Just 20% of retirement-age Americans can pass a basic quiz on how to make their nest eggs last throughout retirement. In fact, a large majority of people age 60 to 75 with at least $100,000 in assets lack the knowledge they need for a financially secure retirement in areas such as life expectancy, Social Security, long-term care needs, investment risk and more.
These findings are part of the new RICP Retirement Income Literacy Survey from The American College of Financial Services.
Despite their failing retirement income grades, many Americans are surprisingly optimistic about their retirement prospects. More than half (55%) consider themselves well-prepared to meet their income needs in retirement, and almost all (91%) are at least moderately confident in their ability to achieve a secure retirement.
“No one liked getting Fs back in school, but retirement income literacy is a test Americans simply cannot afford to fail,” said David A. Littell, RICP Retirement Income Program Director at The New York Life Center for Retirement Income at The American College. “When you’re working, you can plan, save and prepare for a retirement target date. But once you’re in retirement, there is no set target date for how long your savings must last – and little room for error. Workers are increasingly on their own when it comes to making financial decisions and a dwindling few have access guaranteed income from pension plans. Now is the time to raise retirement income awareness and give Americans the strategies and knowledge they need to address this challenge.”
ASSETS ON THIN ICE
Respondents show a particular dearth of knowledge when it comes to understanding how to preserve their assets in retirement. The oft-cited “4 percent rule” for a safe withdrawal rate in retirement is unfamiliar to seven in ten Americans (69%).
- A full 16% thought it would be safe to withdraw 6% or even 8% per year.
- On the other hand, one in five (20%) were overly conservative, estimating 2% to be the safest rate.
Despite the critical role that Social Security plays for most Americans, people are perplexed about when to claim it and how to make the most of their benefits. Only half of respondents (53%) know that it is best to wait until age 70 to claim Social Security for someone with a long life expectancy – a critical decision for one’s financial security.
BOND BUBBLES AND STOCK SURPRISES
Although many Americans are responsible for their own investment choices, a disturbing number of these older respondents showed a lack of knowledge when it comes to understanding investments – especially bonds, which many consider “safe”.
- Only two in five (39%) understand that when interest rates rise, the value of bond funds will decrease – especially concerning with potential rate increases in the near future.
- Less than one in ten (7%) understand that small company stock funds have a higher return over time than large company stock funds, dividend paying stock funds, or high yield bond funds.
“At age 25 or 35, these responses would be problematic but forgivable, because there’s plenty of time to make up for any mistakes,” said Littell. “But at 65 or 70, poor investment decisions can be almost impossible to bounce back from. Even worse, bad decisions can damage both the future growth of a nest egg and the retirement income it can generate over time.”
RETIREES GRAPPLE WITH RISK OF DEPLETING SAVINGS
Managing risk around retirement income is a problem for many Americans. More than half of Americans (51%) underestimate the life expectancy of a 65-year-old man, showing a lack of knowledge around how much time people should plan for living in retirement.
The time closest to retirement is the riskiest period for many retirees – yet the study finds most Americans unsure about how to transition into the drawdown phase.
- Only 37% know that someone planning to retire at age 65 should take the least amount of investment risk at age 65, rather than earlier or later.
- Just 30% of respondents recognize 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.
PLANNING NEEDED
Americans face a retirement income planning deficit. Only 27% of respondents report having a written retirement plan in place – despite the fact that 63% say they have a relationship with a financial advisor, and more than half (52%) are at least moderately concerned about running out of money in retirement. A significant minority (33%) have never tried to figure out how much they need to accumulate to retire securely.
“Basic financial literacy during the working years is dramatically different from the mindset people need when they transition to generating retirement income from their nest eggs,” Littell concluded. “Financial advisors, plan sponsors and financial services companies all have a role to play in raising Americans’ grades when it comes to awareness and understanding of basic retirement income principles.”
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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.
