80% Failed a Retirement Quiz: Can You Pass?
It’s a tough one, and reveals our too-complex retirement system
If you thought saving for retirement was challenging, just wait until you retire. A retirement-income quiz designed by the American College for Financial Planning makes the case that it’s in retirement that the complexity dial is turned past 10.
Eight in 10 consumers (between the ages of 50 and 75) failed the American College’s 2020 Retirement Income Literacy Survey. The average score was 42%. That likely wasn’t what participants expected, as 60% gave themselves an above-average rating for their retirement-income planning knowledge.
But the failure is more the system that makes retirement planning so difficult. The survey has 38 questions. Let that wash over you for a moment. Thirty-eight questions. All relevant questions. All speaking to a variety of topics that feed into making informed decisions that are at the heart of building a plan that can provide financial security in retirement. Surely the fact that so many questions are needed is clear evidence that the system is a big part of the problem.
Do take the test, anyway.
The goal for every household nearing retirement should be to get up to speed on some of the key themes that can financially make or break a retirement. To that end, the survey provides a roadmap of key issues every household should strive to learn more about.
A sample of topics that proved vexing:
—Barely one in three survey participants correctly answered that a 25% negative single year return in a retirement portfolio would have the biggest impact if it occurred right at retirement. More than 40% said that the timing didn’t matter, or that they didn’t know. Research has shown that if you get smacked with a bear market early in retirement it has the biggest impact on how things will play out over your entire retirement. If you can avoid retiring in a bear market, make that a goal. Or consider how to generate enough income from Social Security, and perhaps a plain vanilla income annuity, to cover your fixed living costs. That way you reduce the need to touch your investment portfolio if you run into a bear market early in retirement.
—Nearly 60% of respondents underestimated the average life expectancy for a 65-year-old man. It’s 20 years. And that likely underplays longevity risk for anyone who makes it to 65 in good health. The standard approach to ensure one doesn’t run out of money is to base a plan on living to at least age 90.
—Close to eight in 10 respondents correctly answered that if their savings account earned 2% and inflation ran at 4%, that their purchasing power would be less.
But only half of respondents then correctly chose “a diversified portfolio of stocks” as one of the best ways to protect against inflation. Given the not-small odds of living a long retirement, keeping some of your investment portfolio invested in stocks should be considered. Especially for today’s retirees. Intermediate-term Treasury bonds, which are the best bond for retirees to own (they tend to go up when stocks go down, while other bonds don’t always provide that important lift in hard markets) currently yield less than 1%.
—A timely question given the current low-interest rates on bonds asked what would happen to a mutual fund that invested in long-term bonds if interest rates were to rise significantly, just one in four respondents understood that a portfolio of long-term bonds will “decrease significantly” when interest rates rise.
—Social Security remains too baffling. When asked about the current cash flow problem the Social Security program faces if no changes are made by 2033, nearly four in 10 said promised benefits would be cut by at least 50%. Another 35% didn’t know. Just one in four correctly knew that if Congress does not step in with some tweaks, the program would have enough cash to pay about 75% of promised benefits.
As noted earlier, the range of issues one needs to master to have a good shot at a financially secure retirement is borderline maddening. Even if you have been a happy DIY retirement saver, as you make the turn into actually living off retirement income, hiring a financial pro to hash through your situation and help you land on a long-term sustainable plan can be of great value. There are plenty of qualified planners who will work on an hourly or project basis.
Just make sure you work with someone who operates as a fiduciary. If they nod yes and tell you they always work in your “best interest,” that’s not good enough. You want to hear from a fiduciary.