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Five years after
the release of MetLife’s first Retirement Income IQ Test, a national poll
to gauge pre-retirees’ knowledge of retirement income issues, a new version
of the study, released today by MetLife Mature Market Institute, reveals that
almost seven in ten (69%) pre-retirees overestimate how much they can draw down
from their savings – with an alarming 43% saying they believe they can
withdraw 10% or more each year while still preserving their principal –
even though most retirement experts suggest a withdrawal rate of no more than
4% annually.
MetLife’s 2008 Retirement
Income IQ Test also reveals that significant gaps exist around average life
expectancy and other retirement income issues. Six in ten Americans (60%) underestimate
life expectancy and almost half (49%) underestimate the amount of pre-retirement
income they’ll need once they retire. This lack of understanding is particularly
concerning because poor retirement planning assumptions are compounded after
retirement by today’s much longer life expectancy.
“Five years after
we commissioned the original MetLife Retirement Income IQ Test, one of the first
studies to focus exclusively on retirement income issues, we again wanted to
test consumers’ knowledge about the most important issues they need to
address as they approach retirement,” said Sandra Timmermann, Ed.D., director
of the MetLife Mature Market Institute.
“While we would have
liked to have seen more dramatic increases in the scores, directionally Americans
are improving their retirement income IQs. Yet, there are still far too many
misconceptions about retirement income issues,” added Timmermann. “Most
concerning is the fact that so many pre-retirees overestimate how much they
can spend down from their retirement savings annually. This statistic should
serve as a wake-up call for pre-retirees and advisors alike.”
Glass: Half Empty
or Half Full?
On average, respondents
answered 6.41 of the 15 multiple choice questions in MetLife’s 2008 Retirement
Income IQ Test correctly, resulting in a score of 43 on a grading scale of 100
points.
While this reflects a basic
level of retirement income knowledge, it clearly points to a need for greater
education, advice, and guidance as individuals approach retirement. In addition
to underestimating the amount they need to save and how long they will live
and overestimating how much they can draw down from their savings annually,
nearly seven in ten (67%) of respondents don’t know that Social Security,
a defined benefit pension plan, and an income annuity all pool risk to pay out
a lifetime stream of income. An equal number (67%) don’t know that an
income annuity provides income that is guaranteed and cannot be outlived. Almost
six in ten (59%) surveyed reported that they are seeking financial advice on
such products as 401(k), retirement savings, and long-term care insurance. “With
so many misconceptions surrounding retirement, it is difficult for those who
are approaching retirement to maximize their retirement picture without the
assistance of a professional financial advisor,” said Timmermann. “An
advisor can look at an individual’s lifestyle goals, assets, basic income
needs, and income sources, and then effectively help them put together a plan
to meet their personal retirement needs. It’s important for people to
recognize that they don’t have to go it alone, and with the right kind
of professional help, they can rest easier and look forward to their retirement
with even greater optimism.” Silver Linings
A silver lining in this
year’s Retirement Income IQ Test findings, more than half (56%) of respondents
correctly understand that longevity risk is the greatest risk in retirement,
up significantly from 23% in 2003. Additionally, almost three in four (73%)
of those surveyed 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.
A Gender Knowledge
Gap
The study findings also
point to a gender divide with 65% of men vs. 50% of women somewhat or very confident
that they will have enough money to live comfortably if they live until 85 years
of age. Although more women tend to be concerned about financial security, the
men surveyed answered more questions correctly and by a higher margin. The largest
gaps exist with regard to average rates of inflation, with 31% of men correctly
selecting 3% as the average annual rate of inflation over the past 20 years
versus only 16% of women answering correctly. Men are also more likely to understand
that experts recommend using a benchmark of 80-90% as the amount of pre-retirement
income needed in retirement (50% of men vs. 41% of women). On the other hand,
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 vs. 27% of men).
Action Tied to
Greater Awareness, More Confidence
In addition to the 15 multiple
choice questions, five new questions were added to the 2008 study to ascertain
which actions pre-retirees are taking to prepare for retirement. These questions
also sought to gauge how comfortable pre-retirees are with the outlook for their
retirement future. The findings underscore what one would expect: those who
take action to ensure that they have adequate retirement income are better informed
and more confident that they will have a comfortable retirement.
“Individuals, as they transition into retirement, are eager to make the
most out of the next phase of their life,” added Timmermann. “They
want to approach retirement by making choices that they control, such as where
to live, if and when to work, when to take time for community service and when
to spend time with family and friends. Those who seek advice and guidance, and
then act on it as they approach retirement, are able to transition into this
challenging life stage with more confidence and less worry.” The MetLife
Retirement Income IQ Test was conducted nationwide in April 2008 by GfK North
America. A total of 1,216 males and females aged 56-65 within at least five
years of retirement completed the Web-based survey. All respondents were primary
or co-primary financial decision-makers in their households.
To Learn More
A short interactive version
of the Retirement Income IQ Test is available at www.metlife.com/retirementquiz.
Consumers can use this site to get a quick and immediate assessment of their
Retirement Income IQ. Available at ww.maturemarketinstitute.com is the 2008
MetLife Retirement Income IQ Study that includes the full Retirement Income
IQ Test, the correct answers, and how the study group responded to each question.
To receive a hard copy, please email a request to the MetLife Mature Market
Institute at maturemarketinstitute@metlife.com.
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