‘Fynenshal litiricee’ remains depressingly low, especially in the area of retirement income.
According to the just-released 2020 Retirement Income Literacy Survey from the American College of Financial Services, four in five older Americans fail to understand the basics of how to successfully plan for a financially secure retirement.
Retirees and pre-retirees displayed a lack of knowledge around awareness of income in retirement, basic investment management, and understanding of long-term care needs.
However, those with a written retirement plan in place reported feeling more prepared to navigate the COVID-19 pandemic than their counterparts did.
Similar to the College’s 2014 and 2017 surveys, retirement literacy in 2020 remains low overall, as the results showed a profound lack of both confidence in and knowledge of retirement income issues: eight in ten failed the 38-question retirement literacy quiz, and only a third consider themselves highly knowledgeable about planning for retirement income.
TAKE THE AMERICAN COLLEGE’S QUIZ HERE
Among the financial planning elements driving low scores on the quiz was consumers’ particularly low level of knowledge about preserving assets and sustaining income in retirement:
- More than half underestimate the life expectancy of a 65-year-old man, suggesting that many do not realize how long their assets may have to last.
- 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 determine a prudent withdrawal rate.
- Only 35% know that a negative single year return in a retirement portfolio has the most significant impact on long-term retirement security if it happens at the year of retirement, suggesting a fundamental lack of knowledge about investment risk in the pre-retirement and retirement period.
“Determining how much you can spend in retirement when you don’t know how long you will live or what market returns you will experience is complicated,” Wade Pfau, PhD, Professor of Retirement Income, at The American College of Financial Services, said in a statement. “Unfortunately, the task is even harder for Americans who do not recognize how to properly evaluate these risks in the first place, and who do not understand the lasting impact of a market downturn in the early years of retirement. The survey demonstrates that these retirees don’t fully understand the consequences a bad market can have on their long-term retirement prospects.”
Consumers also displayed a significant lack of knowledge when it comes to understanding investments, despite the fact that a majority self-report that they are at least moderately knowledgeable about investment management.
- Just 26% understand that the value of bonds and bond funds falls as interest rates rise.
- Just 28% know that actively managed mutual funds have higher fees than ETFs.
- Only 18% know that B-rated corporate bonds have higher yield than AAA corporate bonds or treasury bonds.
Long-term care is an afterthought
The survey found that only three in ten have a plan in place for how to fund long-term care needs and only one in four has some sort of long-term care insurance coverage.
Very worrying is the fact that most older Americans are split on whether they will even need long-term care insurance in the future:
- Half say it is at least somewhat likely they will need long-term care services in the future.
- Only 8% consider it very likely that they will ever experience a long-term care need, even though the reality is that 70% will.
- 52% of respondents have not looked into long-term care insurance at all.
- Just 25% know that family members provide the majority of long-term care services nationally, which is concerning as 70% of respondents do not expect their family members to provide the care, highlighting a disconnect in the planning process.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
