Marin Community Foundation
Financial Literacy
Research

Your Confidence About Your Retirement Planning Is Probably Misplaced

Originally published by Anne Tergesen, Wall St Journal [link] on September 07, 2017

With unemployment low and the stock market near record highs, Americans are feeling more financially secure these days. But a new survey reveals that some of that confidence is misplaced.

The reason: Americans lack basic but vital information about such topics as when they can claim Social Security benefits, how much to save to pay for the health-care costs Medicare won’t cover, and how much life insurance to buy.

Because of poor financial literacy, many make decisions that can lead them to save less or fail to maximize their retirement benefits, said Andy Smith, senior vice president of financial planning at Financial Engines, a Sunnyvale, Calif., company that sponsored the survey and manages 401(k) money for a fee.

“There is a persistent problem with financial literacy in this country,” he said. “Poor decisions you make today can cost you for the rest of your life.”

According to the survey Financial Engines released Thursday, of 1,000 American adults ages 18 to 65, about half say they feel more secure today about their finances than they did five years ago—a trend that isn’t surprising given today’s low unemployment and high stock-market level.

Still, only 8% knew enough to pass — scoring 60% or higher — a 10-question quiz on a variety of financial topics. For example, about 65% of respondents didn’t realize they can wait to claim Social Security benefits until age 70. Because beneficiaries earn an additional 6% to 8% for every year they wait to claim between ages 62 and 70, would-be retirees can leave thousands of dollars on the table by claiming too early.

Consider a husband who is entitled to $1,500 a month from Social Security at age 62. If he were to delay claiming benefits until age 70, Social Security would pay him $2,640 a month to start, according to Financial Engines. That higher amount can make a big difference to a surviving spouse considering the likelihood that one member of a 65-year-old couple will live for an additional 20 years or so and the survivor inherits the higher benefit.

People also underestimate average life expectancy. Almost three-quarters of survey respondents didn’t know that a typical 65-year-old man is likely to live almost 20 years, to age 84, while a typical woman can expect to live to almost 87.

Other questions on the quiz concern how many months of living expenses people should generally set aside in an emergency fund (answer: 3-6 months); how much someone who takes out a $20,000 loan at a 20% interest rate that comes due all at once after four years would owe (answer: more than $40,000); and whether it’s better to take a pension as a lump sum payment or a monthly income for life (answer: it depends).

Financial Engines has something to gain from financial illiteracy. As the leader in the fast-growing market for 401(k) managed accounts, Financial Engines is hired by 401(k) participants to manage their accounts for a fee that typically ranges from 0.2% to 0.6% of assets a year. Currently, the company’s managed-account program is available to 9.7 million employees in 731 401(k)-style retirement plans, and about 10% of the participants are paying for the service.

Within 401(k) plans, managed accounts compete with target-date funds, all-in-one mutual funds that automatically reset an investor’s asset allocation by reducing stock holdings and increasing the portion in bonds as the investor ages. Aside from 401(k) managed accounts, the company has over 130 retail locations nationwide.