The survey, the third of its kind performed by The College, included feedback from over 1,500 people nationwide. It raised concerning questions about how well-prepared many older Americans are to leave the workforce and draw down their savings and accumulated assets, despite an increased focus on educating the general public about the importance of proper retirement planning. 

To qualify for participation in the study from April 29 to May 18, 2020, during the beginning of the Covid-19 pandemic, participants had to be between 50 and 75 years old and have at least $100,000 in household assets (not including their primary residence). They were then asked to respond to a series of 78 questions assessing their financial and social status and testing their knowledge of basic financial planning and retirement planning principles. On the 38 questions that addressed retirement planning, 81% of participants received a failing grade, indicating a distressing lack of understanding regarding financial planning fundamentals or current retirement realities. In fact, the overall average score on the quiz was 42%, with only a third of consumers attesting to confidence in their retirement planning skills. 

Faculty at The College expressed unease about the study's results – especially considering Covid-19 pushed many consumers toward unplanned and premature retirements. 

“With a troubled economy and an acceleration of early or forced retirements, consumer understanding of retirement principles is particularly important. Yet the survey demonstrates that retirement literacy remains troublingly low,” said Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP®, Adjunct Professor of Advanced Planning in The College’s Retirement Income Certified Professional® (RICP®) Program. 

The Income and Investment Knowledge Gap 

The general lack of retirement knowledge among consumers who took the survey was broad in scope, covering many concepts College faculty and industry experts agree are fundamental to sound retirement planning. More than half of respondents underestimated the current life expectancy of a 65-year-old man, suggesting they may not realize how long their accumulated assets may have to last in retirement. Only 32% were aware of the limits on amounts they could safely withdraw from a retirement account each year without suffering tax penalties, and 65% didn’t know that a negative single-year return in a retirement portfolio is more impactful if it happens at the time of retirement rather than before or after, suggesting a lack of understanding in how the pre-retirement period factors into long-term planning. 

“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,” said Wade Pfau, PhD, CFA, RICP®, Professor of Practice at The College. “Unfortunately, the task is even harder for Americans who do not recognize how to properly evaluate these risks in the first place. The survey demonstrates that these retirees don’t fully understand the consequences a bad market can have on their long-term retirement prospects.” 

In addition, while over 60% of consumers reported on the survey they felt at least moderately knowledgeable about investment management, survey results showed that, in practice, these individuals might be overconfident in their abilities. Only 18% of those surveyed knew B-rated corporate bonds had a higher yield than AAA corporate bonds or treasury bonds. Furthermore, only 26% understood the relationship between bonds and bond funds and interest rates, demonstrating a cognitive dissonance regarding investing. 

Long-Term Care Realities Leave Many Unprepared 

With the public health crisis of the Covid-19 pandemic looming large over society, the survey found that considerations about long-term healthcare needs caught most consumers off-guard. Only 31% of survey respondents said they had a plan in place for how to fund long-term care needs, and only 23% said they had some kind of long-term care insurance. 

The divergence between belief and reality regarding the need for such insurance was even more concerning. Only half of the respondents said they considered it even somewhat likely they would need long-term care services in the future when industry statistics state at least 70% will. More than half said they hadn’t considered long-term care a factor in their retirement plans. In addition, many consumers didn’t understand the burden the lack of such insurance could place on their loved ones: just 25% knew that family members provide the majority of long-term care services nationally, and 70% said they didn’t expect their own family to provide such care – a potentially dangerous disconnect. 

“The story coming from the data suggests people underestimate their life expectancy – and what’s more, assume they will be healthy for the entirety of their life – when the truth is much different,” said Timi Joy Jorgensen, PhD, Director to Assistant Vice President of Financial Education & Well-Being at The College. 

Pandemic Highlights Importance of Preparedness 

Another effect of the Covid-19 pandemic on retirement planning could be felt in reactions to the market downturn it created. Surprisingly, nearly 40% of consumers reported feeling highly prepared for market turbulence, indicating an unanticipated strength of financial advice – and having a formal plan beforehand was frequently cited as a difference-maker. 

While only one in three respondents reported having a written plan for retirement, those with the plan reported feeling much more prepared to deal with the downturn than those without. 54% of respondents said their financial plans are holding steady despite rough seas. However, the onset of the pandemic also shifted the mindset of many consumers, with 40% saying they now feel less comfortable taking investment risks. 

“A bottom-line conclusion from this survey is that until the plan is written, it isn’t real,” said Parrish. “We are in an environment where people are coming into retirement sometimes faster than expected, without an approach to converting their pot of money into a stream of income, and yet they are looking at increased life expectancy, increased risk of a long-term care event, and decreased prospects of having their needs covered by Social Security and employer plans.” 

While the stakes in the retirement planning game may be high, College thought leaders offered words of encouragement to those who may have participated in the survey and professionals in the field. 

“This is a clarion call for financial advisors to help their clients increase financial literacy and, together, craft a plan for a successful retirement,” said Parrish. “Advisors should take heed of this situation and embrace the opportunity it provides to help Americans prepare for a successful retirement.” 

Jorgensen agreed with his sentiments in her own statement, especially when it came to long-term care planning. “Well-prepared advisors can help with important long-term care conversations and work with clients to plan when and how to have these crucial discussions with family about the likelihood of healthcare needs,” she said. 

You can see the full results of the 2020 Retirement Income Literacy Survey here.

