Where Do Americans Stand in Their Retirement Planning Knowledge?

Virtually everyone understands that money doesn’t grow on trees. But what about planning for retirement? If recent research gives any indication, many Americans may be coming up short. In the 2017 Retirement Income Literacy Quiz – courtesy of The American College for Financial Services and the New York Life Center for Retirement Income – most quiz-takers received barely-failing or below-failing grades.

To measure retirement literacy, the test comes with two options: a six-item questionnaire on key retirement planning areas, and a more comprehensive test with 38 questions. With retirement literacy and retirement planning success being closely linked, you may want to check out the six-question quiz yourself to gauge your own retirement readiness.

So, what exactly did these questions ask? And how did Americans fare in their retirement knowledge? Let’s delve into the data now.

How Do Americans Stack Up in Their Retirement Planning Knowledge?

In the study, Americans aged 60-75 and with at least $100,000 of household assets (excluding home ownership) were surveyed. Among these people, 65% had relationships with financial advisors, and 61% said they had strong retirement income knowledge. Yet despite these findings, just 26% of respondents passed the 38-question test. Of those reporting high awareness of retirement income issues, just 33% passed.

The average score was 47% correct. Just 5% of Americans received a “B” grade or higher!

Of the 38 questions, six focused on specific, fundamental areas of retirement planning:

• Managing portfolio withdrawal rates
• Using life annuities to combat risks of uncertainty and longevity
• The impact of sequence-of-returns risk, or the potential to suffer low or negative returns when taking withdrawals from investments
• Impact of key retirement decisions, like when to stop working and take Social Security
• Efficient tax reduction and planning strategies
• Timing of claiming Social Security benefits

Six Questions on Retirement Income Knowledge

Question 1 was the following and test-takers had these options: “If you had a well diversified portfolio of 50% stocks and 50% bonds that was worth $100,000 at retirement, based on historical returns in the United States the most you can afford to withdraw each year is about ____ plus inflation each year to have a 95% chance that your assets will last for 30 years.” Using the “4% safe withdrawal rate rule,” B was the correct answer.

A) $2,000
B) $4,000
C) $6,000
D) $8,000
E) Don’t Know

Question 2 consisted of this content and these options: “Taking a portion of a retirement portfolio (20%-40%) and buying a life annuity can protect against the uncertainty of life expectancy, ensuring that a basic level of spending is available throughout retirement.” Because a life annuity gives contractual obligations to pay out income for the length of someone’s lifespan, the statement was true.

A. True
B. False
C. Don’t know

Question 3 had this content: “A 25% negative single year return in a retirement portfolio would have the biggest impact on long-term retirement security if it occurs.” Of these options, the time at which sequence-of-returns risk would have the greatest impact would be at point-of-retirement. If a portfolio endured negative or low returns at someone’s retirement stage, that person now faces the uncertainty of whether their withdrawal rates would be sustainable. So, the correct answer was B.

A. 15 years before retirement
B. At retirement
C. 15 years after retirement,
D. Timing doesn’t matter
E. Don’t know

Question 4 was the following items: “Which of the following strategies is least likely to improve retirement security?” The answer was A, as additional savings just five years pre-retirement wouldn’t have enough time to benefit from compounding growth. The other two decisions, deferring Social Security benefits and working later, would more likely yield greater financial security.

A. Saving an additional 3% of salary in the five years before retirement
B. Deferring Social Security benefits claiming for two years past when originally planned
C. Working for two years past planned retirement date
D. Don’t know

Question 5 consisted of this content: “Converting a portion of a traditional IRA into a Roth IRA is a good idea this year if…” The correct answer was A. Money taken from a traditional IRA will be taxed as income. If someone were thinking about converting their traditional IRA into a Roth IRA, a time to consider doing so would be when their tax burden would be lower than normal. That way the taxable effects of the conversion would be less impactful.

A. You have a big tax deduction and your marginal tax rate is lower than normal
B. You have more taxable income than usual and your marginal tax rate is higher than normal
C. The value of your assets in your IRA hasn’t changed in 10 years
D. Don’t know

Finally, the last question consisted of this content: “A single person who is likely to live to age 90 is generally going to be better off claiming Social Security benefits at age…” The correct answer was age 70, as that would the point at which Social Security benefits maximized. In turn, total benefits paid from age 70 to age 90 or beyond would exceed total benefits claimed at earlier ages, such as 62 or even 66. Life expectancy is an important variable in answering this question, though, as well as family medical history.

A. 62
B. 66
C. 70
D. 75
E. Don’t know

Notably, Americans who passed the quiz were:

• 46% more likely to have a long-term care plan in place
• 16% more likely to have a written plan in place
• 11% more likely to feel confident about their retirement
• 36% more likely to feel confident that they could manage their own investments throughout retirement

Ready to get your own financial house in order and obtain more peace of mind? It starts by educating yourself about your options and working with a qualified professional, to help you achieve your goals.

Ready for Financial Peace of Mind?

If you need help navigating the complexities of retirement, creating a reliable income plan for your post-work years, and establishing a predictable lifestyle, the financial professionals at SafeMoney.com can help you. They’ll help you understand your financial picture, walk through the “what ifs,” and can discover powerful strategies to safeguard your wealth and generate sustainable income.

To get started, request a no-obligation consultation. Use our Find a Licensed Advisor section to connect with a financial professional directly. And if you need a referral, call us at 877.476.9723.