Most American adults are stumped by basic retirement-related questions.
That’s according to a new report from the TIAA Institute and the Global Financial Literacy Excellence Center at the George Washington University School of Business. Most quiz respondents bombed, big-time, when posed six questions related to Social Security benefits, Medicare coverage, employment-based retirement savings, ensuring lifetime income, and life expectancy in retirement.
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On average, they answered two out of six questions correctly. But is this surprising?
“Decisions concerning Social Security and Medicare are not that simple and require people to collect quite a bit of information to develop a plan,” said Annamaria Lusardi, co-author of the report and a senior fellow at the Stanford Institute for Economic Policy Research (SIEPR). “For many people, Social Security and Medicare are not enough, and this is why it is alarming to see that the knowledge of how these institutions work is so limited.”
Curious about your retirement know-how? Take the abbreviated quiz below.
Many Americans expect Medicare, for example, will cover all of their expenses. “It’s a shock to them that it doesn’t,” Surya Kolluri, head of the TIAA Institute, told Yahoo Finance. “And then it’s a further surprise that if their income is high, they’ll pay higher premiums for Medicare Part B and prescription drug benefits.”
“Decisions concerning Social Security and Medicare are not that simple” said Annamaria Lusardi, co-author of the report and a senior fellow at the Stanford Institute for Economic Policy Research (SIEPR) (pictured here teaching.)(Photo courtesy of TIAA Institute)
Why financial literacy matters: People who have a grip on retirement concepts are more likely to have a better shot at not outliving their money.
It’s no wonder many of us fall short. Only about 28 states have financial literacy requirements for high school students to graduate. It’s typically a one-semester course covering topics like budgeting, saving, and managing debt.
The real trouble begins when someone starts a job. Waiting to start a retirement savings account even for a year or so has lifelong consequences in terms of saving for retirement. Can you say compounding? “One of the places that could make an impact is if employers were to offer this education when young adults join the company,” Kolluri said. “It’s a perfect time.”
It’s good to know how many years you have to save for. Only a third of Americans knew that, on average, in the US a 65-year-old man will live about 19 more years to age 84 and a 65-year-old woman about 22 more years to age 87, according to the report.
Learn more: How much should I have saved by 50?
Having a bead on how many years you might potentially need to finance after you step away from the workforce is key, Michael Finke, professor of wealth management and director of the Granum Center for Financial Security at The American College of Financial Services, told Yahoo Finance.
“Those who understand average longevity are 54% more likely to plan for spending into their 90s and delay tapping Social Security checks,” Finke, who is the co-author of a new study focused on financial planning for longevity, said.
“Those who had an unrealistically low expectation of retirement longevity were far more likely to indicate that they plan to claim Social Security income benefits before the age of 65,” he added.
Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?
“The main hurdle for people to answer these questions correctly is they haven’t sat down and thought about what they’ll need in retirement and what the situation might look like,” Jeremy Burke, a senior economist at the University of Southern California’s Center for Economic and Social Research, told Yahoo Finance. “As people get closer to retirement, they tend to pay a little more attention to it. It’s a big ask for a lot of folks to try to think about in 30 years what their financial situation’s going to look like.”
He’s spot on. I certainly didn’t give it a passing thought and have been open about cashing out an employer plan when I was 30, paying the penalty and tax, and never looking back. That is until now, when I muse about what that might be worth today.
Generally, people become more knowledgeable about finances as it becomes more germane. “Decisions like whether I should put money away in an Individual Retirement Account (IRA) become relevant when you have enough money to set aside in an IRA, or when you get your first job and are making the decision about how much to save in a 401(k),” Finke said. “It only becomes salient when we’re forced to see the relevancy of that choice in our own lives.”
Learn more: What is a 401(k)? A guide to the rules and how it works.
Then, too, for the most part many people save for retirement these days in default investments like target-date funds which don’t require any knowledge of the financial wizardry behind them.
Nearly 7 in 10 of workers save in automatic investments in their employer-provided accounts that don’t require that they do anything, Finke said. “In essence, when it comes to retirement savings, we’ve bubble wrapped the worker experience when it comes to saving.”
That is a good thing in many ways, but sticky stuff comes when they invest outside of their 401(k), and are prone to making investment mistakes because they’re not as knowledgeable as they need to be, he added.
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Another tripping point in retirement planning is that when people think about whether they have saved enough for retirement it’s all about focusing on their number, Finke said. “That’s the total amount of savings that you have in your retirement account, but that number really doesn’t mean anything to anybody because it’s so difficult to translate the number into a lifestyle.”
I agree. Being a 401(k) millionaire sounds like heady stuff, but what does that really mean when you might have three decades of living costs post-retirement?
“Simply saying that people are too stupid to make good financial decisions is not the right way to go about helping people make better choices,” Finke said.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work” and “Never Too Old to Get Rich.” Follow her on Bluesky.
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