The annual Retirement Income Literacy Survey asks over a thousand Americans between the ages of 60 and 75 to answer basic financial questions that relate to retirement. In the 2017 survey, 74% of the people who responded to the survey failed this quiz -- a disturbingly high percentage. Here are some of the most frequently missed investment-related questions along with the correct answers.

When is a steep drop in portfolio value most dangerous for a retiree: well before retirement, right at retirement, or several years into retirement?

Only 34% of the survey respondents correctly answered that a drop in value that happens right at the time of retirement is by far the most problematic. That's because when your investments decline right at the moment when you begin to tap them, they'll have a much harder time recovering in value and thereby lasting long enough to fund your entire retirement.

If a portfolio drops well before retirement, then there's still time for it to recover before you need to use it; and if the crash happens when you've been retired for a while, by that time you won't need the funds to last as long as you would right at the start of your retirement. And it doesn't help that the first required minimum distribution (RMD) is the biggest one -- if your portfolio is already reeling at the point you have to start taking RMDs, you'll have an even harder time maintaining your capital. You can minimize the risk of starting out your retirement on the wrong foot by shifting your investments over to less volatile assets well before you retire. If you run into this problem anyway, delaying retirement by few years is the safest option. Otherwise, you'll need to keep your retirement account withdrawals as small as possible for at least the first few years, in order to give your savings time to recover.

Worried woman looking at laptop

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Which type of fund has the highest returns over time: dividend-paying stocks, large-company stocks, small-company stocks, or high-yield bonds?

Small-company stocks produce the highest return over a long time window, but just 10% of survey respondents realized that fact. However, small-company stocks also tend to be more volatile and risky than the stocks of larger companies. Thus, small-cap funds and stocks are generally a better choice for someone who still has many years to go before retirement, since volatility doesn't matter so much when you have several decades to go before you need to access the investments. As you approach retirement, it's wise to switch to more stable stock investments such as large-company funds and high dividend yield funds; your percentage of bond investments should also increase over time with a corresponding reduction of stock investments. When you're actually in retirement, it's wise to emphasize income investments like bonds and high dividend stocks.

Which bonds have the highest average yield: treasury bonds, AAA-rated corporate bonds, or B-rated corporate bonds?

Treasury bonds, which are backed by the federal government, have the lowest risk of all bonds but also tend to offer the lowest yield. Corporate bonds are rated according to their risk, based on the issuing company's financial stability: AAA is the highest rating, referring to a very stable company that's highly likely to repay its bonds, while letters further down the alphabet refer to companies in shakier financial circumstances. Because a B rated bond is riskier than an AAA rated bond, the bond issuer must offer a higher yield on the bond in order to tempt investors to accept the higher level of risk. Sadly, only 26% of survey respondents correctly replied that B-rated bonds have the highest yield.

When interest rates rise significantly, do bond funds increase in value, decrease in value, or stay the same?

As just 34% of survey respondents realized, bond values drop when interest rates rise. This happens because bond yields are determined by the interest rate at the time the bond is issued. For example, if you buy a 10-year bond today that offers a 2% yield and then interest rates go up, newly issued 10-year bonds may now be offering 3% or 4% yields. That means your bond with the 2% yield is paying out less than other bonds are, so it's worth less than they are. The more interest rates rise, the lower your existing bond's value will become. Thus, bonds and bond funds tend to suffer when interest rates go up. The good news is that climbing interest rates tend to make stocks rise in value, so if you keep a fair percentage of your retirement savings in stocks, the gains you make in stocks will help balance out the losses in bonds during such times.

Find out if you're retirement literate

You can take the Retirement Income Literacy quiz yourself and see how you'd do. It's important to find out if you are misinformed in some aspects of retirement finance, because if your retirement plans are based on incorrect information, you're more likely to run out of money in retirement or risk having your portfolio fall apart at the worst possible time.

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