4 Big Retirement Planning Topics That Baffle Investors

Slideshow April 11, 2022 at 05:08 PM Share & Print

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The old saw that what you don’t know can hurt you certainly applies to retirement planning. Financial advisors can help their clients by filling the gaps in their knowledge.

Survey results recently released by the Insured Retirement Institute spotlighted serious information gaps among older workers and their regrets about what they had not done to prepare for retirement.

The research was carried out online in March 2021 among 990 Americans age 40 to 73.

The survey’s Retirement IQ evaluation segment was designed to find out how well workers understand concepts important to planning for, and navigating, retirement income needs.

See the gallery for four big knowledge gaps common among older workers.

Michael S. Fischer

NOT FOR REPRINT

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1. Inflation Risk

If you retire at age 65 with an annual retirement income of $60,000 and inflation is 3% per year, how much annual income will you need in 10 years to maintain the same lifestyle?

Only 26% of respondents correctly estimated $80,000 as the amount of annual income they would need in 10 years to maintain their standard of living at a 3% annual inflation rate. Thirty percent of estimates were on the high side, and 45% on the low side, including 15% who estimated they would need $65,000.

IRI noted that understanding the erosive effect of inflation on spending power is critically important for planning to enjoy a secure retirement. It’s also important to have a portion of retirement investment portfolios in risk assets that have a better chance of keeping pace with inflation than “safe” investment options.

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2. Sequence of Returns Risk

To measure understanding of sequence of returns risk, respondents were first told to imagine retirement at age 65 with $500,000 in retirement savings. They were then asked when they would prefer to have a significant market correction occur, assuming they are no longer working and are taking monthly withdrawals from an investment portfolio to meet their income needs.

Just 31% correctly responded that it would be best to have a major correction occur late in life, in this case sometime in the three years prior to death. Among the 69% of respondents who answered incorrectly, 28% said it doesn’t matter — which is true only if no withdrawals are taken.

IRI said this is a significant gap in knowledge about an important concept that can have severe repercussions on financial security during retirement.

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3. Average Monthly Social Security Benefit

About how much is the average Social Security monthly retirement benefit this year?

Respondents did better on this question, with 42% correctly selecting $1,500 as the average monthly benefit and 20% selecting $1,000. This means that 62% did not overestimate the average monthly benefit currently paid to retirees.

However, 38% did overestimate Social Security benefits, which is a real concern for retirement planning, IRI said. It said this is another area in which workers would benefit from having a relationship with a financial advisor who can help them understand how much they can expect to receive from Social Security and develop a strategy to maximize benefits.

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4. Monthly ‘Safe’ Withdrawal Estimate

About how much monthly income, increasing by the rate of inflation each year, can you safely withdraw from a $100,000 retirement account, starting at age 65, in order for the income to last until you are at least age 95?

Respondents were split 50/50 between selecting the correct answer — about $325 a month — and overestimating the income and underestimating the amount they could safely withdraw.

IRI said failing to understand this key concept in managing retirement savings could hasten the depletion of retirement funds. It also underscores another benefit of annuities: locking in assets to produce lifetime income.

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