Data and Research December 3, 2014

Many Lack Basic Retirement Income Knowledge

Just one in five retirement-age Americans can pass a basic quiz on strategies to make their nest eggs last throughout retirement.
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A large majority (80%) of retirement-age Americans received failing grades after taking a basic quiz on how to make their nest eggs last throughout retirement, according to The American College of Financial Services. A recent survey from the organization revealed the well-known “4% rule” is a complete mystery to seven in 10 Americans, and a majority of people age 60 to 75 with at least $100,000 in assets lack important knowledge in areas such as life expectancy, Social Security, long-term care needs, investment risk, and more.

Despite their failing grades, the RICP Retirement Income Literacy Survey indicated more than half (55%) of respondents consider themselves prepared to meet their income needs in retirement, and almost all (91%) are at least moderately confident in their ability to achieve a secure retirement.

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“No one liked getting Fs back in school, but retirement income literacy is a test Americans simply cannot afford to fail,” says David Littell, RICP 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. But once you’re in retirement, there is no set target date for how long your savings must last, and little room for error.”

With a majority unfamiliar with the “4% rule,” many Americans are unaware of how to preserve their assets in retirement. The survey showed 16% thought it would be safe to withdraw 6% or even 8% per year, while 20% were overly conservative, estimating 2% to be the appropriate annual withdrawal rate. Additionally, only half (53%) know that it can be beneficial to wait until age 70 to claim Social Security for someone with a long life expectancy.

The survey displayed that Americans also lack knowledge when it comes to understanding investments, with only two in five (39%) aware that when interest rates rise, the value of bond funds will often decrease. Littell explains that poor investment decisions by retirement-age Americans can be almost impossible to bounce back from, and can damage both the future growth of a nest egg and the retirement income it can generate over time.

Americans struggle with managing and understanding risk around retirement income, as more than half (51%) underestimate the life expectancy of a 65-year-old man. The study revealed Americans’ lack of knowledge about how much time people should plan to live in retirement, as well as their uncertainty about how to transition into the drawdown phase. Just 30% recognize that it can be more effective to work two years longer or defer Social Security for two years than to increase retirement contributions by 3% for five years.

Americans are facing a retirement income planning deficit and they need help planning, the survey finds. Only 27% report having a written retirement plan in place, despite the fact that 63% say they have a relationship with a financial adviser and 52% state they are at least moderately concerned about running out of money in retirement. In addition, 33% have never tried to figure out how much they need to accumulate to retire securely.

“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 explains. “Financial advisers, 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.”

Participants December 3, 2014

Affluence No Buffer for Fear of Health Costs in Retirement

The threat of ever-increasing health care costs has even affluent pre-retirees worried, Nationwide found.
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Money is apparently no protection from the terror that strikes at the hearts of Baby Boomers contemplating health care costs in retirement, according to the third annual Nationwide Retirement Institute survey.

A majority of survey respondents (72%)—all with at least $150,000 in household assets—say one of their top fears in retirement is health care costs going out of control. More than half (55%) believe the Patient Protection and Affordable Care Act (ACA) will increase those costs.

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Fear has done little to inspire these pre-retirees to take action, however. More than one-quarter of employed affluent Baby Boomers (26%) say they believe they will never retire. More than two in five (45%) say they would delay their retirement if they had to buy their own health insurance.

Just two years ago, most affluent Boomers surveyed expressed little concern over health care costs in retirement. Last year, that number rose to 30% and jumped a bit higher this year, to 44% saying they believe it will be the biggest expense throughout retirement.

These concerns can be positive, says John Carter, president of Nationwide’s retirement plans business. On the one hand, they increase the conversations around health care costs in retirement, being a great starting point for advisers to help retirement plan participants assess and plan for these costs.

“We believe there is a lack of clear understanding around the Affordable Care Act,” Carter tells PLANSPONSOR, with four in 10 consumers saying they believe the ACA will increase health care costs in retirement. People just do not fully understand the entire benefits landscape, he feels, a picture that includes Medicare, Social Security benefits and long-term care. Nor do they fully understand how much they will need, to meet expenses in retirement.

 

“Their underestimate of what health care costs in retirement can lead to these fears,” Carter says, and in the wake of fear and misunderstanding, they fail to plan. According to the survey, just 23% of Boomers have discussed health care costs with a financial adviser. “It’s not just about the assets you accumulate,” Carter says.

More than three in five affluent pre-retirees (61%) say they wish they had a better understanding of Medicare coverage. Nearly two-thirds of affluent pre-retirees enrolled in Medicare were unaware the program does not cover long-term care costs. “There is room for us to educate more,” Carter says.

The survey yielded few surprises, Carter says, but it did highlight that a lack of knowledge around how to plan for the costs of health care in retirement continues to be a challenge for pre-retirees. He recommends using all available expense planning tools—such as Nationwide’s Personal Health Care Assessment—and calculators that can help remove the complexity.

As for Boomers who declare they simply will not retire, Carter notes that many say they will postpone retirement or forego it altogether, but only 3% of workers actually do that. For a range of reasons, including unexpected health issues and changes in work situation, the plan is undependable. “We don’t always have a say in the exact date when we’ll retire,” he says.

According to Carter, Nationwide is seeing individuals have more desire to learn how to create an income stream in retirement and how it can match up against liabilities. Since health care costs are a substantial liability, Nationwide’s goal is to move the needle, Carter says. “Not enough people are having these conversations.”

The online survey was conducted between October 6 and 14 by Harris Poll and surveyed 801 Americans aged 50 or older with at least $150,000 in household income.

 

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