Studies revealing that many, if not most, employees are not on track to meet their retirement preparation goals are published with depressing regularity. But a new survey by the Retirement Income Certified Professional unit of The American College explores the topic from another perspective: What is the “retirement literacy” of people on the threshold of ending their careers, or already in retirement?

The survey pointed to some serious knowledge gaps for the more than one thousand 60-75-year olds with at least $100,000 investable assets. While it might be too late for many of them to turn their situation around, it points to educational opportunities that can be directed toward younger employees who still have time to plan accordingly.

High flunk rate

The authors of the survey, which was structured as a quiz, found it “surprising” that most people flunked the quiz. That’s because the quiz was administered to people who had retirement assets to manage, two-thirds of whom had already calculated the cost of retirement, 84% understood stock mutual funds to be safer than individual stocks, and 90% understood the impact of inflation on their purchasing power.

The following survey highlights are segmented by topic:

Retirement portfolio investing:

  • Less than 40% know they need to minimize their investment risk on the eve of retirement
  • 35% understood the correlation between bond credit quality and yield
  • 39% understood how changing interest rates impact bond mutual funds
  • 7% knew that small-cap stocks as an asset class have the highest average returns over the long term

Taxes and insurance:

  • 25% knew that the earlier one wants to be able to begin receiving annuity payments, the higher the annuity premiums for a given benefit amount
  • 36% understood that the best time to convert a conventional IRA to a Roth is when their tax rate is lower than it would otherwise be
  • 25% knew that the probability of needing long-term care at some point in one’s life is 70%

Social Security:

  • 30% knew that starting benefits two years after initial eligibility gives them a greater benefit than they’d get by taking benefits immediately
  • 30% were familiar with the 4% withdrawal rule
  • 54% realize that benefits increase each year retirement is delayed until age 70

False confidence?

Despite the apparent shortcomings in the surveyed group’s grasp of many basic retirement preparation topics, overall confidence levels with their knowledge about retirement saving was relatively high: On a 1-7 scale with 7 being “extremely knowledgeable,” 34% of pre-retirees chose a 6 or 7 to describe their knowledge level, and another 57% chose a value between 4 and 5. Only 2% graded their knowledge in the lowest two tiers.

Similarly, 20% considered themselves “ahead of schedule” in their retirement savings, and 42% believe they are “on track.”

That confidence might be attributable to the fact that relatively few had given serious consideration to subjects such as:

  • The economic personal budget of deteriorating health and long-term care needs
  • Other risks that could undermine their retirement
  • Their taxes in retirement
  • Strategies for generating income in retirement
  • The financial consequences of having a spouse die first.

Richard Stolz is a freelance writer based in Rockville, Md.

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