Americans in Need of Retirement Planning Knowledge

A quiz reveals Americans lack understanding of retirement income planning risks, and plan sponsors can offer education and use plan design to help.

Though the majority of respondents to a survey from The American College of Financial Services reported they are moderately to extremely knowledgeable about retirement income planning, its retirement income literacy quiz revealed four in five older Americans fail to understand the basics about many areas of retirement planning.

Americans can use more education about retirement income planning and investment management. Eighty-one percent of the more than 1,500 Americans surveyed failed the quiz. The average score of the quiz was 42%.

Among the financial planning elements driving low scores on the quiz was Americans’ particularly low level of knowledge about preserving assets and sustaining income in retirement. More than half underestimate the life expectancy of a 65-year-old man, suggesting that many do not realize how long their assets may have to last.

Only 32% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, suggesting most do not know how to determine a prudent withdrawal rate. Only 35% know that a negative single year return in a retirement portfolio has the most significant impact on long-term retirement security if it happens at the year of retirement, suggesting a fundamental lack of knowledge about investment risk in the pre-retirement and retirement period.

Plan Design and Investments Can Help

A Society of Actuaries (SOA) study found half of people are either underestimating or overestimating their life expectancy by five years or more, all based on factors including health, income, lifestyle and family history. Those underestimating their lifespan face a greater risk of outliving their retirement savings, while those overestimating it may fail to prepare in time for financial dependents.

In addition to education and retirement plan design elements, such as periodic withdrawals, retirement industry sources agree that plan investments can play a role in helping employees with distribution streams. The majority of consultants agree on the top three actions for retiree retention: adding distribution flexibility, including retiree-focused investment options and providing employee education/communications. Rick Fulford, head of PIMCO U.S. Defined Contribution, previously told PLANSPONSOR, “Adding a retirement tier—retiree-focused investment options and related support focused on meeting the unique monthly income, liquidity and capital preservation needs of retirees—would help those who no longer receive a paycheck better manage their retirement.”

One thing the market fall associated with the coronavirus pandemic highlighted was how many defined contribution (DC) plan investments fail to protect near-retirees from downside risk—what some call sequence of returns risk. With more DC plan assets in target-date funds (TDFs) than ever before, the retirement plan industry is calling for increasing downside risk protection in TDFs, as well as protection from other retirement risks.

While investors have been told to move to “safer” assets—usually fixed income vehicles—as they move closer to retirement, the current interest rate environment is calling into question which “safer” assets they should use.

“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,” says Wade Pfau, PhD, professor of Retirement Income, program director, and co-director of the Retirement Income Center at The American College of Financial Services.

Long-Term Care Needs Are Being Ignored

The American College survey found that only three in ten (31%) respondents have a plan in place for how to fund long-term care needs and only one in four (23%) have some sort of long-term care insurance coverage.

Most older Americans are split on whether they will even need long-term care insurance in the future. Half (50%) say it is at least somewhat likely they will need long-term care services in the future. Only 8% consider it very likely that they will ever experience a long-term care need, even though the reality is that 70% will.

More than half (52%) of respondents said they have not looked into long-term care insurance at all.

For more information about the 2020 Retirement Income Literacy Survey results and to take the quiz, visit