Financial Literacy Quiz Reveals Americans Lack Understanding of Retirement Income

Older Americans failed a retirement literacy quiz from The American College of Financial Services, where the average score was 31%. The college’s research found that in particular, many retirement investors do not understand the concepts of retirement income and longevity risk.

The 2023 Retirement Income Literacy Study, which surveyed 3,765 Americans aged 50 to 75 in August 2023, revealed a direct correlation between levels of financial literacy and factors like asset level, as respondents with more than $1.5 million scored twice as a high as those with less than $100,000.

Eric Ludwig, co-director of the Center for Retirement Income at the College, says this finding has been consistent with past iterations of the study. He says this year’s study was expanded to include individuals above age 50, whereas the last three surveys were limited to 60- to-75-year-olds who had at least $100,000 in assets.

Ludwig says the college removed the $100,000 asset requirement and widened the age range to get a better understanding of the challenges facing people who are approaching retirement.

The study measured financial literacy in 12 retirement-related knowledge areas—including Social Security, longevity, investments and more—among individuals approaching or in retirement.

Although overall scores on the 12 retirement knowledge areas were low across the board, respondents showed significantly greater knowledge of areas having to do with lived experience, including inflation, housing and Medicare—all of which garnered higher scores than the overall average of 31%.

However, the study revealed that older Americans consistently underestimate life expectancy and are unaware of how long people expect to live, with 22% expecting to live past 89 and just 27% able to correctly identify the average life expectancy of a man at age 65.

Ludwig says this underestimation of life expectancy is concerning as it may cause people to claim Social Security earlier than they should. If individuals end up living longer than they expected, they risk exhausting their savings in retirement—potentially outliving their assets.

Other areas where individuals scored lower included knowledge about long-term care, investments and annuities.

“One thing that stuck out to us [was] this idea that people don’t really know something until they need to,” Ludwig says. “For example, if we look at people’s scores around medical decisions when they’re younger, like [ages] 50 to 60, the scores are super low. But then as people get older, they’re dealing with Medicare, and all of a sudden people’s knowledge on that topic goes way up.”

Ludwig says an interesting finding came when participants were asked “which of the following strategies is most likely to improve retirement security.” The multiple-choice options included:

• Saving an additional 3% of salary in the five years prior
• Working for two years past your planned retirement date
• Deferring Social Security benefits for two years longer
• I don’t know.

While the correct answer was “working for two years past your planned retirement date,” Ludwig says this was the least common response and that the most popular response, selected by 39% of respondents, was “I don’t know.”

“Deferring Social Security is super easy, but probably a lot of people are unable to do that,” Ludwig says. “Everybody has unique health situations, but if they can work an extra couple of years, it can make a really big difference.”

The study also used a Retirement Confidence Scale based on respondents’ self-reported confidence that they will feel financially secure, have enough money to live comfortably and do a good job handling their investments throughout retirement. Based on the results, the college found that retirement confidence level increased with the retirement income literacy score. Essentially, as retirement planning knowledge improved, so did confidence.

Respondents who reported working directly with a financial adviser also tended to have higher scores across all knowledge areas and feel more confident about retirement, according to the study. Participants with ongoing advisory relationships scored 11 points higher on retirement income literacy than those without (38% versus 27%).

“We know that people with less than $100,000 saved are probably not going to qualify to meet with a lot of advisers, which is unfortunate, because those are probably the people that would benefit [the most],” Ludwig says. “If [access to an adviser] is offered through a plan sponsor, that might open the doors for people [with less savings].”

Scores also differed across demographic groups. Generally, white men with more assets, higher levels of education and more life experience—including age and retirement status—tended to have higher retirement income literacy scores. As a whole, white and “other” respondents, which included Asian and AAPI respondents, scored higher than Black and Hispanic respondents.

While many people are now looking to AI and tools like ChatGPT to answer questions about investing and saving for retirement, Ludwig says his research team ran many of their questions through ChatGPT and the tool only scored a 45% on the quiz. After one of the researchers trained ChatGPT using some of the college’s textbooks and information, it only got one question wrong.

“That makes me wonder if [ChatGPT] is just pulling incorrect information out there that’s being perpetuated,” Ludwig says. “Knowing that you can [get information from] a pre-vetted source of information will be important.”