financial literacy and retirement …...finance, and less than half are able to answer four or more...
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PRUDENTIAL INVESTMENTS » MUTUAL FUNDS
WHITE PAPER
Key Themes
• Financial literacy continues to pose a serious challenge to achieving retirement goals. More than a third of working-age Americans and retirees lack even basic knowledge of investing and saving for retirement.
• Not running out of money during retirement remains a top priority for American retirees. Close behind are the ability to afford health care and the ability to maintain their pre-retirement lifestyle.
• Advisors and plan sponsors play an important role in bridging the fi nancial literacy–retirement preparedness gap. Less than one-third of individuals seek retirement planning and investment advice from a fi nancial advisor.
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
STUDY FINDINGS
Page
Introduction 3
Financial Literacy 4
Retirement Preparedness 8
Bridging the Financial Literacy-Retirement 13
Preparedness Gap
About the Survey 15
3
With Americans living longer and a challenging global economic climate, Prudential Investments®
wanted to know how prepared both non-retirees and retirees were in relation to meeting their retirement goals and objectives. What is the current state of financial understanding across generations and income levels, including familiarity with financial products? How are currently employed individuals and retirees approaching retirement planning? What are their retirement goals and key concerns that may impact retirement success? What would retirees have done differently to be better prepared for retirement?
Financial Literacy and Retirement Preparedness, a survey conducted by Prudential, explores the answers to these questions and more.
10,000 65.
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
*Source: “Baby Boomers Approach Age 65—Glumly,” Pew Research Center Publications, December 2010.
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
4
FINANCIAL LITERACY CONTINUES TO POSE A SERIOUS CHALLENGE TO ACHIEVING RETIREMENT GOALS
We have a literacy problem in the United States today—a financial literacy problem. The sad truth is that more than a third of working-age Americans and retirees lack basic knowledge regarding investing and saving for retirement. While many claim to be well prepared to make financial decisions, their perception of their own skills may be inflated. When presented with a set of financial literacy questions, it was discovered that many who believed themselves savvy were lacking in actual financial knowledge. Very few have a decent grasp of the fundamental concepts of economics and finance, and less than half are able to answer four or more financial literacy questions correctly.
ExcellentVery GoodAverageBelow AverageFailing
Saving for Retirement
Investing
Managing Debt
Managing Money3% 7% 26% 35% 30%
5% 10% 24% 29% 33%
17% 24% 34% 17% 8%
15% 20% 32% 23% 11%
Legend:
543210# of correct answers
5%
10%
15%
22%
28%
70%
48%
20%
FINANCIAL LITERACY QUIZ (answers on page 15)
1. Inflation: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the accountif you left the money to grow?
a. More than $102 b. Exactly $102 c. Less than $102 d. Don’t know
2. Rates: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
a. More b. Same c. Less d. Don’t know
3. Risk: Is this statement true or false? “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”
a. True b. False c. Don’t know
4. Mortgage: Is this statement true or false? A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
a. True b. False c. Don’t know
5. Bonds: If interest rates rise, what will typically happen to bond prices?
a. Rise b. Fall c. Stay the same d. No relationship e. Don’t know
Source: FINRA, http://usfinancialcapability.org/quiz.php
FINANCIAL LITERACY SUMMARY
KNOWLEDGE OF DIFFERENT FINANCIAL AREAS
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5
Very well prepared
Need helpin a few areas
Need to catch upin many areas
Beginner 19%
28%
33%
21%
FINANCIAL LITERACY VARIES ACROSS POPULATION SEGMENTS
Almost half of individuals reported being ill-equipped when it comes to making wise financial decisions: 19 percent consider themselves beginners and 28 percent acknowledge they need to catch up in many areas. A slightly greater percentage believe they require help in a few areas, while 21 percent believe they are very well prepared to make decisions.
Millennials, women, the less affluent, and individuals who don’t work with an advisor have among the lowest levels of financial literacy. Only 15 percent of women possess above-average knowledge of investing; that’s compared to 34 percent of men. Among both male and female millennials (those born between the early 1980s and early 2000s), 44 percent are not currently saving for retirement and only 17 percent believe they are well prepared to make financial decisions. It is worth noting that financial literacy does improve as income levels increase.
