What's Your Financial IQ?

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| By Pamela Yellen
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Pamela Yellen
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Quizzes Created: 2 | Total Attempts: 16,987
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  • 1/20 Questions

    If you take distributions from a 401(k), IRA, or other tax-deferred retirement plan before you’re 59½, in most cases you’ll pay:

    • Income tax on the amount you withdraw, plus a 10% penalty on the amount you withdraw
    • Income taxes but no penalty, if you pay the money back within five years
    • A penalty of 5%, plus tax on any gains in your account
    • Just the taxes you would have owed at the time you put the funds into the plan
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It takes most people 5 to 10 minutes to complete the quiz. You'll get your score and clear explanations of every answer as soon as you complete the quiz.

Whats Your Financial IQ? - Quiz

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  • 2. 

    In a tax-deferred government-approved retirement account, such as a 401(k) plan or an IRA, when must you start taking required minimum distributions (RMDs) and paying taxes on the distributions?

    • If you don’t need the money, you may file the proper IRS form and not take a distribution until you need it. No taxes will be due until you withdraw money from your account

    • You must start taking distributions and paying taxes on them by April 1 of the year following the year in which you turn 70½

    • You may defer distributions until age 80½, although you must pay tax annually on any capital gains

    • You must pay estimated taxes starting at 70½, but you may defer distributions until you are 80½, so your fund can continue to grow

    Correct Answer
    A. You must start taking distributions and paying taxes on them by April 1 of the year following the year in which you turn 70½
    Explanation
    Answer: B You must start taking required minimum distributions by April 1 of the year following the year you turn 70½, and you must pay income taxes on that money, too.

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  • 3. 

    What is the difference between saving and investing?

    • To save means to put money where it will grow very slowly (or not at all), and to invest means to put money where it will grow much faster

    • To save means to put money in a vehicle that is safe, protected from loss, and has guaranteed growth, and to invest means to put money in a financial vehicle or asset that has a certain amount of risk and no guarantees of growth

    • To save means to put money into any kind of an account at a bank, and to invest means to put money into a brokerage account

    • There is no significant difference between saving and investing. The words mean essentially the same thing and can be used interchangeably

    Correct Answer
    A. To save means to put money in a vehicle that is safe, protected from loss, and has guaranteed growth, and to invest means to put money in a financial vehicle or asset that has a certain amount of risk and no guarantees of growth
    Explanation
    Answer: B The difference is in the guarantees, not the rate of growth. Furthermore, you can invest through the brokerage arm of many banks, and you can save through some accounts arranged through a brokerage firm (money market funds are an example). To see how much faster your net worth can grow when you focus on saving, rather than investing, check out this interview with a "Bank On Yourselfer" and discover why he wants to "shout about this from the rooftops." www.bankonyourself.com/interview

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  • 4. 

    If you pay cash for a $25,000 car (meaning you pay for it up front, and you don’t make payments to a finance or leasing company), what is your actual cost to purchase the car?

    • $25,000

    • About $22,000 ($25,000, less approximately $3,000 in finance charges you didn’t have to pay)

    • Trick question; it’s usually better to lease

    • $25,000 plus the interest or investment income you could have earned, if you hadn’t withdrawn the money to pay cash for the purchase

    Correct Answer
    A. $25,000 plus the interest or investment income you could have earned, if you hadn’t withdrawn the money to pay cash for the purchase
    Explanation
    Answer: D You finance everything you buy, because you either pay interest when you finance or lease, or you lose interest and investment income you could have had if you had kept your money invested. By the way, contrary to what most automobile dealers would have you believe, leasing is usually the least efficient way to finance anything.

    There’s a better way to make major purchases that solves the problem of having to constantly interrupt the growth of your money when you spend or invest it. This method lets you fire your banker and become your own source of financing. It beats financing, leasing, or even directly paying cash. Click here to watch a video revealing how it works.

    www.bankonyourself.com/video

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  • 5. 

