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Most older Americans feel they are at least “moderately knowledgeable” on retirement income planning, but apparently that’s a misconception, as four in five fail to understand the basics of how to successfully plan for a financially secure retirement, according to a new study released by The American College of Financial Services.

The 2020 Retirement Income Literacy Survey discovered major gaps in savings knowledge.

The study of 1,500 Americans was done through online interviews between April 29 and May 18. Respondents were age 50 to 75 with at least $100,000 in household assets, not including their primary residence.

“With a troubled economy and an acceleration of early or forced retirements, consumer understanding of retirement principles is particularly important,” said Steve Parrish, adjunct professor of advanced planning and co-director of the College’s New York Life Center for Retirement Income, in a statement.

“Yet the survey demonstrates that retirement literacy remains troublingly low. Financial advisors should take heed of this situation and embrace the opportunity it provides to help Americans prepare for a successful retirement.”

In addition, eight in 10 people failed a 38-question online quiz on financial literacy, with an average score of just 42%.

The quiz showed other major knowledge gaps on how to sustain income in retirement:

  • More than half underestimated the life expectancy of a 65-year-old man, which suggests many don’t know how long their assets may last.
  • Only three in 10 have a plan in place for how to fund long-term care needs, and only 8% consider it very likely that they will ever experience a long-term care need — even though the reality is that 70% will.
  • Only 32% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, suggesting most do not know how to manage a prudent withdrawal rate.

Nearly four in 10 consumers reported feeling highly prepared for the market downturn associated with the pandemic, and what made a difference in consumers’ perception of preparedness was having a formal, written retirement plan.

In fact, those with a written retirement plan (47% vs. 35% of those without) or a retirement income plan (43% vs. 22%) reported feeling more prepared to deal with the market downturn. However, only one in three respondents reported having a written plan.

Long-Term Care Issues

The survey also found only three in 10 respondents had a plan in place to fund long-term care needs, while only one in four actually had long-term care insurance.

Further, half said that it’s somewhat likely they will need long-term care services, but just over half have never looked into long-term care insurance.

More troubling is that 70% of respondents stated they didn’t expect their family members to provide care.

When asked to rate their concern on various aspects of retirement, 81% stated cost of health care was moderate to extremely concerning, followed by volatility in investment returns (78%), impact of inflation (75%), and cuts to Social Security (74%). Interestingly, only 53% expressed at least moderate concern about running out of money.

The extensive survey covered various aspects of retirement knowledge, from understanding investments to how life insurance or annuities work in retirement planning, as well as when respondents planned to retire.

When asked what age they planned to take Social Security benefits, 25% said age 62, the earliest age they can take benefits. However, 41% said they would begin collecting at age 66 or older (17% at age 70).

Finally, the survey asked about how COVID-19 is affecting investment behavior, and most respondents, 54%, saw no change in risk, while 39% were less comfortable taking risk. Further, 42% stated they have decreased spending due to the coronavirus, while 15% have increased the amount they are saving. Almost 40% said they made no changes.

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