The Need for a Focus on Retirement Literacy

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Henry Stokes
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1 The Need for a Focus on Retirement Literacy ASEC October 21, 2015 Washington, DC Mathew Greenwald Greenwald & Associates, Inc.

2 Overview Financial security in retirement will be challenged by many factors increasing the cost of the retirement period Retirement literacy is low and costly Many financial literacy efforts have not focused at the special knowledge needed to manage assets and spending at retirement One of the most effective set of actions that can be taken to increase retirement security is to increase retirement literacy Increasing retirement literacy is a free good: it can increase retirement income without sacrifice 2

manage assets and spending at retirement One of the most effective set of actions that can be taken to increase retirement

3 The Retirement Period is Becoming Considerably More Costly Longer life expectancy. Healthy life expectancy gains have not kept pace with life expectancy gains. Reduction in lifetime income from pension plans. Reduction in lifetime income from Social Security. Lower level of health and higher health care costs. Development of new, much more expensive housing options for the elderly. Higher lifestyle needs. Plus, public policy risk with financing pressure on Social Security and Medicare 3

Reduction in lifetime income from pension plans. Reduction in lifetime income from Social Security.

4 The signs are already clear From a page 1 story in the October 16, 2015 USA Today titled No benefit boost for seniors: many older Americans may see a reduced standard of living, particularly 30% of Medicare beneficiaries about 17 million Americans who could see their Part B premium and deductibles rise 52% because of provisions in the Social Security law. 4

particularly 30% of Medicare beneficiaries about 17 million Americans who could see their

5 Managing money in retirement is different and more difficult than managing money while working Accumulation Plan to date certain Time is ally Volatility is ally Inflation lower and have protection More predictable health care costs, low LTC risk Ability to recoup from financial setback Easier at end of period Income No certain end date Time is enemy Volatility is enemy Inflation higher, less protection Health care costs higher, long-term care risk higher Perception of little or no ability to recoup from setback More risk at end of period 5

financial setback Easier at end of period Income No certain end date Time is enemy Volatility is enemy Inflation higher, less protection

6 Retirees exposed to new risks Substantially or totally new risks Sequence of return risk Longevity risk Long term care risk Significantly greater exposure to risk Health care risk Inflation risk Behavioral risk 6

risk Long term care risk Significantly greater

7 The cost of retirement illiteracy is enormous David Blanchett of Morningstar estimates that good financial management can increase retirement income by 29%, and by 38% with better Social Security claiming strategies John Shoven of Stanford University estimates that poor claiming strategies for Social Security cost many single people $60,000 and many married couples $100,000 Better retirement literacy can substantially increase financial security of retirees, especially women, at basically no cost Note: See David Blanchett, Alpha, Beta and Now Gamma 7

poor claiming strategies for Social Security cost many single people $60,000 and many married couples $100,000 Better retirement literacy

8 Retirees have less access to financial advice and support Most savers are in retirement plans with access to retirement plan provider tools and call centers Most retirees have no support and have little knowledge or even awareness of financial products specially designed for the retirement period With less support, they need more knowledge 8

retirees have no support and have little knowledge or even awareness of financial

9 A major study of retirement literacy found many key gaps in knowledge Survey conducted by the American College Online survey of 1,019 people ages with investable assets of at least $100,000 Conducted in July

College Online survey of 1,019 people ages 60-75 with

10 Just one in five ages with at least $100,000 pass the Retirement Literacy Quiz and only a tiny percentage receive a grade of A or B Quiz Grade Based on Total Percentage of Questions Answered Correctly Total (n=1,019) 80% <0.5% 1% 5% 14% A (91%-100%) B (81%-90%) C (71%-80%) D (61%-70%) F (60% or less) 10

Based on Total Percentage of Questions Answered Correctly Total (n=1,019) 80%

11 Formal, written retirement plans are uncommon; only about one in four report having one Do you have a formal, comprehensive, written retirement plan? Total (n=1,019) Yes 27% No 73% 11

12 Only two in five know the value of a long-term bond mutual fund falls if interest rates rise significantly If 100% of a mutual fund s assets are invested in long-term bonds and the investment climate changes so that interest rates rise significantly, then the value of the mutual fund shares Total (n=1,019) 39% 24% 10% 3% 25% Decrease significantly May rise or fall depending upon the type of bond Increase significantly Will not change at all Don't know 12

rates rise significantly, then the value of the mutual fund shares Total (n=1,019) 39% 24% 10% 3% 25% Decrease

13 Only one in three correctly answers a question about which type of investment generates the highest returns over a long period of time Historically, which one of the following generates the highest returns over a long time period? Total (n=1,019) 33% 18% 11% 7% 31% Dividend paying stock funds Large company stock funds High yield bond funds Small company stock funds Don't know 13

the highest returns over a long time period?