    At least 70% of people over 65 will require long-term care services at some point, and 40% will need nursing home care, according to the U.S. Department of Health and Human Services. Based on the length of an average nursing home stay, how much money will you need to cover a typical stay in a nursing home?

    • $30,000

    • $100,000

    • $250,000

    • Medicare covers most of the cost

    Correct Answer
    A. $250,000
    Explanation
    Answer: C The typical stay in a nursing home lasts 2.8 years. And the cost for that stay in a private room will average nearly $250,000 (or close to $220,000 for a semi-private room), according to Genworth, a leading provider of long term care insurance. And many people don’t realize that Medicare does not pay your long-term care expenses.

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  • 6. 

    What is the definition of a liquid asset?

    • An asset is liquid if you can sell it relatively quickly to a willing buyer to get your money out, although you may have to take a loss

    • Money you have in bonds or CDs is liquid

    • Your money is liquid if you can get your hands on it immediately, without incurring a loss or selling an asset

    • Any asset you can use as collateral for a loan is, by definition, liquid

    Correct Answer
    A. Your money is liquid if you can get your hands on it immediately, without incurring a loss or selling an asset
    Explanation
    Answer: C An asset is truly liquid only if you can convert it to cash when you need it, for whatever you need, without begging or applying for it, with no penalties for accessing it, and without sustaining a loss. Bonds may need to be sold at a loss, and most CDs are liquid for only a few days at the end of each term. The fact that you may be able to use an asset as collateral for a loan does not make the asset liquid.

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  • 7. 

    What return on investment do you receive on the payments of principal you make into your home as you pay down your mortgage?

    • The same percentage as the increase in the appraised value (or sales price) over the cost basis of your original purchase

    • The reduction in the loan amount, subtracted from the current appraised value

    • The return you receive is equal to the interest rate you pay on your mortgage

    • Payments of principal you make into your home do not earn interest or make you any money

    Correct Answer
    A. Payments of principal you make into your home do not earn interest or make you any money
    Explanation
    Answer: D. Payments of principal you make into your home do not earn interest or make you any money. Furthermore, the equity in your home is neither liquid nor guaranteed.

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  • 8. 

    How much of the value of your savings will be consumed over the next 35 years, if you pay fees of 1% per year and your returns average 7% per year?

    • 1%

    • 3%

    • 10%

    • 28%

    Correct Answer
    A. 28%
    Explanation
    Answer: D Fees of only 1% would slash the value of your retirement account by 28% over the next 35 years, assuming your returns average 7% per year, according to the U.S. Department of Labor. But most people pay at least 1% in fees each year. On average, participants in small retirement plans pay 1.9% in fees annually, and participants in large plans pay 1.08%.

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  • 9. 

    Since 1929, how many market crashes have there been in which the Dow Jones Industrial Average took at least 16 years to return to pre-crash levels?

    • 0

    • 1

    • 3

    • 7

    Correct Answer
    A. 3
    Explanation
    Answer: C There have been three crashes since 1929 that took between 16 and 25 years to recover.

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  • 10. 

    What percentage of mutual funds, financial experts, and investment advisory services underperform the overall market and comparable indexes?

    • 95%

    • 80%

    • 50%

    • 20%

    Correct Answer
    A. 80%
    Explanation
    Answer: B Fully 80% underperform, according to the highly respected Hulbert Financial Digest. And it’s not only because of the fees they charge. The experts are humans, too, and they’re predictably irrational like the rest of us, buying and selling at the wrong times.

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  • 11. 

    One of the biggest appeals of 401(k) plans and IRAs is that they let you defer paying income tax on the money you place in them. How much can you expect to save by deferring the tax?

