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
What Your Peers Are Reading
“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.”