A new study released on May 2nd by the American College of Financial Services reveals that retirees are alarmingly uneducated when it comes to the financial side of retirement. Researchers conducted online interviews of 1,244 Americans between the ages of 60 and 75 who have at least $100,000 in household assets.

Results show that 74% of respondents failed the 38-question retirement literacy quiz, and only 5% of respondents scored 80% or higher.

6 Things Retirees Don’t Know About Retirement

Here were the top areas where retirees fell down on knowing the basics:

1. How to calculate withdrawal rates

Only 38% knew that on a $100,000 retirement account they could only “safely” withdraw $4,000 per year, suggesting that they don’t know how to calculate a responsible withdrawal rate. A good starting point is to withdraw no more than 4% of your account balance each year, but a financial planner will help you figure out your perfect rate. (See: The 4% Retirement Withdrawal Rule: What to Know and What’s the Best Retirement Drawdown Strategy for You?)

2. The accurate way to estimate of life expectancy

A woman turning 65 can expect to live until she’s 86, according to Social Security data. A man reaching the same age will live to the age of 84, on average, but the study found that half of respondents underestimated how long they will live and how long their retirement savings must last. As life expectancy increases, Americans need to save more for the years where they’re unable to work. (Check out: How Long Will You Live? This Tool Will Tell You.)

3. When to take Social Security

Only a third of respondents understood that it’s better to work or defer Social Security an additional two years rather than increasing contributions by 3% for the five years prior to retirement. In general, the longer you wait to take Social Security, the higher your monthly benefit. Only 55% knew that waiting until age 70 to take benefits is better if you plan to live to age 90.  For those who are behind on retirement savings, waiting longer is a better strategy.  (For more information, read: How do I calculate my Social Security break-even age?)

4. How interest rates affect bonds – and other basics of investing

Investing isn’t easy to understand, but anybody with a retirement account should know some of the basics. The study revealed that only a third of people knew that the value of bonds or bond funds fall as interest rates rise. This is particularly important for people who receive little help managing their portfolio from employers or financial advisors. Most agree that interest rates will continue to rise for the foreseeable future. That could have an impact on retirement accounts heavily weighted in bonds. (See: Understanding Interest Rates, Inflation and the Bond Market.)

Only 10% of respondents knew that stock funds built on smaller companies often yield higher returns than larger company funds or funds full of dividend-paying stocks.

Finally, only 30% knew that actively managed funds have higher fees than index funds and ETFs. Even small differences in fees can have a major impact on a person’s portfolio balance over time. Lack of knowledge in this area is particularly problematic. (Read: Are Fees Depleting Your Retirement Savings? and The Hidden Fees in 401(k)s.)

5. Who is a good candidate for annuities

The appropriateness of annuities in a retirement portfolio is a source of controversy in the financial community, but the study found that people lack a basic knowledge of annuities and as a result, are ill-equipped to make financial decisions regarding annuity products. An alarming 57% of respondents answered all three of the annuity questions on the survey incorrectly and only 29% knew that buying an immediate annuity is more expensive for younger people. Less than one-quarter of people know that the lifetime income payout range for a 65-year-old male is around 6% to 7%. (See our tutorial: Introduction to Annuities.)

6. How life insurance is taxed

Although 60% knew that the death benefit from a life insurance policy owned by an individual is tax free, only 38% knew that the cash value of a policy grows tax deferred. (For more, read: How to Avoid Taxation on Life Insurance Proceeds.)

The Bottom Line

Making smart financial decisions before and during retirement isn’t solely the job of a financial planner or advisor. It starts with knowing the right questions to ask and having reasonable knowledge of how your portfolio can be expected to perform in the future.

Nobody cares more about your money than you. Ask yourself some of these questions If your level of financial literacy isn’t as high as you would like – or as it should be – now’s the time to remedy that problem.




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