Of the 1,213 pre-retirees ages 56 to 65 who took the 15 question quiz, the majority answered only five of the 15 questions correctly, leaving persistent misperception and misunderstanding in a number of core areas, such as life expectancy, inflation, retirement income/savings, long-term care insurance, and to some extent, Social Security. In the 2008 version of the study, most respondents correctly answered six of the 15 questions. The 2011 study also asked a number of questions related to additional aspects of Americans’ post-retirement income needs.
On the positive side, respondents are recognizing that they will live longer and that they will be dependent on Social Security and other steady lifetime income for their prolonged retirement. An increased number of respondents feel Social Security and Medicare are more important compared with five years ago (45% in 2011 vs. 33% in 2008), and 45% of those surveyed said they are likely to work longer than previously planned. However, only 17% knew that delaying the collection of Social Security by three years would add 24% to the amount they receive.
Only 45% knew that experts believe retirees will need 80%-90% of their pre-retirement income to maintain their current standard of living. Nearly three in 10 (29%) respondents incorrectly believe that retirees should limit the percent they withdraw from their savings each year to 7%-10%, and 11% believe they should plan to withdraw between 11%-15%. In reality, experts recommend limiting the percent retirees withdraw from their savings each year to 4%-6 %.
The respondents’ average estimate of what a couple would need in pre-retirement income to cover their essential living expenses (i.e., housing, food, health care, transportation, insurance and taxes) was 61%, very close to informal estimates that about 60% is needed to take care of the absolute basics. Yet, the biggest concern expressed was having enough retirement income to cover them.
“Everyone knows they’re likely to live longer, but most don’t realize that can mean living past age 85 and they fail to calculate how much money they will need for a steady and lasting income,” said Sandra Timmermann, Ed.D., Director of the MetLife Mature Market Institute, in a press release. “The ‘replacement ratio’ of the percent of pre-retirement income necessary to manage essentials, including basic expenses, in retirement is often underestimated and too many people overestimate how much of their savings they can safely withdraw each year. Employers and others advising Americans should be helping pre-retirees to ‘connect the dots’ so, given the uncertain economic climate, they can have a clear picture of their prospects and the financial income strategies needed.”
Key findings from the study include:
• Sixty-two percent of those surveyed in 2011 realize that the greatest financial risk facing retirees is longevity, compared with 56% in 2008 and 23% in 2003.
• When asked about concerns during retirement, the number one answer, by far, was having enough income to cover essential expenses (32%), followed by the ability to afford health care (18%).
• The majority (87%) of respondents have taken steps toward ensuring adequate income for retirement, such as increasing their contributions to retirement plans or extending their working years. Just under two-thirds (62%) of them are currently seeking financial product advice.
• As the options for retirement income sources have expanded, more attention is being given to products such as reverse mortgages, but there is still a general lack of knowledge. Almost one-quarter (24%) correctly identified that a reverse mortgage is accessible only to homeowners age 62 or older, but more than half (54%) were unaware that a reverse mortgage can be used to purchase a primary home.
• After years of public education on long-term care costs, 42% of Americans still incorrectly believe that health insurance, Medicare, or disability insurance will cover the costs of long-term care.