    • 10%-22%. You’ll probably be in a lower tax bracket when you have to pay the tax, since your income will likely be reduced in retirement

    • You might not save anything, and in fact, you might end up paying more

    • It’s impossible to say, but the amount you will save is likely to be substantial

    • You can typically expect to save about 40% of the taxes you would have had to pay

    Correct Answer
    A. You might not save anything, and in fact, you might end up paying more
    Explanation
    Answer: B If your tax bracket and the tax rates don’t change, you’ll end up paying the same amount in taxes. But if you’re successful with investing your nest egg, and if tax rates go up (as most observers believe they will), you’ll end up paying more (potentially much more) in taxes by deferring them.

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  • 12. 

    According to the Social Security Administration, what percentage of people turning 65 today will live past age 90?

    • 5%

    • 10%

    • 25%

    • 40%

    Correct Answer
    A. 25%
    Explanation
    Answer: C 25% will live past 90. And 10% will live past 95. A couple aged 65 and in good health has a 60% chance that one of them will reach age 90, according to the Social Security Administration. But those numbers are just averages—they don’t tell you how long you will live. When planning for retirement, it’s advisable to assume you’ll live to at least 95—or even longer. There is a way to safely grow a nest-egg that can last as long as you do. It's called Bank On Yourself, and it's based on an asset that has never had a losing year in more than 160 years! Get all the details when you click here to download a FREE chapter, of Pamela Yellen's New York Times best-seller, The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future. Would you like to discover how to reach your short-term and long-term financial goals and dreams in the shortest time possible, without taking any unnecessary risk? It's quick and easy to find out when you request a free, no-obligation Analysis here. You'll also get a referral to one of 200 Bank On Yourself Authorized Advisors who can answer any questions you may have. You have nothing to lose and a world of financial peace of mind to gain so request your Analysis by clicking on the button below:

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  • 13. 

    Investors are often advised to invest in asset allocation mutual funds, which spread your money among a blend of equities and fixed-income funds. In theory, this reduces risk of loss. What annual return did the average investor in asset allocation funds realize over the last 30 years?

    • Less than 2% per year

    • About 7%

    • About 10%

    • More than 12%

    Correct Answer
    A. Less than 2% per year
    Explanation
    Answer: A The average return that asset allocation investors actually received was only 1.76% per year over the last 30 years, according to the 2015 annual report from DALBAR, Inc., a well-respected research firm. These investors, who were doing exactly what they had been advised to do, didn’t even come close to beating inflation, which averaged 2.7% per year over the same period. The average investor in equity mutual funds averaged only 3.79% per year, beating inflation by less than 1% per year. This makes it clear that if you're invested in the market, you're only fooling yourself if you believe you are growing real wealth in the Wall Street Casino. But it doesn't have to be that way. The Bank On Yourself method is based on an asset that has grown in value every single year for more than 160 years and has achieved substantial growth without the risk of stocks, real estate and traditional investments. Watch this video to see the long-term rate of return of a Bank On Yourself plan. www.bankonyourself.com/return

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  • 14. 

    How much money will a typical 65-year-old couple retiring today need to cover out-of-pocket health care costs during their lifetimes?

    • $3,500 per year, for supplemental insurance

    • $220,000

    • The husband (average life expectancy 83) will require $28,000 while the wife (average life expectancy 85) will require $41,000

    • About $5,000 per year, thanks to the Affordable Care Act

    Correct Answer
    A. $220,000
    Explanation
    Answer: B Studies show that a sixty-five-year-old couple retiring now will need $220,000 to cover out-of-pocket health care costs during retirement—costs that government programs do not cover, except for the indigent (those with no significant assets). Unfortunately, many couples don’t even have $220,000 in savings. And in case you think that figure must include possible nursing home and long-term care costs, it doesn’t. And the figure assumes you do have Medicare.

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  • 15. 

    Many people today say they’ll just keep working to make up for their retirement savings shortfall. But that may not always be an option. What portion of current retirees were forced out of work earlier than they planned?

    • About one-fourth

    • Almost one-third

    • Almost half

    • About 75%

    Correct Answer
    A. Almost half
    Explanation
    Answer: C Almost half of all retirees were forced out of work earlier than planned, due to layoffs, poor health, or the need to take care of a loved one, according to the Employee Benefit Research Institute.

