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Retirement Literacy Study Confirms Lack of Knowledge

In an effort to study the retirement literacy of American adults nearing or in retirement, the American College of Financial Services conducted an online survey of consisting of 38 questions. Participants were aged between 60 and 75 years old with at least $100,000 in household assets, not including their primary residence. According to a recent Chicago Tribune article about the research, the results were startling, showing a significant lack of knowledge in several key areas.

74 percent of respondents had a failing grade with the average score of correct answers at 47 percent. A shocking 5 percent earned a grade higher than C. Here are the major areas of concern:

  • Preserving assets and sustaining income. Only 38% of participants knew that in order to preserve a nest egg of $100,000 for a lifetime, the maximum rate of withdrawal is 4%. And only 34% realized that a substantial negative return on assets at retirement age would have a much bigger impact than the same negative return before or after retirement age. Approximately 50% underestimated the life expectancy of a 65-year-old man. And finally, only 33% understood that it would be more effective to work two years longer, or defer Social Security for two years instead of increasing their retirement contributions by 3% for five years before retirement. Plus, fewer than half knew that purchasing a life annuity can protect against the uncertainty of life expectancy.
  • Understanding investments. Overall results showed a significant lack of knowledge about how market instruments perform. About 33% of participants understood that the value of individual bonds and bond funds decrease when interest rates increase. Only 10% knew that small-company stock funds typically show higher returns than large company stock funds, dividend-paying stocks and high-yield bond funds.
  • Long-term care. Most respondents underestimated the number of people that will require assistance with “activities of daily living.” Just 18% correctly answered that 70% of the population will need such assistance. Only a third of participants knew that Medicaid, not Medicare, pays for most of the long-term care expenses provided in nursing homes. And only 30% knew that family members provide the majority of long-term care services, as opposed to nursing homes, assisted living facilities or hospitals.
  • Annuities. 19% said they are not knowledgeable about annuity products, when in fact 74% indicated that having a guaranteed lifetime income in retirement is important. Clearly, more learning about annuity options is necessary. Approximately 30% knew that buying an immediate annuity is more expensive for younger people compared to older ones, and just 17% knew that the lifetime payout for a 65-year-old is 6-7%. 14% knew that a deferred annuity with lifetime withdrawal benefits can pay income even if the investment account has a zero balance.
  • Individual retirement accounts. Participants showed an average amount of knowledge about IRAs. However, only ⅓ could identify the best time to convert from a traditional IRA to a Roth IRA (typically when your marginal tax rate is lower than normal for a given year).
  • Social Security. Many participants were unaware of a sufficient amount.

For more information and to view the full results of the study, click here.

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