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Dispatches

The Financial Literacy Quiz That Many Retirees Flunked

In a survey of retirees, most flunked a quiz on retirement income, and nearly one of out of every four respondents gave the wrong answer on at least 70% of all questions.

In a survey of retirees, most flunked a quiz on retirement income. Nearly one of out of every four respondents gave the wrong answer on at least 70% of all questions. Even those who passed the quiz incorrectly answered a large number of questions—just 6% of all respondents received a grade of “C” or better. Not a single person who took the quiz answered enough questions correctly to earn an “A.”

What’s surprising is that those surveyed were both affluent and financially literate. Respondents were between ages 60 and 75 with at least $100,000 in investable assets beyond their house. The majority worked with a financial adviser. They also understood that mutual funds offer more diversification than stocks (84%) and that inflation erodes purchasing power (90%).

Yet, the list of topics respondents misunderstood or could not correctly answer questions about was long. For example:

  • Only three in 10 understood that is better to work longer or defer claiming Social Security benefits for two years than it is save 3% more during the five years leading up to retirement.
  • Three-quarters of respondents didn’t understand the relationship between bond yields and risk (higher yields mean more risk).
  • A similar number didn’t understand that annuity contracts are more expensive when payments start at younger ages.
  • Two-thirds didn’t know to take advantage of being in a reduced tax rate when deciding the best time to roll over traditional IRA assets to a Roth IRA. (It’s best to do a rollover during a year when one is in lower marginal tax bracket.)
  • Most did not realize that small-cap stocks have historically realized the highest returns.
  • Less than 20% knew that Medicaid pays for the majority of long-term care expenses. Most thought that individuals did.

The study was conducted by the American College of Financial Services. Those interested in testing their knowledge can take the quiz at www.theamericancollege.edu/ricp-retirement-income-survey. The correct answers and the rationale as to why they are correct are shown after the completion of the test.

Source: “RICP Retirement Income Literacy Survey,” David Little, Matt Greenwald and Jamie Jopkins, The American College.

Discussion

Ron from CA posted over 7 years ago:

Well, so much for nobody ever receiving an "A"... I scored 37/38, 97%. An "A"?


Tom from WI posted over 7 years ago:

I just took it, rapidly - just buzzed through it and got 87% - all the investment questions were a breeze but some of the annuity stuff I got wrong: who would buy one of those fee guzzlers anyway?


David L from UT posted over 7 years ago:

I missed two, for a score of 95%. I'm sure the members of AAII are not representative of the general population. I would expect higher scores from this group.


Craig from WI posted over 7 years ago:

Basic stuff, really, but we often fail to realize that the vast majority are financial dimwits. As to Tom from Wisconsin's post about annuities, it's partially true that many annuity types have excessive fees. However, in helping a financially illiterate but extremely healthy, spry, still-driving 82 year old widow with low pension and low Social Security income and only about $180k in investible assets the SPIA (single premium income annuity) is a godsend. She gets 13.1% of the amount annuitized now with $25k in reserves boosting her spendable income from $35k to $52k. These 'SPIA' products have a low one-time fee and that's it. Variable and Indexed annuities are the fee traps and it's good to know these differences. She cannot overspend her savings but she doesn't have to.


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