Even Millionaires Flunk Retirement 101: Study

The American College of Financial Services plans to use its new research to help advisors improve client conversations.

By Jerilyn Klein

No matter how the American College of Financial Services slices and dices the results of its just-released 2023 retirement income literacy quiz administered to 3,765 Americans age 50 to 75, the results are dismal.

The average score: 31%. Respondents with at least $100,000 in investable assets fared better (38%) than those below that threshold (25%). Failing, too, were those with greater investable assets of $500 million-$999 million (37%), $1 million-$1.5 million (44%) and $1.5+ million (50%).

The 38-question quiz exposes persistent knowledge gaps in 12 key retirement-related knowledge areas including investments, Social Security, inflation, Medicare, long-term care, annuities, life insurance and taxes.

American College researchers unveiled the results of the study, its fourth iteration in 10 years, during an event The College held February 13 in New York City. The study also broke out literacy levels by age, gender, race, level of education and retirement status. Participants with ongoing advisory relationships scored higher than those without (38% vs. 27%), but still need to learn a lot more about better managing the asset-decumulation period of their lives, the research team said.

“You could call it financial literacy, you could call it knowledge, you can call it understanding, but whatever it is, we know that these are important pieces of information for people in order to make smart decisions about their own retirement,” said Steve Parrish, JD, RICP, CLU, ChFC, AEP, Professor of Practice at The College.

Not Enough

 In the decade since The College launched its Retirement Income Literacy Study, older Americans have not become more knowledgeable about retirement income planning.

“Congress really has tried to improve the retirement system and retirement literacy a lot in the last four years with the Secure Act and Secure 2.0. But as you can see from the research, the needle hasn’t changed a bit,” said Parrish. He wrote more about the study and its implications in his column for Rethinking65.

During the event, Parrish moderated a panel discussion with other members of the American College research team: Chet Bennetts, Eric Ludwig, Michael Finke and Kaylee Ranck.

Self-Assessments Are Accurate

Before starting the retirement literacy quiz, participants were asked to rank, on a scale of 1 to 5, how knowledgeable they are about retirement income planning. “What was interesting is that people were actually really good at self-assessing their knowledge, said Ludwig, CFP, PhD, director of the Center for Retirement Income at the American College.

Those who rated themselves as extremely knowledgeable (a “5”), scored 45% on the literacy exam and 81% of them had said they had more than $100,000 in investable assets. In contrast, respondents who rated themselves as not-at-all knowledgeable (a “1”) scored just 18% on the exam; 73% of them had less than $100,00 in investable assets.

So, what are members of this latter group doing to bridge their knowledge gap? Not much.

“The people that self-assess as having none at all, no experience, no knowledge about retirement planning, just 8% of them actually use or have sought professional help,” noted Ludwig. That compares with 56% of those who self-assessed as extremely knowledgeable.

But financial planning isn’t just for those who have wealth. “Retirement planning is a universal issue,” said Ranck, PhD, director of research for The American College. Everyone has to figure out how much they can spend in retirement, how to withdraw their assets, how to potentially deal with long-term planning, and more.

Yet people largely learn about retirement issues once they’re deeply immersed in them rather than planning ahead. On average, study respondents who were older score higher on literacy — 38% for ages 70-75, vs. 25% for ages 50-54. “Where it becomes more urgent, they become more knowledgeable at that point,” said Ranck.

Long-Term-Care Disconnect

The study also found that just 1 in 4 respondents have any kind of long-term care plan in place and only 1 in 5 have a long-term care policy or a life insurance policy with a long-term-care option. In addition, “only 12% of our respondents said that they were certain they would need some kind of long-term-care, yet 70% [of seniors] need some kind of long-term care. So, there’s a disconnect,” says Ranck.

This isn’t just about numbers for Ranck. “My father is in his aging years and is in need of long-term care. His activities of daily living are shifting. And guess what – he is part of the large percentage of people who do not have a plan in place, have no insurance,” she said. “I’m in the middle of my career, but I am my dad’s long-term-care plan. There is not another option.”

More than one third (34%) of the study’s participants who work with an advisor do have some kind of long-term-care plan or insurance in place, said Ranck. Yet that’s still not enough. She and Ludwig have discussed how a long-term-care issue “can really derail most retirement plans,” she said.

‘Gen X Is Freaked About Retirement’

Michael Finke, PhD, CFP, professor of wealth management and director of the Granum Center for Financial Security at the American College, also expressed concerns about a consequence of target-date funds, the savings vehicle now used by more than 60% of workers.

“Target funds have been a success in the current accumulation phase but it’s actually divorced people from having to make decisions about their own retirement,” he said. “When people start to see the end zone approaching, once they hit their 50s, they start realizing that they have no idea how much money they’ve saved, how they’re invested, what their options are for generating income in retirement, and they have no idea what sort of risks they’re exposed to.”

“Everything is automated and when they get to retirement, we sort of dump a half a million dollars in their lap and say, ‘Good luck figuring out what to do with that money after retirement.”

Finke also elaborated on why “Gen X is freaked about retirement,” the title of one of the presentation slides. Gen Xers “have been in this sort of soft, bubble-wrapped environment of accumulation,” he said, and it shows in their responses. According to the study, they worry more than other generations about running out of money, the cost of healthcare, long-term care expenses, changes in taxes, inflation, Social Security Cuts and other issues. In addition, “there is a tendency for Generation X to be wary of institutions,” he said.

Less Stress

Survey respondents who worked with a financial professional showed 20% less financial anxiety and 25% less financial stress, noted Chet Bennetts, CFP, assistant professor of financial planning and program director of ChFC and CFP certification programs at The American College. They were also twice as likely to maintain their portfolio during volatile markets in 2022.

With such big concerns as inflation and Social Security cuts, “even the best financial advisor or investment financial planner in the world is not going to [say] bippity-boppity-boo and we have a magic wand,” he said. “However, when you added an advisor, there was an impact and those concerns did decrease, in part, I’m sure because of the preparation and the conversations of how do we handle, how do we anticipate.”

The American College team also emphasized that there are no one-size-fits-all solutions for consumers regarding when to start taking Social Security, how to withdraw from retirement portfolios, or other planning decisions. “We need to give them the right information at the right time,” said Bennetts.

Jerilyn Klein is editorial director of Rethinking65.

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