Retirement quiz: See if you pass

If you are in or soon aiming for retirement, here are some things you probably should know. Let’s see if you do.

1.

True or false? Retirees who claim Social Security past age 68 can avoid having those benefits count as taxable income.

(Answer below.)

2.

The advice “pay yourself first” refers to what?

(Choose one.)

1. Rely on investments that reinvest dividends.
2. Reward yourself every payday with a treat.
3. Prioritize savings and investments with automatic deductions.
4. Prioritize retirement over inheritance or charity.

(Answer below.)

3.

Which of the following is a reason for retirees to plan ahead on taking their annual required minimum distributions (RMDs) from retirement accounts like 401(k)s and traditional IRAs?

(Choose one.)

1. Possible effects on Social Security benefits.
2. Possible effects on taxes.
3. Possible effects on private pensions.
4. Possible effects on Medicare.

(Answer below.)

4.

Considering the usual relationship between interest rates and bond values, what should investors expect as the Federal Reserve cuts short-term rates?

(Choose one.)

1. Bond values will decline.
2. Bond values will grow.
3. Bond values will be unchanged.
4. Bond values will become more reliant on stock prices.

(Answer below.)

5.

Social Security retirement benefit amounts automatically adjust annually based on which of the following?

(Choose one.)

1. An executive order.
2. The federal deficit.
3. Inflation.
4. The balance in the Social Security trust fund.

(Answer below.)

Answers

1.

False.

Whenever you start receiving them, Social Security retirement benefits are subject to federal income tax. Taxpayers who report a “combined income” above $25,000 for individuals ($32,000 for a joint tax return) could owe taxes on up to 85% of their Social Security checks. Social Security defines combined income as adjusted gross income, tax-exempt interest income and half of the Social Security benefits received in a year.

A temporary tax provision allows recipients 65 and older to deduct up to $6,000 from their annual benefits when determining their tax liability. The deduction is in effect from 2025 through 2028.

Social Security provides automatic tax withholding from benefits to help cover possible tax costs.

Some states also count Social Security benefits as taxable income. Consult your advisor and tax professional about your individual circumstances.

Learn more

• Must I pay taxes on Social Security? from the Social Security Administration    
• Frequently asked questions: Social Security income, from the Internal Revenue Service
• Tax information for seniors & retirees, from the Internal Revenue Service
• Quiz: How Much Do You Know About Social Security Basics? from Kiplinger personal finance

2.

c. Prioritize savings and investments with automatic deductions.

By automatically directing part of your paycheck or bank account to investments, you force yourself into the habit of regularly contributing to your long-term wealth. The less you handle such money, the less you’ll be tempted to fritter it away.

Workers should use automatic deductions to take advantage of employer-based retirement accounts, even more so if the employer offers to match part of the worker’s contributions. Remember to increase contributions with each pay raise.

Retirees should consider using direct deposit options for their Social Security checks and pension benefits.

Learn more

• What Does Paying Yourself First Mean? How It Works and Goal, from Investopedia
• How to save and invest, from Investor.gov.
• Social Security Direct Deposit, from the Social Security Administration

3.

b.  Possible effects on taxes.

Because they’re counted as income, RMDs can affect a retiree’s tax rate. They also can have an impact on how much of the retiree’s Social Security benefits are subject to income tax.

Through such strategies as qualified charitable contributions and Roth conversions, retirees can find ways to lower their tax liability while still meeting the distribution requirements. Advisors and tax professionals can suggest the best withdrawal options based on individual situations. 

Learn more

• Taxation of Retirement Income, from the Financial Industry Regulatory Authority
• Retirement plan and IRA required minimum distributions FAQs, from the IRS
• Deciding which retirement accounts to tap, a Money Talk Video with Dave Sandstrom
• When should I …take my required minimum distribution? 
• An IRS FAQ on qualified charitable distributions from IRAs

4.

b. Bond values will grow.

Bond values have an inverse relationship to interest rates so that when rates go down, values go up. On the other hand, when rates rise, values decline. The relationship makes sense when you consider that existing bonds issued at higher interest become more attractive than new bonds paying less interest. 

Learn more

• Inverse Relation Between Interest Rates and Bond Prices, from Investopedia
• Bond Funds and Income Funds, from Investor.gov
• Understanding Bond Yield and Return, from the Financial Industry Regulatory Authority

5.

c. Inflation.

Social Security relies on data from the Bureau of Labor Statistics to determine the yearly cost of living adjustment (COLA) for retirement benefits. The data comes from a specific version of the third quarter Consumer Price Index, which measures price changes for a basket of goods and services. Typically, Social Security announces the percentage rate for the COLA in October, and the raise, if any, takes effect in January. By law, the COLA can’t reduce benefits, but there have been years when benefits have not changed from one year to the next.

Learn more 

• Cost-of-Living Adjustment (COLA) Information, from the Social Security Administration
• Heads Up: COLA is Automatic, by Joel Dresang
• When Should I …check my Social Security Statement?

Compiled by Joel Dresang