Non-affluent
Affluent
Mature
Boomer
Generation X
Millennials
Female
Male 34%
15%
19%
23%
26%
36%
41%
15%
% excellent/very good knowledge
Non-affluent
Affluent
Mature
Boomer
Generation X
Millennials
Female
Male 41%
27%
34%
29%
38%
N/A
52%
24%
% excellent/very good knowledge
Non-affluent
Affluent
Mature
Boomer
Generation X
Millennials
Female
Male 27%
14%
17%
18%
23%
28%
29%
16%
% very well prepared
LEVELS OF PREPAREDNESS VARY
KNOWLEDGE OF INVESTING
KNOWLEDGE OF SAVING FOR RETIREMENT
PREPAREDNESS TO MAKE FINANCIAL DECISIONS
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
6
IMPROVING FINANCIAL LITERACY REMAINS AN IMPORTANT CALL TO ACTION
There’s no question that financial literacy promotes good financial habits. An improvement in financial habits is not only better for individuals; it’s better for the US economy, as well. The more financially literate individuals become, the more likely they are to take critical steps to achieve a secure retirement, and to be in better shape financially overall. Financially literate Americans tend to save more and borrow less.
Financial literacy is also the key to driving better investment decisions. Basic financial management practices like keeping track of household expenses, monitoring investments, and seeking help from investment advisors and other professionals can all contribute to improved financial literacy.
Furthermore, individuals who are more financially literate are more likely to participate in employer-sponsored plans, a strong first step to a secure retirement.
More Financially Literate (answered 4 or more questions correctly) Less Financially Literate (answered 3 or less questions correctly)
Legend:
Get a financial professional
Evaluate different financial products for use in reaching your retirement savings goal
Estimate number of years your money will last in retirement
Estimate expenses in retirement
Estimate income needed in retirement
Talk to spouse about retirement plan
Set up retirement plan
Establish spending budget
Monitor investments and make adjustments when needed
Estimate income from Social Security
Focus on physical health
Keep track of income and expenses 58% 35%
53% 33% 38%
14%
38%
7%
37% 21%
37% 20%
37%
19%
34%
11%
30% 10%
26% 8%
25% 7%
25% 11%
% taking action
61%
45%Less Financially Literate
More Financially Literate
ADOPTION OF DIFFERENT FINANCIAL PLANNING PRACTICES
PARTICIPATE IN EMPLOYER-SPONSORED PLAN (E.G., 401(K), 403(B), 457)
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7
Afford nursing home care in retirement
Financial security to my loved ones if I die or become disabled
Not become a burden to loved ones in retirement
Have cushion to pay for unexpected expenses in retirement
Have income to maintain desired retirement lifestyle
Afford medical/health care in retirement
Not run out of money in retirement 39%
26%
38%
27%
38%
26%
40%
31%
41%
38%
42%
27%
31%
20%
% very confident
More Financially Literate (answered 4 or more questions correctly) Less Financially Literate (answered 3 or less questions correctly)
Legend:
At the end of the day, sound financial knowledge results in improved confidence in achieving top financial goals like not running out of money during retirement and maintaining a desired lifestyle.
In fact, those who are more financially literate are at least 10% more confident that they would not run out of money in retirement, would be able to afford medical and health care expenses in retirement, and would have the income needed to maintain their desired retirement lifestyles.
FINANCIAL LITERACY AND CONFIDENCE IN ACHIEVING TOP FINANCIAL GOALS (RANKED IN ORDER OF IMPORTANCE)
33%
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
8
RETIREMENT PREPAREDNESS
Top 3 retirement goals and objectives
1
2
3
For most Americans, the most important financial goal is not running out of money in retirement. This was the top priority for 75 percent of the population. Only a third feel confident that they’ll achieve that top retirement goal. This number is even lower among women, the less affluent, and younger Americans who are further from retirement.
Affording medical care was also a key priority for 68 percent, a reasonable concern since American seniors report more problems paying for health care than other countries with advanced economies. And 66 percent of Americans make lifestyle their top priority—they’d like to continue living their lives in a particular way.
33%
32%
32%
36%
32%Have cushion to pay for unexpected expenses in retirement
Not become a burden to loved ones in retirement
Have income to maintain desired retirement lifestyle
Afford medical/health care in retirement
Not run out of money in retirement
% very confident
Non-affluent
Affluent
Private
Public
retirees
<10 years from retirement
10 to <30 years from retirement
30+ years from retirement
Female
Male 39%
26%
30%
24%
30%
48%
30%
34%
46%
24%
% very confident
CONFIDENCE IN ACHIEVING TOP FINANCIAL GOALS
CONFIDENCE IN ACHIEVING TOP GOAL OF “NOT RUNNING OUT OF MONEY IN RETIREMENT”
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9
THE OPPORTUNITY TO IMPROVE RETIREMENT PREPAREDNESS
The link between financial literacy and retirement readiness is undeniable. Today, a full third of the population rate themselves below average or failing when it comes to retirement planning, while another third is at an “average” level of preparedness. That means only 33 percent of our aging population is fully ready to retire.
Sixty-two percent of adults and 37 percent of those adults who are within 10 years of retirement believe they have less than 20 percent of what they need for retirement. When you consider that 10,000 Americans will be retiring every day for the next two decades, those statistics are particularly alarming. The further from retirement individuals are, the less prepared. Thirty-six percent of the total U.S. population is not currently saving for retirement at all. Of that 36 percent, 29 percent are 10 years from retirement. Even more concerning: More than 40 percent of millennials are not saving for retirement today—even with the broad availability of employer-sponsored programs.
