Older Americans not ready to help themselves: 3 in 4 fail retirement income literacy quiz

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

Even more troublesome, 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.

These findings are part of the new RICP® Retirement Income Literacy Survey released May 2 from The American College of Financial Services – the most comprehensive survey exploring the drawdown phase of Americans’ financial lifetimes, when people are no longer receiving a paycheck from their jobs but must still fund their lifestyles during a potentially lengthy retirement.

“Over the next 12 years, an estimated 10,000 Baby Boomers will reach the age of 65 every day,” said David Littell, Retirement Income Program Co-Director at The American College of Financial Services. “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. The results of this survey are alarming and a stark reminder of the need to be prepared for the decades in retirement when you are not earning a steady stream of income.”

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%) of respondents indicate they have high levels of retirement income knowledge. Of those who claim to be highly knowledgeable, only 33% 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% of women passed the quiz as opposed to 35% of men
• 49% of respondents with over $1 million in assets passed as opposed to 20% of respondents with below $1 million in assets
• 40% of those with a graduate degree or more passed – as opposed to just 9% 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 said. “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% 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%)recognize that a life annuity can protect against life expectancy risk
• Only 38% of participants in the survey know that 4% is the amount they can afford to “safely” withdraw per year from a retirement account

Jamie Hopkins, Retirement Income Program Co-Director at The American College of Financial Services said, “Retirees are living much longer so there’s a need for smart advice around how to turn consumers’ nest eggs into something they can live on for up to three decades or longer in many cases.”

Long-Term Care: Out of sight, out of mind

Very worrying is the fact that a majority (82%) of respondents do not expect that mostolder 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%) know that Medicaid pays for the majority of long-term care expenses provided in nursing homes
• Just 30% 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 said. “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% more likely to have a long-term care plan in place
• 36% more likely to feel confident they could manage their own investments throughout retirement
• 16% 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 said. “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.”

Methodology: The American College of Financial Services commissioned Greenwald & Associates for the study. Respondents were asked a number of knowledge, behavior and attitudinal questions about retirement income planning.Information for this study was gathered through online interviews conducted between Feb. 16-March 1, 2017. A total of 1,244 Americans were interviewed. To qualify for participation in the study, respondents had to be ages 60-75 and have at least $100,000 in household assets, not including their primary residence.

• David Littell and Jamie Hopkins will discuss the findings on a webcast at 1 p.m. ET on June 21, 2017. You can register for the free, live webcast here: http://knowledge.theamericancollege.edu/ricp-literacy-survey-webcast-register-now/

About The American College of Financial Services: The American College, based in Bryn Mawr, Pa., was founded in 1927 and is the nation’s largest non-profit educational institution devoted to financial services. Holding the highest level of academic accreditation, the College has educated one in five financial advisors across the United States and offers prestigious financial planning designations such as the Retirement Income Certified Professional (RICP®), Chartered Life Underwriter (CLU®), Chartered Financial Consultant (ChFC®) and the Certified Financial Planner (CFP®). It recently approved conferral of PhD degrees to the first class of graduates of that program. The American College’s faculty represents some of the financial services industry’s foremost thought leaders. For more information, visit TheAmericanCollege.edu.