According to a study by The American College of Financial Services, three in four retirement-aged adults failed a quiz on ways to make their nest eggs last through retirement. Moreover, older Americans between the ages of 60 and 75 have trouble comprehending vital financial topics including investment considerations, how to pay for long-term care expenses, and strategies for sustaining income throughout retirement.
This is particularly troubling considering that, over the next 12 years, about 10,000 Baby Boomers are expected to reach age 65 daily—in the midst of market volatility and a major gap in financial literacy.
“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,” says David Littell, retirement income program co-director at The American College. “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.”
However, many Americans might not even be aware they are unprepared for retirement. More than half—61%—of respondents reported having high levels of retirement income knowledge. Of these, however, only 33% passed the quiz, highlighting a need for more effective targeted communication about essential topics. Such efforts can also be aided by a variety of tools and services to help with retirement planning.
Littell adds, “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.”
For those who are unprepared, grasping some basic points about retirement planning should help. As things are, the survey found that 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; and 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.
Adding to the delusion behind retirement planning, most respondents (82%) fail to believe most older Americans will need long-term care at some point in their lives. Just one in three (33%) know that Medicaid pays for the majority of long-term care expenses provided in nursing homes. Only 30% know that family members—not nursing homes, assisted living facilities or hospitals—provide the majority of long-term care costs, the organization notes.
Littell also observes, “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.”
Littell continues, “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.”