Pre-retirees Unsure About Executing Retirement Income Strategies

Unlike their younger counterparts, individuals nearing or in retirement don’t have the luxury of long time horizons in which to grow their nest eggs. They are at a point where developing a strategy to sustain their assets and draw retirement income is critical. However, many lack the knowledge to do so effectively.

According to a survey by the American College of Financial Services, 74% of respondents failed a 12-question retirement income quiz. Of those who passed, only 5% scored a “B” (80%) or higher.

In particular, several respondents failed to correctly answer questions around preserving assets and sustaining income in retirement. The survey found only 38% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, and only 34% know that a substantial negative investment return at retirement age is more damaging to portfolio sustainability than the same negative return a number of years before or after retirement. 

The study also indicates most respondents lack knowledge of best practices to execute near retirement. Only 33% understand the benefits of working two years longer or deferring Social Security for two years as opposed to increasing contributions by 3% for five years just prior to retirement. Moreover, fewer than half know that using a portion of their portfolios to purchase a life annuity can protect against longevity risk.

In fact, the lack of knowledge behind annuities was of particular concern to researchers. Rating scores on sections from best to worst, “annuity products in retirement” took the top followed by “company retirement plans” and “paying for long-term care expenses.”

According to the survey, only 29% know that buying an annuity product will be less expensive for an older person than a younger one; only 17% know the lifetime income payout rate for a 65-year-old male is roughly in the 6% to 7% range; and only 14% know a deferred annuity with a guaranteed lifetime withdrawal benefit can pay income even if the investment drops to zero.

However, 74% say having a source of guaranteed lifetime income in retirement is important.

Furthermore, the research highlighted several areas for which older Americans scored very well. Subjects marked by high proficiency include housing finances, Medicare issues, the principle of inflation, the role taxes play in retirement, and life insurance concepts.

Next: Demographics Play Key Roles in Literacy

The survey found major gaps in score levels along the lines of gender, asset amounts, and education levels.

More men (35%) passed the quiz than women (18%). More than half (82%) of women failed the quiz, suggesting the need for targeted communication and education based on particular concerns that may be more common among females.

Not surprisingly, higher passing levels seemed to correlate more closely with those who had substantial assets. For example, 49% of those with at least $1 million in assets passed the quiz, as opposed to 20% who passed with less than $1 million in assets. Of those who passed, 40% had at most a graduate degree, 32% had at most a college degree, and only 9% never graduated college.

Surprisingly, the study found that more people who weren’t working with financial advisers passed than those who were working with advisers. Thirty-four percent of people without advisers passed, and only 22% of those working with advisers did as well.

However, the study also shed light on what people value in advisers. Of respondents with an adviser, 52% stated it was extremely important for their adviser to act as a fiduciary. Moreover, 76% of respondents with advisers found it extremely important that their adviser educate them on retirement risks.

Moving forward, it’s imperative that advisers educate clients about these risks, focus on areas of low proficiency, and re-enhance dimensions of high proficiency. A thorough evaluation of a client’s financial literacy can also help, as 61% of respondents reported they were very or extremely knowledgeable about retirement income planning; however, only 33% of them passed the literacy quiz—with a mean score of 51.87%.

The 2017 RICP Retirement Income Literacy Survey Report can be found at Retirement.TheAmericanCollege.edu.