Debt, retirement saving on minds of many people

Aprilwas Financial LiteracyMonth, and throughout I kept track of the most frequently asked questions that I fielded fromthis column, my “Jill onMoney” radio showand the “Better Off” podcast. The good news is that my listeners and readers are on top of many personal finance issues.

According to theNational Financial LiteracyTest, a snapshot of basic money concepts, the average scorewas a disappointing 63 percent, and only 48 percent of those who took the testwere able to pass it. One area that proved especially tough for respondentswas debt. Just 44 percent knew that loan payments are based on both the interest rate and the length of the loan.

Most of the debt-related questions that I fielded during the monthwere about student loans. Borrowerswere hyper-focused on paying downoutstanding debt, but manywondered, “Should I pay offmy student loans before funding retirement?” If you have access to aworkplacematch for your retirement plan, I recommend contributing up to that level to capture the money, in addition to aggressively paying downstudent loans.

Without a match, Iwould suggest putting 1 percent or 2 percent of your income into an employer-based or your own retirement account, simply to get into the habit of saving.

Another common questionwas about consolidating old retirement accounts, which makes the overall management of retirement funds easier.

“Are there any situations where it doesn’t make sense to roll over a 401(k) at a previous employer into an IRA?” one person asked. “If a 401(k) is preferable, should I rollmy old IRAs intomy current 401(k)?” If your old plan has plenty of low-cost investment options and your employer allows you tomaintain it after leaving, it is just fine to leave it as is. There is also an extra benefit to a 401(k) account: Assets within the account are protected against claims fromcreditors and frombankruptcy courts.

Presuming that you are currently participating in an affordable, company-sponsored plan that allows you to transfer other retirement accounts into the plan, theremay be another compelling reason to do so. If you plan to or are likely to keepworking into your 70s, you can postpone required minimum distributions froma 401(k), 403(b), profit-sharing or other defined contribution plan until you retire, as opposed to an IRA, fromwhich you are compelled to take distributions after you turn 701⁄

The most frequently asked question that I received during Financial LiteracyMonthwas: “Do I have enough to retire?” Considering that the hardest question on theNational Financial LiteracyTestwas one that explored the concept of compounding interest, this is indeed an important topic. (Just 30 percentwere able to answer correctly: “If I invest $100 per month starting at age 21, and that money earns a 7 percent annual return, howmuchwillIhave after 70 years?” The answer: “More than $1.5 million.)

Howmuch you need to retire depends on your specific circumstances, not a simple rule of thumb. You need to start by projecting what your income need will be during retirement; for those who don’t currently track expenses, this involves an extra step.

Once you have your income need in hand, then you need to factor in future income, such as pensions, Social Security or earnings from your investments. Many investment companies have free retirement calculators, as does the Employment BenefitResearch Institute. If you are willing to pay up, the E$Planner calculates what you should save and spend to maintain your living standard. It costs $149 for the first year one and $70 annually thereafter to update licenses.