Retirement Literacy Gap: Why Planning Is More Important Than Ever

The American College of Financial Services conducts an annual Retirement Income Literacy Survey focused on various retirement income topics, including inflation, Medicare, investments, Social Security, pensions, housing, and more. The survey targeted respondents aged 50 to 75—individuals nearing retirement or already retired, who ideally should be informed about these topics. Unfortunately, the results revealed a critical lack of knowledge in retirement planning, with an average score of just 31% out of 100.

It’s impossible to be an expert in everything. Often, even highly intelligent individuals may lack the understanding or interest required to make confident decisions unless someone works in a particular field. Many investors manage their own money, but this can become a part-time job—requiring constant portfolio management, investment research, and attention to accounting and tax implications. Notably, “investments” was among the lowest-scoring areas in the retirement income quiz.

This information raises the question: Do people know what they’re investing in? Investing today is no longer as simple as putting money into a low-cost index fund and forgetting about it. While this approach may have worked for novice investors just starting out, those pursuing specific goals must make active decisions. These include determining the savings rates required to meet their objectives and choosing the accounts that best suit their financial situation.

Interestingly, survey respondents scored higher on topics that have been in the spotlight recently, such as inflation. Underestimating inflation could mean retirement savings don’t last as planned. Conversely, overestimating inflation could result in withdrawing more funds than necessary and possibly missing out on future growth. For nearly 30 years before the pandemic, inflation rarely exceeded 4%, maintaining historically low levels. This extended period of stability made it easy for many to overlook inflation as a significant risk when planning for retirement. However, the recent sharp rise in inflation has brought this issue to the forefront of financial planning, with many now seeing high inflation as the new normal. While it’s crucial to address inflation risk, it’s equally important to maintain a balanced perspective and avoid overreacting to short-term trends when planning for the long term.

Planning for retirement is complex, involving many moving parts, including annual spending, retirement goals, tax considerations, available assets, time until retirement, life expectancy, sources of income, and decisions about when to claim Social Security or pension benefits. On top of this, factors like inflation, the economy, life changes (such as births, marriages, divorces, or deaths), and fluctuations in income or savings can significantly affect outcomes. A well-thought-out plan accounts for these variables and adapts to progressive changes to keep you on track.

You don’t need all the answers—just clear goals. Collaborating with a financial planner can significantly increase your chances of achieving your retirement objectives. Planners have the knowledge and tools to help you identify the best path to your desired future. A trusted financial adviser can guide you during your saving years, ensuring a good mix of tax-deferred and tax-free savings for retirement. Additionally, advisers can help minimize tax liability by balancing various aspects of your financial life.

While it’s never too late to start planning, the sooner you establish a plan, the stronger and more effective it will be.

If you have questions on how begin planning for your retirement, the experts at Henssler Financial will be glad to help: