We’re flunking our IQ test on retirement security
Posted on 17 July 2008
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/column/were-flunking-our-iq-test-on-retirement-security
Think you’ve got a pretty good handle on planning for retirement? I doubt it.
The MetLife Mature Market Institute recently published results of its Retirement Income IQ Test, and the results were just awful. Metlife—the insurance company’s research and education arm—surveyed more than 1,200 people who are five years away from retirement age on 15 multiple choice questions related to long-term retirement security.
Respondents answered 6.41 of the 15 questions correctly. I’ve been out of school quite a while, but to the best of my recollection, answering 43 percent of questions on a test correctly usually gets you an F.
So try your hand at the questions below, excerpted from the Metlife quiz. I’ve printed the correct answers at the bottom of today’s column – no cheating!
Q: What percent of pre-retirement income do experts think retirees need to use as a benchmark for determining the amount of annual income needed in retirement?
A: 20-30%; 40-50%; 80-90%; 90-100%
Q: To help ensure that an individual has enough money to make savings last his or her lifetime, experts are now recommending limiting the percent they withdraw from their savings each year to:
A: 4%; 7%; 10%; 15%
Q: At what age would a person who is age 55 in 2008 be able to collect full Social Security benefits?
A: 59; 62; 65; 66
Q: How much do people older than age 65 spend annually on out-of-pocket costs for health care?
A: $1,190; $2,200; $4,700; $6,900
In the longer test, a fair number of the questions related to annuities—a financial product Metlife sells. But the results still offer a pretty good snapshot of our collective understanding of financing retirement security. And it’s not a pretty picture.
Almost 70 percent of Metlife’s test-takes over-estimated the amount they can withdraw annually from their retirement savings without hurting their principal. An almost equal number couldn’t identify Social Security, defined benefit pensions and annuities as sources of guaranteed income annuity. Only 43% have a clear idea of what they’ll need to spend out-of-pocket for health care in retirement.
One of the most interesting findings focuses on our understanding of the risk of outliving savings. The good news is that 56 percent correctly identified longevity as the biggest risk to retirement security—up significantly from 23 percent when Metlife asked the same question in 2003. However, 60 percent underestimated their own chances of living beyond an average life expectancy: just 34 percent correctly said that an individual has a 50 percent chance of living beyond age 85.
That misunderstanding of longevity risk may help explain why people think they can withdraw and spend more money than they should each year from their retirement accounts. An alarming 43 percent of quiz takers thought they could withdraw 10 percent or more annually while still preserving their principal—even though most experts suggest withdrawing far less in order to stretch savings to cover a retirement that could last 30 years.
A conservative approach—assuming a long life in retirement—would be withdrawing no more than 4 percent annually. Some situations might allow for a modestly higher rate of withdrawal—but nothing approaching 10 percent.
“People still don’t know the basics,” says Sandra Timmermann, the Institute’s director. “We need to not only save a lot of cash but figure out how to make it last. And people under-estimate their longevity, so the problem is compounded.”
Correct answers:
Pre-retirement income: 80 to 90 percent
Annual withdrawals: 4 percent
Social Security benefits: 66
Out-of-pocket health care: $4,700
Take the full quiz
If you’d like to take the full Metlife quiz, you can download the questions here [pdf file]. Another file with the correct answers is here.
