trendspotting | PLANADVISER July/August 2017

Need for Retirement Income Education

Most older Americans know very little about annuities

By Javier Simon | July/August 2017

Unlike their younger counterparts, individuals nearing or in retirement do not have the luxury of a long time-horizon to grow their nest egg. They have reached the point where developing a strategy to sustain their assets and draw retirement income is critical. However, many lack the knowledge to do so effectively.

According to a survey by the American College of Financial Services, 74% of respondents failed a retirement income quiz. Of those who passed, only 5% scored a “B” (80%) or higher.

In particular, some respondents failed to correctly answer questions about preserving assets and sustaining income in retirement. The survey found only 38% knew that $4,000 is the most they could afford to “safely” withdraw per year from a $100,000 retirement account, and only 34% knew that a substantial negative investment return at retirement age is more damaging to portfolio sustainability than the same negative return a number of years before or after retirement.

The study also indicates that most respondents are unaware of best practices to execute near retirement. Only 33% showed they understood the benefits of working two years longer or deferring Social Security for two years as opposed to increasing contributions by 3% for five years just prior to retirement. Moreover, fewer than half knew that using a portion of their portfolios to purchase a life annuity can protect against longevity risk.

Only 29% knew that buying an annuity is less expensive for an older person than a younger one; only 17% knew the lifetime income payout rate for a 65-year-old male is roughly 7%; and only 14% knew an annuity with a guaranteed lifetime withdrawal benefit can pay income even if the investment drops to zero.

However, the research highlighted several areas for which older Americans scored very well. Subjects marked by high proficiency include housing finances, Medicare issues, the principle of inflation, the role taxes play in retirement, and life insurance concepts. More men (35%) passed the quiz than women (18%). More than half (82%) of women failed the quiz, suggesting the need for targeted education to them.