A national poll to gauge pre-retirees' knowledge of retirement income issues showed that 69 percent of them overestimated how much they can draw down from their savings. A surprising 43 percent said they thought they could withdraw 10 percent or more each year while still preserving their principal, though most experts suggest a withdrawal rate of no more than 4 percent annually.
The 2008 Retirement Income IQ Test, created for the MetLife Mature Market Institute, also reveals significant gaps concerning life expectancy and other retirement income issues:
A full 60 percent of Americans underestimate life expectancy, and 49 percent underestimate the amount of preretirement income they'll need once they retire.
This lack of understanding is of concern because poor retirement-planning assumptions are compounded after retirement because of today's longer life expectancy.
Sandra Timmermann, director of the MetLife Mature Market Institute, acknowledged that "Americans are improving their retirement-income IQs. Yet, there are still far too many misconceptions about (the) issues. Most concerning is the fact that so many preretirees overestimate how much they can spend down from their retirement savings annually."
Half empty or half full?
The online test was taken by 1,216 people ages 56 to 65 and within at least five years of retirement. On average, the respondents correctly answered 6.41 of the 15 multiple-choice questions in the 2008 test, resulting in a score of 43 on a grading scale of 100 points. This was considered a basic level of retirement-income knowledge.
In addition to underestimating the amount they need to save and how long they will live, and overestimating how much they can draw down from their savings annually, 67 percent did not know that an annuity provides income that is guaranteed and cannot be outlived.
But 59 percent reported that they are seeking financial advice on such products as 401(k), retirement savings and long-term care insurance.
"With so many misconceptions surrounding retirement, it is difficult for those who are approaching retirement to maximize their retirement picture without the assistance of a professional financial adviser," said Timmermann. "An adviser can look at an individual's lifestyle goals, assets, basic income needs and income sources, and then effectively help them put together a plan to meet their personal retirement needs. "It's important for people to recognize that they don't have to go it alone . . ."
On the plus side, 56 percent of the respondents understood that longevity risk is the greatest risk in retirement; that was a significant increase from the 23 percent who answered that question correctly in 2003.
The gender difference
The study findings also pointed to a gender divide. Although more women tend to be concerned about financial security, the men surveyed answered more questions correctly. The largest gaps exist with regard to the national average rate of inflation: 31 percent of the men correctly selected 3 percent as the average annual rate over the past 20 years, vs. only 16 percent of women answering correctly.
On the other hand, 35 percent of the women knew that the average annual cost of a private room in a nursing home is $78,000, vs. 27 percent of the men.
"Individuals, as they transition into retirement, are eager to make the most out of the next phase of their life," added Timmermann. "They want to approach retirement by making choices that they control, such as where to live, if and when to work, when to take time for community service and when to spend time with family and friends."
This article was excerpted from the MetLife Web site, www.maturemarket institute.com.