How Much Do You Know When It Comes to Preparing for Retirement? Fidelity’s Retirement IQ Survey Uncovers Significant Knowledge Gaps

Three-Quarters Underestimate How Much They Will Need to Save for Retirement

Want to Know Where You Stand? Fidelity Offers Ways to Boost Your Retirement IQ

Eight Questions Everyone Should Consider

BOSTON--(BUSINESS WIRE)-- Many Americans find the subject of retirement planning to be a daunting prospect and struggle with how best to identify how much they’ll need to save, how to make their money last throughout retirement—as well as where to start. To gain a greater understanding of America’s knowledge of the subject, Fidelity Investments^® conducted its first-ever Retirement IQ Survey, to gauge how well the average American understands these critical topics. The result: many are missing the mark on key retirement questions and there are a number of myths and misconceptions that could be holding them back. In fact, many had misunderstandings in every area, including those 55 or older, whose retirement is less than ten years away.

“Although retirement may seem far off for many, there are retirement concepts everyone should know to ensure you’re able to fulfill the goals you have for yourself and your family,” said Ken Hevert, senior vice president of Retirement at Fidelity. “We encourage investors to think about the goals they want to achieve and develop a plan to get there, but it starts with knowing where you stand in order to identify opportunities to improve. By spending a few hours, you can boost your Retirement IQ significantly and develop a good grasp of the essentials needed to put you on a path to a secure retirement.”

So what are the questions people need more help with—and more importantly, what are the correct answers? Fortunately, this one’s an open-book quiz. Top questions by category follow below. Want to study up first? Fidelity’s study guide “5 Retirement Facts You Probably Don’t Know (But Should!)” can help you brush up on your retirement knowledge.

Saving for Retirement

Question #1: Roughly how much do investment professionals estimate people save by the time they retire?
The correct response is “at least 10 times the amount of one’s last full year’s income.¹” Even if there is some debate among professionals around how much the average person needs to save, nearly three-quarters (74 percent) of respondents underestimated how much is needed. Furthermore, 25 percent of respondents expected to only need to save 2-3 times the amount of their last full year income, a number that is well below suggested/estimated targets. For pre-retirees, 19 percent of respondents aged 55-65 answered 2-3 times, which is more concerning because this group has far less time to make up for the shortfall.

Question #2: How often over the past 35 years do you think the market has had a positive annual return?
The survey revealed that the majority are unaware that the market² has enjoyed a positive annual return 30 out of the past 35 year years³. Historically the U.S. stock market has gained about seven percent per year⁴, so it’s important to invest in stocks to provide opportunities for growth. Only eight percent of overall respondents answered correctly while 55-65 year-olds fared a little better at 14 percent.

“Saving for retirement isn’t simply about setting aside money from your paycheck, but also making that money work harder through a sound investment strategy that aligns with your goals,” said Hevert. “Even with market volatility, the stock market has performed remarkably well over the long-term. The majority of investors need to have a diversified portfolio that includes equities to enable growth over time. If you’re not investing, you’re likely losing money due to inflation.”

Question #3: If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest if it grew at the historical stock market average?
The correct answer is about $40,000⁵, which 16 percent answered correctly. However, nearly half (47 percent) underestimated how big an impact relatively small savings can have over time. Twenty-seven percent of respondents calculated the answer to be about $15,000, which undervalues the power of consistent savings and would represent a zero percent stock market return vs. the market average of seven percent. Saving regularly, combined with the power of compounding interest, illustrate why it’s important to make it a habit to automatically set aside money at an early age, as the following three scenarios demonstrate. It’s also the reason simply saving one percent more of your salary can add up—and the younger you start, the better.

Preparing for Retirement

Question #4: Given the current average life expectancy, if you want to retire at age 65, about how long would you need your retirement savings to last?
While one’s longevity is influenced by factors such as family medical history and lifestyle (exercise, diet, etc.), the average life expectancy is about 87 (85 for males, 87 for females⁶), meaning the answer is approximately 22 years—a number one third of respondents got right. Thirty-eight percent of Americans estimated they would only need to make their hard-earned savings last for about 12-17 years, which could leave some at risk of running out of money in retirement. Since people are living longer, healthier lives, many—especially younger generations—need to plan for a retirement lasting 30 years or more.

