A 2023 study by the American College of Financial Services has uncovered a concerning discovery: most adults aged 50-75 are vastly uneducated about retirement income and how to successfully manage their finances after leaving the workforce.
This is largely due to a mere 15% of Americans who have retirement plans with defined benefits, leaving the rest to figure out a retirement income plan on their own. Shifting from the mindset of “saving and investing” to “drawing retirement income” is also a major change that some may need additional advice on while they progress into retirement. As the study findings indicated, financial literacy scores were low for those nearing retirement and individuals who had already retired. These results only stress the importance of working with a financial advisor, or elder law attorney, to remain confident when making crucial decisions that affect retirement income.
Understanding How Retirement Income Literacy is Scored
A financially successful retirement will look different for everyone, but most will have overlapping areas of responsibility that play an important part in drawing retirement income over time. To get an idea of where each of the 3,800 study participants stood with their existing level of retirement income knowledge, they were tested on the following topics:
- Taxes
- Housing
- Inflation
- Annuities
- Investments
- Medicare
- Life Insurance
- Long-Term Care
- Social Security
- Life Expectancy
- Retirement Plans
- Retirement Income
The test scores averaged only 31% for overall income literacy, which was considered to be a failing grade. It was also determined that individuals with fewer assets achieved much lower scores, while those with substantially more assets scored nearly twice as high. A key takeaway from these results is the growing demand for financial education at all levels of the financial spectrum to ensure individuals are equally and adequately prepared for the retirement stage of life.
Financial Literacy Builds Confidence
Additional results from the study made it clear that individuals who scored the highest for financial literacy were also more confident in their retirement security. Considering that the trend for this group includes those who possessed a greater number of assets, there appears to be a correlation between retirement income literacy and feeling more prepared to live comfortably as a retiree.
An important part of this confidence is the inclusion of financial advisors who have worked with these individuals to help educate them about retirement income and making wise investment choices. Being able to ask questions, seek advice, and work closely with an advisor or attorney can significantly improve retirement income literacy, and help those preparing for retirement to feel empowered, educated, and excited about the future.
Knowledge Areas: Strengths and Weaknesses
Of the 12 knowledge areas that the study participants were tested on, several yielded higher scores than others for most individuals. In general, topics like housing, Medicare, life insurance, Social Security, and inflation received better results compared to the lowest-scoring topics of long-term care, investments, and annuities at the very bottom with a 12% passing rate. The highest testing score, on the subject of inflation, still turned out only a 47% passing rate among the entire test group.
Perhaps unsurprisingly, participants seemed to have more knowledge of the topics that they were already managing in their lives, with inflation being just one example. While this does work to the individual’s advantage for overall retirement knowledge, many of the remaining knowledge areas could become critically important later in life (such as long-term care). Others, who might rely on investments and annuities to support their retirement income, may have no prior knowledge of how these income streams work before retiring.
One topic that scored particularly low was life expectancy at 27%. The conclusion was that a judgment error exists among many individuals who think they will only live to be a certain age. As a result, factors like long-term medical care and housing expenses are not adequately planned for, and their retirement income may not be sufficient to cover the costs.
Other Factors to Consider for Retirement Income Literacy
Several demographic and socio-economic considerations were also noted during the study in relation to how well certain individuals performed. A few of the findings were:
- Retired individuals scored higher than individuals still in the workforce
- Those with greater assets and wealth had more retirement income literacy overall
- Individuals who identified as “white” or “other” for their race generally scored higher
- A correlation was found between higher scores and having a graduate degree or advanced education
- Female participants consistently scored lower than males
As mentioned previously, whether or not participants had worked with a financial advisor was also an indicator of higher retirement income literacy scores. Those who stated that they had at some point received advice or counsel from a professional significantly performed better in all of the study’s knowledge areas. When measured against the Consumer Financial Protection Bureau Financial Well-Being Scale, these individuals all exhibited greater confidence in their retirement planning.
Consult With an Elder Law Attorney
If you have questions and concerns about retirement income, then working with a financial advisor or qualified elder law attorney will provide the confidence you need to retire peacefully. Elder law attorneys specifically can assist with legal security for your estate, benefit program guidance, and determining the best long-term options for you and your family.
Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice focuses solely on working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe!
Please contact our office today at (281) 665-3807 to schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.