NEW YORK (MainStreet) — While many Americans can’t wait to retire, most are bad at planning for post-work life.
A new Retirement Income Literacy Survey from The American College of Financial Services shows just 20% of retirement-age Americans can pass a basic quiz on how to make their savings last through their golden years. The study also reveals a large majority of people age 60 to 75 with at least $100,000 in assets — those who should know the most about retirement — lack the knowledge needed for financial security in retirement in areas such as life expectancy, Social Security, long-term care needs, investment risk and more.
"No one liked getting Fs back in school, but retirement income literacy is a test Americans simply cannot afford to fail," said Professor David Littell, 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," Littell said. "But once you’re in retirement, there is no set target date for how long your savings must last – and little room for error,” Littell said. “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."
Perhaps most disheartening about the study was that most Americans think they are planning for retirement adequately. In fact, more than half — 55% — consider themselves well-prepared to meet their income needs in retirement, and an astounding 91% are at least moderately confident in their ability to achieve a secure retirement.
Despite the confidence, nearly seven out of ten Americans did not know of the “4%” retirement rule — a rule of thumb annual withdrawal rate often cited by planners as safe to keep in retirement. Some 16% of those surveyed thought it was allowable to take 6%, or even 8% out annually. One in five actually went under the rule, saying they thought 2% to be the safest rate.
The new research also showed that despite having to make many of their investment choices before they reached retirement age, only 39% of Americans understand that when interest rates rise, the value of bond funds decrease. To boot, and less than one in ten — 7% — understand 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," Littell said. "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."
The study also reveals most retiring Americans don’t have a solid plan for their later years. Only 27% of those surveyed report having a written retirement plan in place — 63% say they have a relationship with a financial advisor.
"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 said. "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."
--Written by Chris Metinko for MainStreet