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Knowledge Plus Action Equals Retirement Security

Retirement security – the Holy Grail to millions of workers – usually is defined as living comfortably and having no financial worries. To get there, though, workers need to “worry” about a variety of issues. They need to decide how much to save, how and where to invest, and how to generate income from savings at retirement. They also need to manage a variety of risks such as longevity risk, market risk, inflation risk and health risk. Moreover, many workers aren’t even aware of all the risks they face. Understanding these risks, much less managing them, can be overwhelming.

Earlier this year, LIMRA quizzed more than 1,800 household decision makers about their financial literacy. They were asked a series of 10 questions on finances and retirement. Half of the questions were true/false, so respondents had a fifty-fifty chance of picking the right answer. One in five people who took the quiz got fewer than five answers correct.

We also asked people to rate their financial literacy. Some were asked before they took the quiz and others were asked afterward. Not surprisingly, people’s assessment of their financial literacy tended to be lower if they rated themselves after they took the quiz. This suggests that people may generally overestimate their literacy, which is a bit scary if they described themselves as “not very knowledgeable” or “not at all knowledgeable” about investments and financial products when not quizzed.

So where are people acquiring their knowledge? The most common response is that people teach themselves. The next most common response is that they obtain information from parents and family. Anyone who has ever received “hot tips” from Uncle Larry knows that family may not be the best source of information. A little more than one in 10 said they had some formal training, such as a class or seminar. Men, those under age 35, those with higher incomes and people with a college education were more likely to have had some formal training. Those age 55 and over and those with higher incomes are more likely to have received education from a financial professional. At least most professionals have standards and designations, unlike Uncle Larry.

Many recognize the need to be better informed. When asked where they think more education is needed, generating retirement income was the most common topic identified. Those with lower incomes tend to be more interested in education on how and where to save, budgeting, and managing debt. Those under age 34 expressed a greater need for financial education overall. Given that they are the generation coming of age in a tough job environment and likely to be without a defined benefit pension plan, education for this group is critically important.

Acquiring knowledge is necessary, but putting it into an action plan is also essential. The study found that almost three quarters have taken at least one step to plan for a secure retirement. The most common step for those working full time was to contribute to an employer-sponsored retirement plan. Not surprisingly, those over age 55 have taken more planning steps. They are more apt to have calculated their likely income, discussed planning with a professional, reviewed their asset allocation and determined what their expenses will be in retirement. While these are all positive actions, it is still discouraging that fully a quarter of those over age 55 have taken no steps at all.

Even when you know what actions to take, intentions easily can be derailed by things like inertia and cognitive biases that lead to investing mistakes. Tools like automatic enrollment in a defined contribution plan are excellent, effective ways to get people saving and investing appropriately.

LIMRA also polled current retirees for their best advice to achieve a secure retirement. Their answers focused on four central themes: saving, planning, paying off debt and managing money wisely. These are not stunning revelations, but affirmations of what we know to be good practices. The best advice is often simple, like that of the retiree who summed up her advice in three words: “Save! Save! Save!” 

Alison Salka is responsible for directing LIMRA’s retirement research program. She supervises and conducts consumer research, benchmark studies and white papers focused on helping member companies better understand issues and trends in the retirement market. Contact her at [email protected].

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