Why It Matters:
  • Americans in or approaching retirement think they know more than they do about retirement income.
  • About 75% of those surveyed failed a recent test of retirement knowledge.
  • Only 17% of women could pass the 38-question test.

Your client looks at you across the desk and nods as you explain retirement preparation strategies.

But does he or she really understand?

A new survey from the American College of Financial Services says “no.”

The survey conducted by the nonprofit accredited college found 74% of participating Americans failed a 38-question quiz about financing retirement. Think about that. And only 5% got 81% or more of the questions correct.

Financial professionals have a lot of work to do if Americans are going to understand the basics of an adequately funded retirement.

The Retirement Income Literacy Survey claims to be the most comprehensive survey exploring the drawdown phase of American retirement. More than 1,200 Americans between 60 and 75 years old with at least $100,000 in assets participated.

“Over the next 12 years, an estimated 10,000 Baby Boomers will reach the age 65 every day,” said David Littell, Retirement Income Program co-director at the college. “More and more Americans are retiring, but so few understand basic facts and strategies when it comes to ensuring that their retirement is a comfortable one. The results of this survey are alarming.”

  • Americans think they know more than they do. Of the 61% who claimed to have a high level of financial literacy, only a third passed.
  • Only 17% of women passed the quiz. But men can’t claim much better; only 35% of them passed.
  • Of the participants with a graduate degree, 60% failed.
  • Only 20% of people with less than $1 million in savings passed, but among those with more than a million bucks, only half passed.

The survey examined participants’ understanding of saving, investing, inflation, long term care, Social Security, and other topics.

Sample questions:
  1. If you had a well-diversified portfolio of 50% stocks and 50% bonds that was worth $100,000 at retirement, based on historical returns in the United States the most you can afford to withdraw each year is about ____ plus inflation to have a 95% chance that your assets will last for 30 years.
  2. True or false: Taking a portion (20%-40%) of a retirement portfolio and buying a life annuity can protect against the uncertainty of life expectancy, ensuring that a basic level of spending is available throughout retirement.
  3.  To maximize the safe withdrawal rate from a portfolio over a 30-year retirement period, it is best to hold ___ in equities throughout retirement.

(Answers, according to the American College of Financial Services: 1. $4,000; 2. true; 3. 50%-60%, or 25%-35% depending on risk profile)

During a webinar presenting the report, the authors suggested financial professionals can help break the ice with clients by encouraging them to take the full quiz. The results could surprise them.

The entire report, including the full quiz, a shorter six-question quiz, a breakdown of the results, and infographics are available free online.

Things to Consider:
  • Ask clients if they’d be interested in taking the online test themselves. It may open some eyes.
  • The breakdown of results may help explain where clients are having the most trouble.
  • Even clients who think they have a strong grasp of financial literacy may not.

The American College of Financial Services was founded in 1927 and is the nation’s largest nonprofit educational institution devoted to financial services, offering financial planning designations including the Retirement Income Certified Professional (RICP®), Chartered Life Underwriter (CLU®), Chartered Financial Consultant (ChFC®), and the Certified Financial Planner (CFP®).

Transamerica is not affiliated with the American College of Financial Services.