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  • 16. 

    The Pension Protection Act of 2006, passed by Congress, is about 401(k) retirement plans. Who does this law protect?

    • Employees who put money into their companies’ 401(k) plans

    • Employers who offer 401(k) plans

    • Workers not eligible for a 401(k) plan

    • Workers whose pension funds were at risk

    Correct Answer
    A. Employers who offer 401(k) plans
    Explanation
    Answer: B It protects your employer from liability—as long as your employer automatically invests your 401(k) money in certain types of mutual funds. The problem is those funds are often costly and perform poorly. If you lose your shirt, you have no recourse. You may choose to opt out of these automatic investments, but 90% of all new hires let their plan administrator choose where their money will be invested for them, according to Towers Watson, a global financial consulting firm.

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  • 17. 

    Many 401(k) plans allow workers to take loans up to certain limits from their accounts during their employment. If you lose your job or leave the company for any reason, how soon must you pay back your loan (plus interest), in order to avoid owing income taxes plus a 10% penalty?

    • 10 days

    • 30-60 days

    • 180 days

    • One year, as long as you continue to pay the interest due on your loan

    Correct Answer
    A. 30-60 days
    Explanation
    Answer: B You generally have 30-60 days to pay back your loan in full, plus interest. An estimated 75% of workers who leave their jobs with a loan outstanding end up defaulting and getting stuck paying penalties and taxes, according to research by Harvard economist Brigitte Madrian. Government-sponsored retirement plans have more strings attached to them than a puppet. Your money is essentially in prison. Click Here to Download a FREE Chapter of Pamela Yellen's Best-Selling Book, The Bank On Yourself Revolution, and discover a retirement plan alternative that gives you an unbeatable combination of guarantees, safety, liquidity, flexibility, control and tax advantages.

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  • 18. 

    The top-performing mutual fund for the decade ending December 31, 2009, enjoyed an 18% annual return. What annual return did the fund’s typical investors actually receive?

    • 17%, after fees

    • 14% - 18% depending on investors’ hold time

    • Lost an average of 11%

    • 8%, due to inflation, taxes, and fees

    Correct Answer
    A. Lost an average of 11%
    Explanation
    Answer: C According to Morningstar, Inc., they lost an average of 11% per year—every year—for ten years, even though the fund’s prospectus boasted an 18% annual gain. That’s because mutual funds are legally required to advertise only the results of “buy-and-hold” investors. So when a fund advertises returns for any given period—in this case, a decade—it assumes investors bought the fund on the first day of that period and held it until the last day of the period—no matter how wild the ride got. But that rarely happens in real life. In fact, on average, investors hold mutual funds for less than five years.

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  • 19. 

    If someone had made a $10,000 investment in gold in 1802, how much would that investment have been worth in 2008 (206 years later), after adjusting for inflation?

    • $26,000

    • $132,500

    • $436,000

    • $1.2 million

    Correct Answer
    A. $26,000
    Explanation
    Answer: A Barely $26,000, according to John Bogle, founder of Vanguard. Gold reached a high of $1,011.25 in 2008, when Bogle made that calculation. Seven years later, in March 2015, gold was only slightly higher, at $1,148 (and that’s not accounting for inflation since 2008).

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  • 20. 

    If you own a $20 stock and it goes up by 40%, how much money did you make on that stock?

    • $8, less the commission

    • Nothing

    • It depends on your original purchase price (cost basis)

    • $28

    Correct Answer
    A. Nothing
    Explanation
    Answer: B You didn’t make any money unless you actually sold the stock and (hopefully) locked in your gains. Many people make the mistake of assuming that paper profits are the same as real wealth. Learn more about the critical differences between paper wealth and real wealth here. www.bankonyourself.com/real-wealth

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Quiz Review Timeline (Updated): Sep 14, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Sep 14, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • May 21, 2015
    Quiz Created by
    Pamela Yellen
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