2020 Retirement Income Literacy Survey Results

The survey, the third of its kind performed by The College, included feedback from over 1,500 people nationwide. It raised concerning questions about how well-prepared many older Americans are to leave the workforce and draw down their savings and accumulated assets, despite an increased focus on educating the general public about the importance of proper retirement planning. 

To qualify for participation in the study from April 29 to May 18, 2020, during the beginning of the Covid-19 pandemic, participants had to be between 50 and 75 years old and have at least $100,000 in household assets (not including their primary residence). They were then asked to respond to a series of 78 questions assessing their financial and social status and testing their knowledge of basic financial planning and retirement planning principles. On the 38 questions that addressed retirement planning, 81% of participants received a failing grade, indicating a distressing lack of understanding regarding financial planning fundamentals or current retirement realities. In fact, the overall average score on the quiz was 42%, with only a third of consumers attesting to confidence in their retirement planning skills. 

Faculty at The College expressed unease about the study's results – especially considering Covid-19 pushed many consumers toward unplanned and premature retirements. 

“With a troubled economy and an acceleration of early or forced retirements, consumer understanding of retirement principles is particularly important. Yet the survey demonstrates that retirement literacy remains troublingly low,” said Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP®, Adjunct Professor of Advanced Planning in The College’s Retirement Income Certified Professional® (RICP®) Program. 

The Income and Investment Knowledge Gap 

The general lack of retirement knowledge among consumers who took the survey was broad in scope, covering many concepts College faculty and industry experts agree are fundamental to sound retirement planning. More than half of respondents underestimated the current life expectancy of a 65-year-old man, suggesting they may not realize how long their accumulated assets may have to last in retirement. Only 32% were aware of the limits on amounts they could safely withdraw from a retirement account each year without suffering tax penalties, and 65% didn’t know that a negative single-year return in a retirement portfolio is more impactful if it happens at the time of retirement rather than before or after, suggesting a lack of understanding in how the pre-retirement period factors into long-term planning. 

“Determining how much you can spend in retirement when you don’t know how long you will live or what market returns you will experience is complicated,” said Wade Pfau, PhD, CFA, RICP®, Professor of Practice at The College. “Unfortunately, the task is even harder for Americans who do not recognize how to properly evaluate these risks in the first place. The survey demonstrates that these retirees don’t fully understand the consequences a bad market can have on their long-term retirement prospects.” 

In addition, while over 60% of consumers reported on the survey they felt at least moderately knowledgeable about investment management, survey results showed that, in practice, these individuals might be overconfident in their abilities. Only 18% of those surveyed knew B-rated corporate bonds had a higher yield than AAA corporate bonds or treasury bonds. Furthermore, only 26% understood the relationship between bonds and bond funds and interest rates, demonstrating a cognitive dissonance regarding investing. 

Long-Term Care Realities Leave Many Unprepared 

With the public health crisis of the Covid-19 pandemic looming large over society, the survey found that considerations about long-term healthcare needs caught most consumers off-guard. Only 31% of survey respondents said they had a plan in place for how to fund long-term care needs, and only 23% said they had some kind of long-term care insurance. 

The divergence between belief and reality regarding the need for such insurance was even more concerning. Only half of the respondents said they considered it even somewhat likely they would need long-term care services in the future when industry statistics state at least 70% will. More than half said they hadn’t considered long-term care a factor in their retirement plans. In addition, many consumers didn’t understand the burden the lack of such insurance could place on their loved ones: just 25% knew that family members provide the majority of long-term care services nationally, and 70% said they didn’t expect their own family to provide such care – a potentially dangerous disconnect. 

“The story coming from the data suggests people underestimate their life expectancy – and what’s more, assume they will be healthy for the entirety of their life – when the truth is much different,” said Timi Joy Jorgensen, PhD, Director to Assistant Vice President of Financial Education & Well-Being at The College. 

Pandemic Highlights Importance of Preparedness 

Another effect of the Covid-19 pandemic on retirement planning could be felt in reactions to the market downturn it created. Surprisingly, nearly 40% of consumers reported feeling highly prepared for market turbulence, indicating an unanticipated strength of financial advice – and having a formal plan beforehand was frequently cited as a difference-maker. 

While only one in three respondents reported having a written plan for retirement, those with the plan reported feeling much more prepared to deal with the downturn than those without. 54% of respondents said their financial plans are holding steady despite rough seas. However, the onset of the pandemic also shifted the mindset of many consumers, with 40% saying they now feel less comfortable taking investment risks. 

“A bottom-line conclusion from this survey is that until the plan is written, it isn’t real,” said Parrish. “We are in an environment where people are coming into retirement sometimes faster than expected, without an approach to converting their pot of money into a stream of income, and yet they are looking at increased life expectancy, increased risk of a long-term care event, and decreased prospects of having their needs covered by Social Security and employer plans.” 

While the stakes in the retirement planning game may be high, College thought leaders offered words of encouragement to those who may have participated in the survey and professionals in the field. 

“This is a clarion call for financial advisors to help their clients increase financial literacy and, together, craft a plan for a successful retirement,” said Parrish. “Advisors should take heed of this situation and embrace the opportunity it provides to help Americans prepare for a successful retirement.” 

Jorgensen agreed with his sentiments in her own statement, especially when it came to long-term care planning. “Well-prepared advisors can help with important long-term care conversations and work with clients to plan when and how to have these crucial discussions with family about the likelihood of healthcare needs,” she said. 

You can see the full results of the 2020 Retirement Income Literacy Survey here.