Research can tell us what we already know and yet reveal new twists. And what we learn from this research can have a profound affect when we’re dealing with people’s ability to retire successfully.
The American College of Financial Services 2023 Retirement Income Literacy Study, released February 13, finds that older Americans lack actionable retirement knowledge. The College confirmed this through its latest retirement literacy quiz that respondents, on average, failed.
The study did find that financial literacy is positively correlated with asset level. For example, respondents with more than $1.5 million score twice as high as those with less than $100,000 (50% vs. 25%). But across-the-board, respondents score poorly on answering basic retirement questions.
With robust results from surveying more than 3,765 Americans ages 50 to 75, this study demonstrates a concerning state of affairs for retirement planning in the United States. Most troubling is that we’ve seen the same results for nearly a decade.
Building on studies The College conducted in 2014, 2017 and 2020, the 2023 study demonstrates that most Americans lack knowledge on 12 key retirement-related knowledge topics. Those topics include retirement issues such as Medicare, Social Security, investments, insurance and life expectancies.
The Key to a Successful Retirement
It’s not enough that Social Security has introduced new and improved benefit statements, and the Secure Act now requires plan sponsors to provide an annual illustration of a 401(k) participant’s account balance converted into a lifetime income. Despite these efforts at bolstering awareness, older adults continue to have low literacy concerning retirement issues.
Advisors may be tempted to brush off the study’s results by saying it’s no surprise that people are ill-informed on retirement related topics. But knowledge is key to a successful retirement. In the U.S., with the exception of Social Security and the comparatively small number of workers with guaranteed pensions, saving for retirement is voluntary.
This requires the consumer to know how much to save, where to save it, and how much to drawdown at retirement. And this necessitates clients understanding basic concepts about investing, taxes, insurance and finances. Call it “literacy” or call it “competence,” Americans need to know enough to take on the burdens that come with the freedom of voluntarily saving for retirement.
The Good News in The Data
The new study also reveals the essential role financial professionals play in educating clients. Respondents who have advisors have higher retirement income literacy and better outcomes than their peers. They get higher scores across all knowledge areas, are more financially well-off, and feel more confident about retirement. For example, participants with ongoing advisory relationships scored 11 points higher on retirement income literacy than those without (38% vs 27%).
While The College retirement income literacy study confirms what we know – Americans are ill-informed on retirement topics – it tells us much more. Tweaking the data provides a path for how advisors can specifically provide help to their clients. Consider these three planning opportunities this research suggests:
One size doesn’t fit all
The research reveals that retirement planning knowledge is highly variable across different parts of society. For example, respondents score higher the more investable assets they have, and if they have earned advanced degrees. Men consistently score higher than women, and white respondents score higher than Black and Hispanic respondents. This disparity underscores the need for advisors to avoid a ready-made, one-size-fits-all approach to retirement planning. To improve retirement literacy, planners must be sensitive to demographic and cultural differences in their client base. They need to be ready to respond to different levels of knowledge among different socioeconomic groups. And if truly committed to raising the bar for Americans, retirement planners should commit to providing their knowledge to underserved markets, whether through community outreach or pro-bono services.
Improved knowledge improves confidence
On the survey, those who work with financial advisors score nine points higher than those who don’t (50% vs. 41%) on financial well-being, measured by the Consumer Financial Protection Bureau Financial Well-Being Scale. This is crucial to planning because a key goal for retirement is to be in a state of well-being and confidence. The research tells us that having a financial advisor predicts decreased stress and anxiety, controlling for demographic factors. This fact should be proactively pointed out to prospective clients. An advisor doesn’t just “take care of” retirement planning for the client. Rather, through the interaction involved in working with an advisor, the client can become more knowledgeable, prepared and confident.
A place for ‘DNA-based’ advisors
Considering the complexity of retirement planning issues, it is not surprising that Americans have consistently scored poorly on these quizzes. Between changes in tax law, modification of government benefits, a volatile economy, and the endless introduction of new retirement products, we can’t realistically expect Americans to ace a retirement quiz. However, with advice they can do better.
Consider the possible sources of retirement advice. An explosion of online tools has appeared since The College conducted its first literacy quiz in 2014. This cyber information may not have helped as much as expected. As part of the 2023 study, researchers at The College administered the 38-question quiz to ChatGPT. It scored 45%, only 14% better than the participants’ overall average (31%). This suggests that retirement planning continues to benefit from the knowledge, insight and dedication of human advisors. Clearly, for many, retirement planning should not be a DIY activity. And generative AI, helpful as it can be, does not replace the value of the advisor-client relationship.
What Really Matters Most
I’ve been involved with The College’s literacy survey for several years. As I’ve reviewed the questions and answers, I’ve been struck by how inexact, yet important retirement planning really is. There are many wrong answers to the questions asked, but there is also more than one right answer when it comes to planning. A successful retirement plan is not measured by getting a better score, but by the preparedness and confidence that comes with having better knowledge. To the extent an advisor has this knowledge and can impart it to clients, Americans will experience more successful retirements.
Steve Parrish, JD, RICP, CLU, ChFC, AEP, is Professor of Practice and Scholar in Residence at The American College of Financial Services. With over 45 years’ experience as an attorney and financial planner, Parrish frequently addresses the financial challenges of individuals, business owners, and executives nationwide.
