When are reverse mortgages due? What triggers early withdrawal penalties? What exactly is covered by Medicare again?

Retirement planning is hard, and most people struggle to understand the fundamentals, according to a new report by the American College of Financial Services, a nonprofit that educates financial advisers. Only 20 percent of people in or near retirement who were surveyed by the group passed a quiz about the basics of retirement planning.

The group quizzed more than 1,000 people, ages 60 to 75, who had at least $100,000 in assets. The goal was to get a sense of how informed people are as they approach retirement, says Dave Littell, a director at The American College. “In some ways we expected people wouldn’t do that great on the test,” Littell says. “We were surprised at just how bad they did.”

People were most stumped by questions about the strategies that could help their money last longer in retirement. For instance, more people said they would get the biggest boost to their retirement income by saving more when they were close to retirement, but in reality pushing back retirement by a few years or delaying Social Security would have a bigger impact, Littell says. (Savings set aside at that stage don’t have as much time to benefit from investment growth, he says.)

Indeed, people often misunderstand the rules about drawing down their assets in retirement, says Gary Koenig, vice president of financial security for the AARP Public Policy Institute. People forget that they need to start taking required minimum distributions from their individual retirement accounts and 401(k)s after age 70 1/2, says Koenig, who was not involved in the study. Others don’t know that taking Social Security benefits at 62 leads to a permanent reduction in benefits, assuming incorrectly that they would start receiving full benefits once they reach full retirement age, he says.

Some of the 38 questions asked in the quiz were far from elementary, hitting on complicated retirement products like annuities. Some were more focused on investing topics like interest rate risk and mutual fund costs. (Do you know what a PE ratio is? Or what is the average lifetime payout for a 65-year-old male getting an immediate income annuity?) Some of the terminology may have tripped people up, Littell says. “Jargon is a challenge,” he says, adding that it can be tough to avoid such complicated terms.

But the confusion also highlighted another risk — people may be over confident about their retirement security. While most people struggled to answer the questions on retirement strategy,  more than half, or 55 percent, said they felt they were prepared to meet their income needs in retirement. Ninety-one percent said they were moderately confident they would have a secure retirement.

The quiz also highlighted one thing that people often get wrong that could increase their chances of running out of money in retirement — how long they are likely to live. Most people underestimate their longevity, putting them at risk of drawing down their savings too soon, collecting Social Security benefits too early and taking a lump-sum payment from a pension plan when they might be better off with an annuity, Koenig says.

What do you think, are you smart enough to retire? Test your luck with this excerpt of the quiz:


A 65-year-old man has an average life expectancy of approximately an additional:

10 years
15 years
20 years
25 years


What is the proportion of the population that is going to need assistance with activities of daily living (need long-term care) at some point?                



True or false: Medicare typically pays for the costs of a nursing home for one year.



Social Security workers’ monthly benefits are increased for each year that benefits are deferred from age 62 to age…



According to the Social Security Administration, in 2033 they will only have funds to pay for approximately ___ of promised benefits.

0 percent
25 percent
50 percent
75 percent


Which one of the following statements concerning the federal income tax treatment of distributions to a 65-year-old retiree is true?

All distributions from a Roth IRA that has been maintained for more than five years will be tax-free
All distributions from a traditional IRA will be taxed as long-term capital gains
Distributions from a traditional IRA prior to age 70 1/2 will be subject to an additional 10% penalty tax


True or false: An individual who is age 75 can still make a Roth IRA contribution if he or she has earnings from work and does not exceed the earnings limit.



If a person has a portfolio of long-term bonds and interest rates rise significantly, then the value of those bonds will…

No change at all


A PE ratio means…

Profits to expense
Price to earnings
Par value to earnings
Price to expense


Who provides the majority of long-term care?

Family members
Nursing homes
Assisted living facilities

Your score: 0 / 10