Only 26 percent of older Americans – with investable assets of at least $100,000 – were able to pass a retirement income literacy quiz, which asked 38 questions over a variety of topics such as taxes, Medicare, Social Security and retirement plans like 401ks.
And they didn’t exactly pass with flying colors. Less than 1 percent scored between 91 and 100 percent; roughly 5 percent scored between 81 and 90 percent; and 8 percent scored between 71 percent and 80 percent. The largest range of scores for passing grades was between 61 and 70 percent, which accounted for 13 percent of all test takers and roughly half of all passing scores.
The quiz is the centerpiece of a recently published research study in the Journal of Financial Planning, titled, “Retirement Income Literacy: A Key to Sustainable Retirement Planning,” by Jamie P. Hopkins, J.D., LL.M., RICP, CFP, ChFC, CLU; and John A. Pearce II, Ph.D. The American College New York Life Center for Retirement Income created the quiz in an effort to fill a void of research specifically on comprehensive retirement income planning literacy.
Roughly 1,200 Americans between the ages of 60 and 75 participated in the study. The “at least $100,000 of investable assets” criteria means the data set excluded lower-income Americans.
The 2017 retirement income literacy survey found older Americans displayed a lack of knowledge on vital topics such as preserving assets, sustaining retirement income, investments, long-term care, Social Security, and annuities. Within specific topic areas, respondents showed the highest level of knowledge about Medicare with an average score of 76 percent; and demonstrated the lowest level of knowledge about annuities, with an average score of just 20 percent.
- Surely you’ll pass the quiz, right? Find out by taking it here.
The survey results demonstrate the significant power of financial literacy: planning, confidence, and retirement satisfaction all improved as literacy rates increased.
The study’s authors say this is important knowledge for financial advisors, as educating clients on retirement risks and strategies can help clients understand their plan better and feel more confident about their own retirement. For instance, among those who passedthe literacy quiz:
- 46 percent were more likely to have a long-term care plan in place (compared to those who failed the quiz);
- 36 percent were more likely to feel confident that they could manage their own investments throughout retirement;
- 16 percent were more likely to have a written comprehensive retirement plan in place;
- 87 percent were more likely to take risks after doing research; and
- 8 percent were more likely to have an estate plan in place.
Demographic divides
Results showed that differences in literacy scores were associated with a variety of demographic factors. For instance:
- 17 percent of women passed the quiz, vs. 35 percent of men.
- 49 percent of respondents with $1 million or more in investable assets passed the quiz compared to only 20 percent of those with less than $1 million in assets. Only 12 percent of those with the lowest level of wealth ($100,000 to $199,999) passed while 50 percent with $1.5 million or more passed.
- 40 percent of those with a graduate degree passed the quiz vs. 9 percent of respondents without a college degree.
Perceived vs. actual knowledge
Although there is a correlation between self-reported knowledge and actual literacy, a big gap still exists between what people say they know and what they actually know.
Respondents indicated high levels of self-reported knowledge, with 88 percent saying they were moderately to extremely knowledgeable about retirement income planning. However, of this same group, only 28.6 percent passed the quiz with a score of 60 percent or higher.
Although there was a huge misalignment between the level of knowledge and actual knowledge of survey respondents, those who claimed higher self-reported knowledge still did better on the literacy quiz than those who reported low knowledge.Only 8.6 percent who indicated they were not knowledgeable about retirement income planning passed the quiz.
Not concerned about running out of money
Respondents were also asked to rate their concern level across seven different categories: (1) running out of money; (2) cost of health care; (3) paying for long-term care expenses; (4) changes in tax rates; (5) impact of inflation; (6) cuts to Social Security; and (7) volatility in investment returns. Running out of money was of least concern to the group, while health care costs and potential cuts to Social Security were highest levels of concern.
Takeaways for advisors
This paper concludes with suggested actions that financial advisors can take to anticipate the specific information needs of their clients and to improve their preparation for collaborating fully in retirement planning.
Three broad implications for financial planners from this study:
- First, because of generally low financial literacy levels, financial advisors should consider providing basic introductory material to current and prospective clients. Face-to-face meetings can then begin with an assessment of the materials, saving the planner time, and allowing the client to review the material at their preferred pace.
- Second, financial advisors should expect clients to have less knowledge on specific retirement income planning topics. As indicated by the survey results, client knowledge is likely to be especially low concerning annuity products in retirement, company retirement plans, paying for long-term care, and investment considerations in retirement planning.
- Third, financial advisors should consider the likelihood that their clients are more confident in their knowledge of financial planning for retirement they really are. Rather than downplay the importance of quantitative issues, planners may wish to build justifiable confidence in their clients about their retirement planning based on their newly acquired understanding of the statistical and analytical underpinnings of the decisions they must make.
Results of the survey serve as a reminder of the need for increased retirement income literacy, because of the correlation between literacy and better retirement planning.
- Take the quiz here.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
