On the whole, Americans might seem to be among the best-educated individuals in the world. Yet, when it comes to matters related to retirement income needs, the vast majority is fairly clueless.
Indeed, in what is possibly the first extensive Retirement Income Literacy study, most Americans near or at retirement age failed a very basic quiz on how to make their nest eggs last. Only 20 percent received a “passing” score.
Conducted by The American College of Financial Services, the Retirement Income Literacy study looked at how knowledgeable Americans in the 60 to 75 age bracket are on such matters as life expectancy, Social Security claims, long-term healthcare needs, investment risks, and more. Retirement Wire spoke with Director Dave Littell and Associate Director Jamie Hopkins of the college’s RICP Retirement Income Program about the study findings, which they said were worse news than expected.
A Worst Case Scenario
“Overall I didn’t expect people to do that great, but I didn’t think it would be this bad,” Littell said of the study’s combined quiz results. “There were a lot of people that got less than 30 percent right. I know how critical these issues are to people’s retirement so I worry a lot that people don’t know a lot of this material.”
While The American College of Financial Services does a lot of work around financial planning topics, this was its first time conducting a retirement income literacy survey. It believes it is also the first such study in the industry.
“There has been a lot of work done on financial literacy generally, but with retirement income literacy we have seen no comprehensive studies,” Littell explains.
In fairness, the study is not reflective of the population as a whole. Those surveyed have definite assets. But that was in fact the point, to determine if those individuals knew how to best manage those assets.
“They have a minimum of $100,000 and most people had more than $200,000 in assets,” Littell said of the respondent pool. “They showed some signs of financial literacy, and 70 percent of them saw advisors. But we still had this low performance. All of those factors are part of why I say that things are worse than I would expect.”
Also disheartening is that the quiz was not really very hard, Littell said. “We did 38 quiz questions relating to how much time people spend thinking about all these issues, planning for these issues, and also their attitudes on these various concerns.”
Unfortunately, the test results were dismal. Eighty percent of respondents received an ‘F’ score; 14 percent received a ‘D’; 5 percent received a ‘C’; and 1 percent received a ‘B’.
“No one liked getting Fs back in school, but retirement income literacy is a test Americans simply cannot afford to fail,” Littell noted in the study summary.
What The Study Reveals
So just what did the quiz-takers get so wrong? Here are some highlights:
• “Respondents showed a particular dearth of knowledge when it comes to understanding how to preserve their assets in retirement,” the study summary says. Nearly two-thirds are unfamiliar with the “4%” rule.
• “Only half of respondents (53 percent) know that it is best to wait until ago 70 to claim Social Security for someone with a long life expectancy,” the study indicates,
• “A disturbing number of these older respondents showed a lack of knowledge when it comes to understanding investments—especially bonds, which many consider ‘safe’.
• “More than half of Americans (51 percent) underestimate the life expectancy of a 65-year-old man, showing a lack of knowledge around how much time people should plan for living in retirement.”
• “Only 27 percent of respondents report having a written retirement plan in place – despite the fact that 63 percent say they have a relationship with a financial advisor.”
You’d Think They’d Know Better
One of the things that most surprised Littell about the study results is that the quiz takers were all individuals in the period of their lives when they should be paying close attention to retirement issues.
“We limited the group to people age 60 to 75 so it was only people that [should] understand these things as they approached and moved into retirement,” Littell said. “We thought that people probably didn’t know a lot about many of these complex issues, but there really wasn’t a comprehensive study before to validate that.”
The suspicions of Littell and Hopkins proved true, and then some.
“We discovered that only 20 percent got a passing score of 60 percent on the quiz. The average score was about 42 percent, so America’s knowledge about some of these key issues that affect their retirement is relatively low, which worries us,” Littell stresses.
Another study finding that surprised Littell and Hopkins was how little participants understood the benefits of delaying Social Security.
“I was surprised when we asked them even simple questions about Social Security claiming. There has been a ton of press about that issue,” Little’ll said.
How Did They Get it all so wrong?
So why do so many retirees or soon-to-be retirees know so little about how to manage their retirement income? Both Littell and Hopkins have some theories.
“I think people make a lot of really important decisions without much information, especially financial decisions,” Littell said. “They choose to take Social Security based on what their friends and family have done. I’ve seen this in my life. I’ve tried to convince people that should wait until past retirement age, and they look at me like I’m crazy.”
Hopkins points to misplaced confidence.
For example, “We asked how competent do you feel on long-term care that you know the issues. Everyone rated very competently, almost across the board. But then we see only 40 percent of people get the [corresponding] question right. So not only are people getting the questions wrong but they think they know the areas. That to me was one of the big takeaways.”
Hopkins also said that the study results reveal a failure on the part of retirement planners to better educate their clients. As both note, the majority of those taking the quiz all sought out advisors.
“Part of our study also raises the question of, if you do have a financial advisor, what role does that financial advisor have in educating the client,” Hopkins said. “A financial advisor probably wouldn’t say that, ‘my first job is to educate my client with all this information’, but maybe providing more education can give them more tools to make [better] decision on their own.”
It certainly raises the question of where should these individuals be getting this information from, Hopkins explains.
“Some of that goes back even further: that we don’t do a good job at [teaching] financial literacy at a young age,” Hopkins complains. “We have Americans that are financially illiterate. And retirement income planning is possibly more difficult than your general financial literacy, If we don’t do a good job with the basics up front, it’s going to be very difficult for them to understand more complex issues—annuity pricing or long term care planning or even Social Security claiming issues.”