Argument No. 1,863 for More 401k Financial Wellness

Respondents believe they’re more knowledgeable than they are

401k wellness, retirement, savings, employeesThis is a problem.

If anyone is looking for yet another example of the extreme state of financial wellness and education among employees, this is it.

Three in four retirement-age Americans fail a basic quiz on how to make their retirement income last throughout retirement.

Even more troublesome, according to a new survey from The American College, older Americans between the ages of 60 to 75 with at least $100,000 in assets display “a worrying lack of knowledge on a variety of vital topics” such as paying for long-term care expenses, investment considerations, strategies for sustaining income throughout retirement and life expectancy.

“Over the next 12 years, an estimated 10,000 Baby Boomers will reach the age 65 every day,” David Littell, retirement income program co-director at The American College of Financial Services, said in a statement. “More and more Americans are retiring but so few understand basic facts and strategies when it comes to ensuring that their retirement is a comfortable one.”

Americans believe they know a lot more than they do when it comes to retirement income literacy. Although the majority fail the quiz, most are also confident about their retirement income knowledge. Almost two thirds (61 percent) of respondents indicate they have high levels of retirement income knowledge. Of those who claim to be highly knowledgably, only 33 percent could pass the quiz.

The demographic divide

There are significant differences in literacy rates between men and women, college educated and non-college educated, and between wealthier and less wealthy respondents.

Only 17 percent of women passed the quiz as opposed to 35% of men

Fully 49 percent of respondents with over $1 million in assets passed as opposed to 20 percent of respondents with below $1 million in assets

Another 40 percent of those with a graduate degree or more passed—as opposed to just 9 percent of respondents without a college degree who passed

“The drastic demographic differences are unsettling because all Americans—regardless of background— deserve to live out their retirement comfortably,” Littell continued. “This divide underscores how important it is for everyone to plan ahead.”

Clueless on strategies to improve retirement security

Respondents lack knowledge of the strategies that are most effective to improve retirement security.

Only 33 percent understand that it is more effective to work two years longer or defer Social Security for two years than to increase retirement contributions by 3% for five years just prior to retirement

Fewer than half (45 percent) recognize that a life annuity can protect against life expectancy risk

Only 38 percent of participants in the survey know that 4 percent is the amount they can afford to “safely” withdraw per year from a retirement account

Long-term care: Out of sight, out of mind

Very worrying is the fact that a majority (82 percent) of respondents do not expect that older Americans will need long-term care at some point in their lives. When considering long-term care, respondents lack knowledge on several critical items.

Just one in three (33 percent) know that Medicaid pays for the majority of long-term care expenses provided in nursing homes

Just 30 percent know that family members—not nursing homes, assisted living facilities, or hospitals—provide the majority of long-term care costs

“It is extremely hard to put a good retirement plan in place when consumers are not literate about the risks they face and how to solve for these risks,” Hopkins also noted. “For instance, the misunderstandings about long-term care shown in the survey indicate that people don’t understand the huge burden a long-term care event will have both on their finances and family.”

Power of retirement literacy

Retirement literacy rates appear to correlate with better retirement planning as those with higher scores are more likely to have plans in place. Respondents who passed the quiz were:

  • 46 percent more likely to have a long-term care plan in place
  • 36 percent more likely to feel confident they could manage their own investments throughout retirement
  • 16 percent more likely to have a written plan in place

“With more and more Americans entering into retirement each year, there is a premium on retirement literacy,” Littell concluded. “The time is now for retirees and pre-retirees to gain the knowledge they need to make smart decisions for a financially secure retirement. It is critical to have a plan in place in order to ensure you are on track for secure retirement years.”

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