What’s interesting is that despite the fact that millennials are lagging with regard to saving, they still expect to retire at the age of 67, the same age as other segments. Almost everyone expects to live and work longer, and most expect to enjoy approximately 20 years of retirement. Men and women share the same expectations with regard to longevity and years in retirement.
Failing33%
Average34%
Very Good/Excellent33%
Total Nationwide
LEVEL OF RETIREMENT PLANNING
AMERICANS’ RETIREMENT SAVINGS
67
20+
36% 62%
Have nothing saved for retirement
Have less than 20% of what they need
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
10
On average, employed Americans estimate that they’ll need about $850,000 saved for retirement, and a monthly income of about $3,000. (The more financially literate within the population place their required monthly income closer to $3,500 and total savings at over $1 million.) Millennials expect they’ll need about $960,000—yet they’re only saving about 8 percent of their income currently, compared to the 12 percent and 14 percent Gen X and Boomers are saving, respectively. As a segment, Gen Xers perceive their need for retirement savings to be the greatest among their multigenerational counterparts, placing their total amount needed at $1.025 million. Women overall expect to need less than men ($772,000 vs. $932,000).
While how much individuals anticipate they will need at retirement varies, starting earlier can pay off. As shown in the chart below, beginning to save at age 25 versus age 35 can have a big impact on retirement savings.
$124,035
$255,080
30 Years
$10,000
$32,071
$57,435
20 Years 30 Years20 Years
A $10,000 initial investment + an annual contribution of $2,500, assuming a 6% average annual rate of return, yields an extra $131,045 if invested over 30 years
A $10,000 initial investment, assuming a 6% average annual rate of return, yields an extra $25,364 if invested over 30 years
STARTING EARLIER CAN PAY OFF
Source: Prudential Investments. For illustrative purposes. Does not represent any particular investment. Past performance is no guarantee of future results.
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11
THREATS TO ACHIEVING RETIREMENT SUCCESS
Of course, all Americans hope to retire successfully, but many have concerns. Health care costs, changes to Social Security and inflation are among the top concerns. While individuals cannot control all concerns, some concerns are within their control—for example, not saving enough due to procrastination.
Approximately 15 percent of adults admit to being procrastinators when it comes to planning for retirement—they simply believe they have more than enough time to save for retirement, and aren’t concerned with the issue at present. These numbers are highest among millennials (25 percent), men (18 percent vs. 13 percent of women), and non-affluent Americans (17 percent).
Sentiment around saving for retirement varies broadly. No single group seems to have a healthy perspective on the topic. Nearly 25 percent of individuals feel downright pessimistic about their retirement. This group includes the less financially literate, the less affluent, and those without a retirement account. In the words of one respondent, “I will never save as much as I need, so it really doesn’t matter when I start.”
About 35 percent feel a sense of hopelessness regarding their retirement. “I should do more to prepare for a secure retirement, but I really don’t know how/what to do!” These individuals are more likely to be women (42 percent), the less financially literate (42 percent), or the less affluent (40 percent).
A lower percentage of Americans—16 percent —feel uncertain. Among Gen X (20 percent), the less literate (20 percent), and Millennials (19 percent), the overwhelming sentiment is, “Anything can happen from now until I retire, so I don’t see the point of planning.”
Changes to employer pension
Caring for parents/loved ones
Low interest rates
Market volatility
Illness or disability
Inflation
Changes to Social Security
Health care costs 52%
48%
39%
34%
28%
26%
20%
19%
PERCEIVED THREATS TO RETIREMENT SUCCESS
29%
Source: Center for Retirement Research at Boston College; Towers Watson Healthcare Cost Survey 2010 and Bureau of Labor Statistics.
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
12
ADVICE AND LEARNING FROM RETIREES
Successful retirees are more likely to retire on schedule or later than they had planned. How do they achieve that successful retirement? When asked about their experience, they offered helpful words of wisdom for those planning their futures:
• “It’s never too early in life to begin saving on as regular a basis as you can. Pay yourself first.”
• “If your employer has a 401(k) plan, put as much into it as you can--especially if they match up to a certain amount!
• “Find a financial advisor you can trust; invest some conservatively and some aggressively.”
Many even advised to reduce debt, “work as long as you are healthy,” and even work part-time once retired.
SOURCES OF RETIREMENT INCOME
Employer-sponsored retirement plans play a major role in helping participants achieve retirement security. More than a third of non-retirees expect to draw the majority of their income in retirement from such accounts. Those currently retired rely on their employer-sponsored plan for more than a quarter of their current income.
