Data and Research

Pre-retirees Unsure About Executing Retirement Income Strategies

According to a survey by the American College of Financial Services, 74% of respondents failed a 12-question retirement income quiz.

By Javier Simon editors@plansponsor.com | June 22, 2017
Page 1 of 2 View Full Article

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

SPONSORED MESSAGES