Retirement ‘fluency’ linked to retirement confidence, study finds

People's confidence in their retirement plan is linked to a new benchmark called "retirement fluency," which measures how much people know about topics such as Social Security, Medicare, and options for retirement savings, according to a survey by the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC).

When quizzed about retirement topics, Americans correctly answered only 40% of the questions, showing the need for improvement in their retirement fluency.

This finding is from the 2024 TIAA Institute-GFLEC Personal Finance (P-Fin) Index, an annual barometer of financial literacy, which, for the first time, also covered Retirement Fluency. The retirement fluency portion consisted of five multiple-choice questions. For most of the questions, about 30% of the respondents answered, "don't know."

Respondents’ mistakes

The following are some of the mistakes made by the respondents:

• Most failed to recognize that a retirement savings opportunity with an employer match is better than one without the match.

• Only about half (53%) were aware that buying an annuity could offer guaranteed lifetime income, safeguarding against the risk of outliving retirement savings. Others answered that buying life insurance would help or that nothing could be done.

• Almost 60% of respondents did not know that Social Security benefits last for a lifetime and that workers receive benefits if they become disabled before retiring.

• A vast majority lacked a basic understanding of how long people tend to live in retirement, a knowledge gap that could keep them from saving enough money to last a lifetime. Almost 60% said either they didn't know, or they underestimated the life expectancy of a 65-year-old. Only one third of respondents (32%) knew the correct answer: age 84 for men and age 87 for women.

• About 30% were aware that Medicare covers about two-thirds of retirees' health-care costs.
"Now, more than ever, financial literacy is crucial to addressing our very real retirement savings gaps," said Thasunda Brown Duckett, CEO of TIAA. "This report shows that if we're going to improve retirement outcomes, we have to start by improving our understanding of how to save and how long our retirements will be. While there are no quick fixes to boosting our Retirement

Fluency, increasing access to education resources and operating with intentionality will get us on the road toward financial health and resilience."

The P-Fin research showed a strong connection between people's Retirement Fluency and how financially prepared they are for retirement. For example, the survey said, Americans correctly answered an average of only 40% of the retirement-related questions. Among people with that level of Retirement Fluency, only 60% were confident they would have enough money to live comfortably throughout retirement. But for those who answered at least 80% of the questions correctly, this figure jumped to 75%.

Low levels of financial literacy

The 8th edition of the annual report also included data about Americans' knowledge of personal finance—something often linked to their knowledge of retirement planning. Based on a 28-question survey, people correctly answered about one half of those questions, which has been the norm since the survey began. All told, only 16% demonstrated a very high level of financial literacy by correctly answering at least 22 questions. This underscores concerns about people making financial decisions with a poor level of financial literacy.

The P-Fin Index sheds light on the importance of financial literacy for financial well-being, the report said. Compared with consumers with a very high level of financial literacy, for instance, those with a very low level are twice as likely to be debt-constrained, four times more likely to lack one month of emergency savings and three times more likely to not have any confidence in their retirement-income prospects.

Enhancing financial literacy

Survey after survey shows that Americans’ financial literacy level is low—and this continues to be the case year after year. What is causing this continued low level of financial literacy and what can agents and advisors do to raise it?

“The overall lack of financial literacy is a complicated dynamic, but perhaps the most significant root cause for this is lack of education in schools,” said Brian Haney, founder/CEO of The Haney Company. “Americans simply are not taught anything about money; so, it is no wonder that as adults, we struggle financially. The financial knowledge most Americans have is “caught,” not taught. We are often introduced to concepts as adults we haven’t had to engage with before, or we’ve been “taught” by ill-equipped parents doing the best they can, misguided friends or coworkers, and generally unqualified online or media personalities. “

Turning the tide will require everyone in the financial industry to advocate for change, and to volunteer to lead on the front lines, added Haney. “I’m proud of organizations like NAIFA that are leading the way by lobbying for state-based changes to require financial education be added as a core requirement to graduate from high school,” he said.

Agents and advisors should participate in education by partnering with schools or organizations in their communities offering financial education, Haney said. They can also work with employers who are looking to provide financial wellness programs to their employees. There are many simple avenues practitioners can pursue, but the best place to start is to accept responsibility for the outcome. “Then,” he added, “look within your existing network and spheres of influence and find the right places where you can provide value. We all need to become responsible for getting the tide to rise!”

The path to “retirement fluency”

So, what can be done to also enhance clients’ retirement fluency? According to Haney, the path to helping Americans be better prepared for retirement needs to run down two concurrent tracks.

The first is the need to help Americans see their financial picture holistically. “Retirement is really one component of a larger integrated puzzle, and we do people a disservice by only concentrating on one piece,” Haney said. “Work to help them understand everything from banking to savings to lending and investing. Help them understand how to rank their financial priorities and create a roadmap forward to help them get to those destinations and milestones they want to achieve.”

The second step, Haney added, is to help them build the right habits. Saving for retirement is a habit, just like eating right, exercising, and brushing your teeth. The problem is often not a lack of interest in saving for retirement; it’s that people have poor habits supporting their vision for a successful retirement.

“Agents and advisors need to become more adept at creating a working framework that helps people help themselves,” Haney said. “We cannot do it for them. Building good money habits is often a key that opens many positive doors. When money is less of a stressor, we free up our mental space to address other issues. When we are more financially stable, we tend to take better care of ourselves. There are many added benefits of financial savvy and confidence that go beyond just good money management; so, if we really want to help our clients change their lives for the better, we must hone our coaching and therapist skills to help people overcome the mental and emotional barriers to change and support optimal habit formation!”

 

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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