While retirees currently receive more than two-fifths of their income from Social Security, non-retirees anticipate that Social Security will contribute less than a fifth to their retirement income. After their employer-sponsored plans and Social Security, those planning for retirement expect to draw income from other retirement accounts, such as IRAs, and cash to provide income during retirement.
38%
10%
12%
17%
8%
3%
5%
7%
26%
7%
6%
43%
7%
1%
1%
9%Others
Part-Time Job
Home Sale/Reverse Mortgage
Income from Investments
Social Security
Cash
Other Retirement Accounts (e.g., IRA)
Employer-Sponsored Retirement Plan
Pre-Retiree Retiree
Legend:
RETIREMENT INCOME SOURCES
5 things retirees wishthey’d done differently
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13
With a Financial Advisor
Other properties/real estate investment
Primary residence
Life insurance
Annuities
Exchange traded funds (ETFs)
Mutual funds
Individual stocks
Individual bonds (government, municipal)
Cash (checking, money market, certificates of deposit, or savings accounts other than IRA)
Individual retirement account (IRA) that is NOT employer-sponsored
Employer-sponsored pension plan
Employer-sponsored plan (e.g., 401(k), 403(b), 457) 67% 59%
39% 20%
64% 33%
63% 40%
20% 8%
41% 15%
49% 16%
12% 1%
27% 12%
42% 32%
47% 27%
16% 10%
More Financially Literate (answered 4 or more questions correctly) Less Financially Literate (answered 3 or less questions correctly)
Legend:
56% 39%
27% 16%
36% 14%
46% 37%
11% 5%
26% 6%
23% 4%
7% 1%
8% 3%
25% 19%
29% 13%
7% 5%
Without a Financial Advisor
FINANCIAL LITERACY AND PRODUCTS USED TO SAVE FOR RETIREMENT
ADVISORS AND PLAN SPONSORS CAN HELP BRIDGE THE FINANCIAL LITERACY–RETIREMENT PREPAREDNESS GAP
We have already established a link between financial literacy and retirement preparedness. We know that advisors and retirement plan sponsors can help in educating individuals, promoting financial literacy and bridging the gap. Those who work with advisors are much more likely to invest in employer-sponsored retirement plans, regardless of their level of financial literacy. They also have a more diversified mix of investments to save for retirement, including individual stocks, bonds, and mutual funds.
Yet less than one-third of individuals seek retirement planning and investment advice from a professional financial advisor, so the literacy–preparedness gap continues to grow—and retirement preparedness suffers as a result.
There is also significant opportunity for advisors to provide better tools to educate, empower, and encourage participants to save more. These professionals are not fully embracing the opportunity. However, only 38 percent of participants rate the education, tools, and information provided by their employer’s plan as excellent or very good. Even worse, 29 percent do not think plan sponsors are working in their best interest. Plan sponsors and advisors need to work harder and more creatively to gain participant trust and make educational tools accessible and user-friendly if we intend to build a more financially literate and retirement-ready population.
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
14
IN SUMMARY
With more Americans retiring now than ever before, and so few prepared for the next chapter in their lives, there’s a growing chance that many will not achieve their retirement goals. Retirement today is not the “sure thing” it was for past generations, and those preparing for retirement have a broad set of priorities. Yet saving for retirement isn’t the top priority for many, and isn’t even a concern for some.
There is a clear need to bridge the financial literacy gap and ensure that every individual, from Gen Y through current retirees, understands the importance of good financial habits, particularly as they relate to retirement savings.
Financial advisors and retirement plan sponsors can play a significant role in bridging this gap. By making plans accessible and understandable, and by providing better tools and education, plan sponsors can foster greater trust and participation among employees.
If financial literacy becomes a shared priority, more Americans are likely to understand their retirement planning options, more likely to plan successfully, and more likely to achieve the retirement they envision.
78%
36% 31% 19%
of investors askfor financial advice
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15
ABOUT THE SURVEY
The Financial Literacy and Retirement Readiness Study was conducted using an online survey among 1,302 adult Americans nationwide. All participants met the following criteria:
• Age 21 and up
• Some involvement in household financial decisions
• Employed full-time or part-time, self-employed, stay-at-home parent, or retired
• Students and those who were unemployed were excluded in the non-retiree sample
The Financial Services Group of Lightspeed Research fielded the survey between October 31 and December 2, 2013.
Test answers: (1) a. More than $102 (2) c. Less (3) b. False (4) a. True (5) b. Fall
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Defi nitionsAffluent is defined as those with household income >= $75K or net investable assets >=$250K
Millennials/Generation Y (21 to 34)
Generation X (35 to 49)
Boomer (50 to 68)
Matures (69 or older)
FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS
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0277835-00001-00 PI4159 Expiration: 12/31/2016