It might not be a surprise that pre-retirees are seeking advice, as individuals within five years of retirement failed miserably MetLife’s second Retirement Income IQ Test, a national poll to gauge pre-retirees’ knowledge of retirement income issues. The pre-retirees scored 43 on a scale of 100.
According to a press release on the test results, almost seven in 10 (69%) pre-retirees overestimate how much they can draw down from their savings during retirement—with 43% saying they believe they can withdraw 10% or more each year while still preserving their principal. MetLife said most retirement experts suggest an annual withdrawal rate of no more than 4%.
Additionally, 60% of the 1,216 males and females who completed the test underestimate life expectancy and almost half (49%) underestimate the amount of pre-retirement income they will need once they retire. MetLife noted the test results clearly point to a need for more education, advice, and guidance for individuals approaching retirement.
Nearly seven in 10 (67%) test respondents do not know that Social Security, a defined benefit pension plan, and an income annuity all pool risk to pay out a lifetime stream of income, and an equal number (67%) do not know that an income annuity provides income that is guaranteed and cannot be outlived. Fifty-nine percent reported that they are seeking financial advice on 401(k)s, retirement savings, and long-term care insurance.
On a positive note, more than half (56%) of respondents correctly understand that longevity risk is the greatest risk in retirement, up significantly from 23% in the first Retirement Income IQ test in 2003. Additionally, almost three in four (73%) know when a 55-year-old is able to collect full Social Security benefits, and two in three (62%) have a good understanding of how long-term care expenses are covered.
Although more women tend to be concerned about financial security, the men completing the test answered more questions correctly and by a higher margin. Almost one-third (31%) of men correctly selected 3% as the average annual rate of inflation over the past 20 years versus only 16% of women. Men are slightly more likely to understand that experts recommend using a benchmark of 80% to 90% as the amount of pre-retirement income needed in retirement (50% of men verse 41% of women). However, women were more likely to know that the average annual cost of a private room in a nursing home is $78,000 (35% of women verse 27% of men).
Almost two-thirds (65%) of men are somewhat or very confident they will have enough money to live comfortably if they live until 85 years of age, compared with 50% of women.
The full Retirement Income IQ test, the correct answers, and answers given by the study group are available at www.maturemarketinstitute.com.