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Are You Smart Enough About Your Own Retirement?

Metlife’s new retirement income IQ study shows increased awareness about longevity, but big gaps when it comes to knowledge of expenses and the income you’ll need for retirement.

If you’re caring for an older relative, you’re probably all too aware of their financial needs and the “system’s” shortcomings. But are you taking the steps needed to safeguard your own future and minimize the impact that insufficient financial planning could have on you and your children? Recent findings from the 2011 MetLife Retirement Income IQ, a 15-question quiz on retirement issues conducted by the MetLife Mature Market Institute, shows that Americans have a lot more to learn about what they need for a financially secure retirement. Of the 1,213 pre-retirees aged 56 to 65 who took the quiz, the majority answered only 5 of the 15 questions correctly, demonstrating misperceptions and misunderstandings in key areas like inflation, retirement income and savings, long-term care insurance and Social Security. This is a further leg down from the 2008 study in which most respondents correctly answered 6 of the 15 questions. The new study also asked questions about income needs after retirement. On the positive side, people are recognizing that they will live longer and that they will be dependent on Social Security and other steady lifetime income for more years of retirement. An increased number of respondents feel Social Security and Medicare are more important compared with five years ago (45 percent in 2011 vs. 33 percent in 2008), and nearly half said they are likely to work longer than previously planned. However, only 17 percent knew that delaying Social Security payment by three years would add 24 percent to the amount they receive. Only 45 knew that experts believe retirees will need 80 to 90 percent of their pre-retirement income to maintain their current standard of living. Nearly three in ten respondents incorrectly believe that retirees should limit the percent they withdraw from their savings each year to 7 to 10 percent, and 11 percent of people believe they should plan to withdraw between 11 and 15 percent of savings. Experts recommend limiting withdrawals to between just 4 to 6 percent a year after retiring to conserve wealth. The respondents’ average estimate of what a couple would need in pre-retirement income to cover their essential living expenses including housing, food, health care, transportation, insurance and taxes, was 61 percent, very close to what’s needed to take care of the absolute basics. Yet, they are very concerned about enough retirement income to cover just these basics. “Everyone knows they’re likely to live longer, but most don’t realize that can mean living past age 85 and they fail to calculate how much money they will need for a steady and lasting income,” said Sandra Timmermann, EdD, director of the MetLife Mature Market Institute. “The ‘replacement ratio’ of the percent of pre-retirement income necessary to manage essentials, including basic expenses, in retirement is often underestimated and too many people overestimate how much of their savings they can safely withdraw each year. Employers and others advising Americans should be helping pre-retirees to connect the dots so, given the uncertain economic climate, they can have a clear picture of their prospects and the financial income strategies needed.” Key findings from the study include:
  • Sixty-two percent of those surveyed in 2011 realize that the greatest financial risk facing retirees is longevity, compared with 56 percent in 2008 and 23 percent in 2003.
  • When asked about concerns during retirement, the number one answer was having enough income to cover essential expenses (32 percent), followed by the ability to afford health care (18 percent).
  • Eighty-seven percent of respondents have taken steps toward ensuring adequate income for retirement, such as increasing their contributions to retirement plans or extending their working years; 62 percent are currently seeking financial product advice.
  • As the options for retirement income sources have expanded, more attention is being given to products such as reverse mortgages, but there is still a general lack of knowledge. Almost one-quarter correctly identified that a reverse mortgage is accessible only to homeowners age 62 or older, but more than half were unaware that a reverse mortgage can be used to purchase a primary home.
  • After years of public education on long-term care costs, 42 percent of Americans still incorrectly believe that health insurance, Medicare or disability insurance will cover the costs of long-term care.
Pre-retirees are especially hard-pressed to make decisions based on inadequate information and knowledge and do not fully understand the need for planning that accounts for both savings to fund their retirement and create an income strategy that will last their lifetimes. About The MetLife Mature Market Institute®. The MetLife Mature Market Institute is MetLife’s center of expertise in aging, longevity and the generations and is a recognized thought leader by business, the media, opinion leaders and the public. The Institute’s groundbreaking research, insights, strategic partnerships and consumer education expand the knowledge and choices for those in, approaching or working with the mature market.