These findings are part of the new RICP® Retirement Income Literacy Survey 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 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 knowledgably, 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 

Littell continued, "The drastic demographic differences are unsettling because all Americans – regardless of background – deserve to live out their retirement comfortably. 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 most 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%) 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 

Hopkins also noted, "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. 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 

Littell continued, "With more and more Americans entering into retirement each year, there is a premium on retirement literacy. 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 February 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. 

ABOUT THE AMERICAN COLLEGE OF FINANCIAL SERVICES 

Founded in 1927, The American College of Financial Services is the nation’s largest nonprofit educational institution devoted to financial services professionals. Holding the highest level of academic accreditation, The College has educated over 200,000 professionals across the United States through certificate, designation, and graduate degree programs. Its portfolio of applied knowledge also includes just-in-time learning and consumer financial education programs. The College’s faculty represents some of the foremost thought leaders in the financial services industry. Visit TheAmericanCollege.edu and connect with us on LinkedIn, Twitter, Instagram, Facebook, and YouTube. Discover all the ways you can expand your opportunities with us.

Nearly twice as many retirement-age men are able to pass, and although those numbers are still grim, this underscores the trouble women face in their own retirement knowledge. Even more worrisome is that despite low retirement literacy, the majority of women (55%) are still extremely confident that they and their spouses would have enough money to retire comfortably. 

These findings are part of the RICP® Retirement Income Literacy Survey 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. 

Women demonstrated lower literacy rates in 10 out of 12 knowledge categories. There was a discrepancy in performance between men and women across the areas of annuity products in retirement (16% vs 24%), company retirement plans (30% vs 40%) and investment considerations in retirement planning (21% vs 49%). However, women performed just as well as men (76%) on the topic of Medicare insurance planning and actually exceed on the topic of paying for long-term care expenses (38% vs 35%), which is important as women live longer on average. 

Retirement Income Literacy: Don't Know, Don't Care 

Women are aware that they have poor retirement literacy – yet this does not impact their confidence in retirement. Only a third (33%) of women stated they were extremely knowledgeable about retirement income planning, compared to 44% of men. However the majority of women (55%) reported they were extremely confident they would have enough money to live comfortably throughout retirement. 

• Only 24% of extremely confident women could pass the quiz while roughly 42% of the extremely confident men could pass the quiz. 
• In all 12 knowledge categories – including strategies for sustaining income, life expectancy, and life insurance – women reported lower self-perceived retirement income planning knowledge than men. 

"Women face considerable challenges when it comes to preparing for retirement, and lacking financial literacy certainly does not help the cause," said Jocelyn Wright, State Farm® Chair in Women and Financial Services and Assistant Professor of Women's Studies at The American College of Financial Services. "This is a problem, especially when a female at age 65 can expect to live another 20 years on average, two years longer than the average man. With this in mind, women cannot depend on their spouse to hold the keys to their retirement. It is time to get smart on how to navigate this complex and extremely important stage of life." 

Financial Decision-Making: Riding in the Passenger's Seat 

Men tend to think they are the primary decision maker while women tend to believe that they split the decision making. In fact, there is a disconnect between finances being a team effort. Eighty percent of women said that they shared the decision making with their spouse while only 35% of men stated they shared the decision making. Women were also less likely to use resources such as friends or the internet for advice and information around financial assets. 

• Only 20% of women responded that they were the primary financial decision maker, compared to 65% of married male respondents. 
• Only 27% of women stated that they consult friends for advice and information about financial assets, compared to 39% of men. 
• 46% of female respondents looked up financial information online at least once a year, compared to 61% of male respondents. 

Interestingly, women respondents who identified themselves as the primary financial decision maker in the household were more than twice as likely to pass the retirement literacy quiz (26%) than those that identified themselves as sharing the decision making (12%). 

Silver Lining: Knowing Where to Turn 

Although the majority of women are lacking retirement income literacy, most do understand the value of a financial advisor and believe advisors are a good source of knowledge around retirement income. The survey found that women were just as likely as men to consult a financial advisor or a financial services firm to get financial information. Women also had different expectations from their advisor. 

• About half (55%) of women with a financial advisor stated that it is extremely important that their financial advisor educate them about the risks of running out of money in retirement, as opposed to only 42% of men. 
• Additionally, 60% of women said it is important to receive education from an advisor about investment management, as opposed to only 47% of men. 

"All people, regardless of gender, should be equipped with the knowledge that could better prepare them for retirement," said Jamie Hopkins, Retirement Income Program Co-Director at The American College of Financial Services. "Women face a number of challenges that the average man does not face in retirement, including greater longevity. So in some ways women should be more aggressive investors and have better retirement income literacy rates as they need to make their money last even longer in retirement." 

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 February 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. 

ABOUT THE AMERICAN COLLEGE OF FINANCIAL SERVICES 

Founded in 1927, The American College of Financial Services is the nation’s largest nonprofit educational institution devoted to financial services professionals. Holding the highest level of academic accreditation, The College has educated over 200,000 professionals across the United States through certificate, designation, and graduate degree programs. Its portfolio of applied knowledge also includes just-in-time learning and consumer financial education programs. The College’s faculty represents some of the foremost thought leaders in the financial services industry. Visit TheAmericanCollege.edu and connect with us on LinkedIn, Twitter, Instagram, Facebook, and YouTube. Discover all the ways you can expand your opportunities with us.