Most employees fail to understand basic retirement concepts

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Working Americans of all ages are plagued by widespread misconceptions and procrastination that could undermine their retirement readiness — unless they devote enough time to learning basic concepts, Fidelity Investments’ first-ever Retirement IQ Survey finds.

Most notably, as many as two-thirds of the respondents underestimated what they will need to save for retirement.

“While we know from previous studies we’ve conducted that Americans have made progress in covering essential expenses in retirement, we wanted a better understanding around what people comprehend when it comes to retirement basics,” says Ken Hevert, SVP of retirement at Fidelity Investments.

While noting that progress has been made to move the needle on retirement readiness, he says the survey’s knowledge gaps point to the need for better education. Hevert believes employers, along with their advisers, are positioned to help educate, inspire and motivate employees to be proactive and start saving early.

“We recognize how important it is for employers to engage with their plan participants as early as possible because it’s often in the workplace where people first learn about what they need to do to prepare for retirement,” he says.

Also see:16 areas where employers most want help from their broker.”

The survey identified procrastination as a serious concern. More than half of respondents confessed to putting off an important financial decision such as creating a budget, paying bills on time or saving for retirement.

Failing grade

Many people surveyed, including those age 55 and older, gave wrong answers to questions in nearly every category, even though it was a multiple-choice format, according to Hevert. He says the average grade was 30% (the equivalent of an F), no one answered all 14 questions correctly and 1% got all of the questions wrong. Fewer than 0.5% of respondents received a 79% (C+), which was the highest grade.

The question most people answered correctly concerned the age of Medicare eligibility (77% got it right), while there was a three-way tie for toughest question, which only 14% answered correctly. Those results included:

· Number of years out of the past 35 with a positive market return (about 60% thought it was half the time or less, whereas the correct answer was 80% of the time).

· Future value of $50 a month earning market average return (half underestimated it).

· Largest expense for most retirees (most wrongly guessed healthcare, whereas the correct answer is housing).

Despite these poor test results, Hevert emphasizes that by spending just a few hours on the subject, working Americans can boost their Retirement IQ scores dramatically and develop a good grasp of the essentials needed to make smarter decisions that can put them on the path to a secure retirement. The employer-based system can encourage plan participants to think about the goals they want to achieve and develop a plan to get there, which he says starts with knowing where they stand in order to identify opportunities to improve.

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Retirement readiness Retirement benefits Retirement planning Retirement income Financial literacy Financial planning