Editor’s note: This article is part of a Next Avenue special section about women age 50+ managing their money. As part of the special section, Next Avenue personal finance blogger Kerry Hannon has created this Money IQ Quiz.
1. You should save regularly for retirement and other long-term financial goals an amount that matches at least…
ANSWER: C, 10 percent of your net income.
The least painful way is to contribute automatically to an employer’s retirement plan or saving through payroll deductions. It’s the out-of-sight, out-of-mind method of saving. If you have put off saving until age 50, you’ll probably need to save closer to 20 percent to retire well.
2. Generally speaking, you should have enough money set aside to pay living expenses for a minimum of…
ANSWER: B, three months.
It’s vital to have an emergency savings cushion in case you, or someone in your family, encounters unexpected, uninsured medical costs or you lose your job. Target three times your basic monthly expenses to get started, but if you can ramp it up to a year’s worth of savings over time, do so. A money market mutual fund or a bank savings account are smart, safe places to safeguard this money.
3.Your total debt (not including your mortgage) should be no more than…
ANSWER: B, No more than 35 percent of your net income.
Lenders look at your debt-to-income ratio — the amount of debt you have versus your overall income — when they are deciding whether to extend credit, say, to approve you for a mortgage or a credit card. Generally, the lower it is, the greater the chance you will be approved. Check out a debt-to-income ratio calculator, like this one on BankRate.com.
4.The best way to raise your credit score is to…
ANSWER: A, pay your bills on time.
Approximately 35 percent of your credit score is based on your payment history, according to Fair Isaac Corp., whose FICO score is the most widely-used. Around 30 percent is based on how much credit you have access to and how much you’re using; about 15 percent is based on how long you’ve had your credit cards and roughly 10 percent is determined by the number of times credit card companies request your credit report. (Lots of requests suggest you may be desperate for credit and headed for trouble).
5. You should update your will…
ANSWER: A, When you have a major life change, such as marriage, divorce or birth of a child.
The point of a will is to ensure that the right people will inherit your assets. So getting married or divorced or having a baby are all good reasons to get your will updated. Without a will, there’s no telling who’ll get what you leave. Plus, your estate will go into probate — a costly, slow-moving legal process. If your assets are in the six figures or higher, you probably ought to have a trust as well, to help minimize estate taxes and avoid probate.
6. If you are divorced, you are typically eligible for your ex’s Social Security benefit if…
ANSWER: B, you’re 62 or older, were married for at least 10 years and are not currently married.
Don’t pass up your ex’s Social Security benefit if you’re entitled. You may be eligible to collect as much as half of your husband’s Social Security retirement or disability benefits, even if he has remarried. (If you remarry, though, you generally cannot collect Social Security benefits on your former spouse’s record unless your later marriage ends by death, divorce or annulment.) You may also be able to receive only your ex’s Social Security benefits now and delay receiving your own until a later date, which is a great idea. Social Security benefits are increased by a certain percentage — 8 percent annually for those born after 1943 — if you delay your retirement beyond Full Retirement Age, now 66 to 67.
7.If you leave a company before you have “vested” in your employer-sponsored 401(k) plan, you…
ANSWER: C, might receive a percentage of your employer’s contributions in addition to your own.
In a plan like a 401(k), your contributions and any subsequent earnings are always 100 percent vested. However, you may have to work a set number of years before you are vested in the employer’s matching contributions. For example, with graduated vesting, an employee must be at least 20 percent vested after two years, 40 percent after three years, 60 percent after four years, 80 percent after five years and 100 percent after six years.
8.The best way to determine how much you’ll need to have saved to cover retirement living expenses is to…
ANSWER: C, make a personal retirement plan projection.
Knowledge is power. Once you have your plan in place, you begin to take action and can see your stockpile accumulating year after year. Workers who have done a retirement savings needs calculation tend to report higher savings goals and are more likely to feel very confident about affording a comfortable retirement. Start with The Ballpark E$timate calculator from the Employee Benefit Research Institute’s site, Choose to Save. Many mutual fund companies also have useful retirement calculators on their sites. Two other good calculators for people over 50: Retirement Works2 for You andE$Planner.
9.Every woman needs…
ANSWER: C, both a living will and a healthcare power of attorney and a financial power of attorney.
A living will stipulates your end-of-life wishes. A healthcare power of attorney names the person who will make health-care decisions for you if you can’t. A financial power of attorney names the person who will make money decisions for you if you can’t. One of the major benefits of having these papers in place is that you save your family the angst of trying to guess what you’d want. It can also avoid family conflicts and a significant financial burden on your heirs.
10.The biggest hurdle to realizing financial well-being in retirement is…
ANSWER: C,You haven’t started a regular savings strategy that includes investing in stocks and bonds.
One key to a comfortable retirement is putting a disciplined,diversified investing plan in place in advance. Bonds generally are less volatile than stocks, but over the long haul, stocks have outperformed bonds, bank savings accounts and CDs. A general guideline for a safe, diversified retirement savings portfolio: take 100 and subtract your age for the percentage of your portfolio to hold in stocks. If you’re 55, you’d want 45 percent in stocks. As you get older, gradually shift toward a higher concentration in safer bonds.
10.0 out of 100 points
100 points: Congratulations! You have your financial wits about you. But never stop learning about ways to manage your money. Continue to make your finances a priority, and you should be well-prepared for a secure future.
70 to 90 points: This is pretty darn good. You have the basics under your belt and are on your way. Keep at it, though. Push yourself to focus with a vengeance and stay on top of your money game by regularly monitoring your situation.
40 to 60 points: You’ve learned a few important things about taking control of your finances, but you need to ramp it up. A good way to get started is to scan the list of stories in Next Avenue’s special section and see where you can learn more. Also, do the intermediate checklist.
0 to 30 points: Yikes. It’s time for you to start learning about investing and putting money aside for your retirement. Read through our entire special section on ways women 50+ can take control of their money. Then do the beginner checklist. Good luck!