Americans Sliding Back on Financial Literacy - Here's Why

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The American College of Financial Services is out with its 2020 Retirement Income Literary Survey.

The study is highly useful, helping analysts and financial consumers alike examine the nation’s retirement income literacy gap, along with knowledge of key financial planning topics (like investments, long-term care, and Social Security), financial security prospects, and the impact of COVID-19 on retirement planning.

From a bird’s eye view, U.S. retirement literacy in 2020 “remains low overall”, according to the study, as the results showed a profound lack of both confidence in and knowledge of retirement income issues:

These trends are straight from the survey:

--- Eight in ten survey participants failed the 38-question retirement literacy quiz, and only a third consider themselves highly knowledgeable about planning for retirement income.

--- More than half underestimate the life expectancy of a 65-year-old man, suggesting that many do not realize how long their assets may have to last.

--- Only three in ten (31%) have a plan in place for how to fund long-term care needs, and only 8% consider it very likely that they will ever experience a long-term care need – even though the reality is that 70% will.

--- Only 32% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, suggesting most do not know how to determine a prudent withdrawal rate.

--- Nearly four in ten (39%) consumers reported feeling highly prepared for the market downturn associated with the pandemic, and what made a difference in consumers’ perception of preparedness was having a formal, written retirement plan:

--- Those with a written retirement plan (47% vs. 35% of those without) or a retirement income plan (43% vs. 22%) reported feeling more prepared to deal with the market downturn.

--- Yet only one in three (33%) respondents report having a written plan.

“With a troubled economy and 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, Adjunct Professor of Advanced Planning and Co-Director of the Retirement Income Center at The American College of Financial Services. “Financial advisors should take heed of this situation and embrace the opportunity it provides to help Americans prepare for a successful retirement.”

Driving financial literary scores downward was a particularly low level of knowledge about preserving assets and sustaining income in retirement.

For example, only 35% know that a negative single year return in a retirement portfolio has the most significant impact on long-term retirement security if it happens in the year of retirement. 

That suggests a fundamental lack of knowledge about investment risk in the pre-retirement and retirement period, according to study researchers.

“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, Co-Director of the Retirement Income Center at The American College of Financial Services. “Unfortunately the task is even harder for Americans who do not recognize how to properly evaluate these risks in the first place, and who do not understand the lasting impact of a market downturn in the early years of retirement."

"The survey demonstrates that these retirees don’t fully understand the consequences a bad market can have on their long-term retirement prospects," he added.

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The ongoing COVID-19 saga is also impacting American’s financial planning strategies and outcomes.

While many survey participants say they “felt prepared”, the pandemic has shifted the mindset of many investors.

For example, 39% say they now feel less comfortable taking investment risks. Meanwhile, only 8% say they’ve adjusted their allocations to be more conservative, but a realignment of risk tolerance is noteworthy and more than half (54%) of consumers said they are holding their financial plans steady.

“A bottom-line conclusion from this survey is that until the plan is written, it isn’t real. And the pandemic showed that those with a real plan are in better shape to grapple with forced financial changes,” 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.”

“This is a clarion call for financial advisors to help their clients increase financial literacy and, together, craft a plan for a successful retirement.”

The survey is well worth a closer look. Check it out at the link above and take the survey yourself at the American College web site.