces risk. If one asset such as equity takes a dive, the other assets such as fixed income may be having a better year. Diversification is the cornerstone of modern portfolio theory and applies also within the equity class, such as real estate or technology.

7. B. 401(k) plans can have different investment goals, such as a high rate of return or a diversified investment basket. The purpose of a 401(k) is to allow you to shelter retirement savings from taxation until you withdraw them during your retirement years.

8. C. Most Americans greatly underestimate the money they will need to spend on health costs not covered by Medicare. The current lifetime average for a couple is over $250,00 spent in retirement.

9. B. Depending on your income and other circumstances, you can set up a Roth account during your working years. You would contribute post-tax money but would not be taxed on the income or capital gain of the account when you withdraw money in retirement.

10. Your premium will decrease, all else equal, because you will be retaining a greater portion of risk.

11. C. Single-earner households with dependents have the greatest need for life insurance. If you’re retired with no dependents and are still paying a life insurance premium, consider dropping it (term) or discuss with your insurer an exchange for a long-term care policy (whole life).

12. Men can generally expect to live about 20 more years if they’ve made it to age 65. Women age 65 will live on average to age 87.

The last question contains both good news and bad news. Though COVID may throw a wrench into the actuarial statistics, seniors today can still generally expect quite a few years in retirement. The question is whether we can afford long retirements. Financial fluency will help answer that for you.

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