14 Just two in five recognize that an income annuity can protect against life expectancy risk True or false: Taking a portion (20-40%) of a retirement portfolio and buying a life annuity can protect against the uncertainty of life expectancy, ensuring that a basic level of spending is available throughout retirement. Total (n=1,019) 43% 22% 35% True False Don't know 14

annuity can protect against the uncertainty of life expectancy, ensuring that a basic level

15 Just three in ten are able to provide the correct response regarding the strategy least likely to improve retirement security Which of the following strategies is least likely to improve retirement security? Total (n=1,019) 30% 20% 18% 32% Saving an additional 3% of salary in the five years prior to retirement Deferring Social Security benefits for two years longer than originally planned Working for two years past the planned retirement date Don't know 15

Total (n=1,019) 30% 20% 18% 32% Saving an additional 3% of salary in the five years prior to retirement Deferring

16 Only one-quarter identify B-rated corporate bonds as the long-term bond that typically has the highest yield Which of the following types of long-term bonds typically has the highest yield? Total (n=1,019) 24% 25% 10% 41% AAA rate corporate bonds B-rated corporate bonds Treasury bonds Don't know 16

long-term bonds typically has the highest yield?

17 Only one in eight knows a deferred variable annuity with guaranteed lifetime withdrawal benefits can pay income even if the investment account goes to zero A deferred variable annuity with guaranteed lifetime withdrawal benefits Total (n=1,019) 54% 23% 13% 7% 2% Pays guaranteed income that varies based on market performance Can pay income even if the investment account goes to zero Ensures that the investment account will not lose value Only offers investment alternatives with fixed returns Don't know 17

23% 13% 7% 2% Pays guaranteed income that varies based on market performance Can pay income even if the investment account goes

18 Just one in four knows that an annuity paying income of $1,000 a month is generally going to be more expensive the younger the owner is when the payments begin An immediate income annuity that pays income of $1,000 a month is generally going to be more expensive Total (n=1,019) 51% 26% 15% 4% 4% The younger the owner is when the annuity begins For a man rather than for a woman If interest rates rise For a single person than for a couple Don't know 18

is generally going to be more expensive Total (n=1,019) 51% 26% 15% 4% 4% The younger the owner is when the

19 One in eight knows that the lifetime income payout rate for an immediate income annuity for a 65-year-old male today is roughly 6 to 7% The lifetime income payout rate (the annual annuity payment as a percentage of the purchase price) for an immediate income annuity for a 65-year-old male today is roughly Total (n=1,019) 65% 16% 13% 5% 1% 3-4% 6-7% 10-12% 14-15% Don't know 19

payment as a percentage of the purchase price) for an immediate income annuity for a

20 Almost half do not know that Social Security retirement benefits are increased for each year that benefits are deferred from age 62 to age 70 Quiz Question Social Security workers monthly benefits are increased for each year that benefits are deferred from age 62 to age Total (n=1,019) 54% 5% 17% 9% 15% Don't know 20

Security workers monthly benefits are increased for each year that benefits are

21 Half underestimate the average life expectancy of a 65-year-old man A 65-year-old man has an average life expectancy of approximately an additional: Total (n=1,019) 39% 38% 12% 5% 7% 10 years 15 years 20 years 25 years Don't know 21

22 However, more than half rate their ability to meet their income needs during retirement highly How would you rate your efforts when it comes to meeting your income needs during retirement? Seven point scale Total (n=1,019) Net Top 2: 55% Net Middle 3: 44% 36% 19% 25% 16% Net Bottom 2: 1% 3% 1% <0.5% Excellent (7) (6) (5) Fair (4) (3) (2) Very poor (1) 22

23 Suggested actions Increasing retirement literacy among those ages 55 to 70 requires a new focus Decide on key information needed in pre-retirement period Decide on key information needed in retirement period Strengthen information provided by Social Security Administration (a highly trusted source of information) to those ages 55 to 70 Strengthen Social Security website page dedicated to financial advisors 23

24 Suggested actions Increase efforts to encourage the development of written retirement plans at work site among those 55 and over Encourage broad educational programs aimed at pre-retirees and retirees 24

25 Two Questions Do you agree that increasing retirement literacy should be a separate and important component of overall efforts to increase financial literacy? What are the best methods of increasing retirement literacy? 25

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