Question #5: Approximately how much did the average monthly Social Security benefit pay in 2016?
Social Security is a key part of retirement income for most Americans, so it’s encouraging 43 percent of respondents answered this one correctly: about $1,300.⁷ Even better, half of pre-retirees got it right. Still, with over 75 ways to claim and dozens of factors influencing one’s decision of when to retire, $1,300 is simply an average. In general, waiting until at least the time you’re entitled to full Social Security Retirement benefits¹¹ (between 65-67) may help increase your monthly benefit. If you can afford to wait until your full retirement age, your monthly Social Security income will increase by 30 percent.⁸

Living in Retirement

Question #6: About what percentage of your savings do many financial experts suggest you withdraw annually in retirement?
As a general rule of thumb, Fidelity suggests limiting portfolio withdrawals to no more than four to five percent of your initial retirement assets, adjusted each year for inflation, over the course of your retirement horizon. Although four out of 10 (42 percent) pre-retirees answered correctly, 38 percent of those over the age of 55 said they could withdraw seven percent or more of their savings annually, putting many at risk of quickly running out of savings in retirement. Also, 15 percent of this age group felt they could withdraw 10 to 12 percent annually—a rate that could drain many households of savings in less than a decade.

While some new retirees make the mistake of withdrawing too fast, Fidelity suggests covering essential expenses with guaranteed income sources (like Social Security, pensions and annuities), while covering nice-to-haves (like travel or gifts to loved ones) from withdrawals from your investment portfolio.

Question #7: What do you think is the single biggest expense for most people in retirement?
For most Americans, housing, health care and transportation are typically the largest expenses in retirement, but housing by far tops that list. In fact, for many retirees, housing can make up nearly half of their expenses⁹. While 17 percent of respondents answered this correctly (and 13 percent of those aged 55-65), a larger number of respondents (69 percent) thought health care would be the largest expense. This is perhaps an indication of the deep concern many Americans have around an expense that is difficult to predict, since it involves the state of one’s health among other factors, including skyrocketing health care costs in recent years. Of note, health care was also the No. 1 item respondents were most worried about being able to afford—including 63 percent of pre-retirees.

Question #8: About how much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?
Fidelity has been tracking this cost since 2002 and estimates the average 65-year old couple retiring in 2016 will spend $260,000 to pay for out-of-pocket health care expenses¹⁰ over the course of retirement. Only 15 percent were on the mark, with 72 percent underestimating the true amount of health care costs. Overall, 22 percent (including 19 percent of pre-retirees) underestimated how much they would spend by about $200,000.

“If you’re like most Americans, health care is expected to be one of your largest expenses in retirement, after housing and transportation costs. But unlike previous generations, most of us won’t have access to employer-or union-sponsored retiree health care benefits,” said Hevert. “That’s why these costs will likely consume a larger portion of your budget—and you need to plan for that.”

Want to Learn More? Fidelity Offers Resources to Help You Know Where You Stand
Every individual’s circumstances and vision are unique, but one of the first steps is to know where you stand on the retirement preparedness spectrum and whether you are on track to meet your goals. With this in mind, Fidelity has introduced a retirement score to enable anyone to quickly and easily estimate whether they’re on track to meet their retirement goals as well as tips to improve, simply by answering a few key questions. In addition, Fidelity offers a variety of resources, including:

• Educational Fidelity Viewpoints^® articles, including “Seven ways to boost your retirement IQ,” “How to get the most out of Social Security,” “Ready to work after your primary career ends?” and a Retirement Roadmap Special edition devoted exclusively to retirement planning. A podcast discussing how much the average person needs to save is also available.
• Investors can also use Fidelity’s online Planning & Guidance Center, either online or with the help of a Fidelity investment professional, to dive deeper into their retirement score. Within the Center, customers can create or view their retirement plan, identify specific steps to improve their readiness, model outcomes and review investment strategies, and make adjustments to their plan, when needed, to help ensure they stay on track to achieve their goals.
• Designed for a younger generation, Fidelity.com/mymoney offers videos, infographics and articles on topics related to budgeting, saving, investing and more, including a video weighing the financial ramifications of paying off student loan debt or saving for retirement and an infographic showing the impact of saving 1 percent more. In addition, Fidelity’s interactive Money Check-up can help people quickly understand their financial wellness and where they need to take action.

About the Survey
The Fidelity Investments^® Retirement IQ Survey is an online survey conducted in two phases: first, among a sample of 1,007 respondents ages 55-65 who are not retired, which was completed December 14-19, 2016; next, among a demographically representative U.S. sample of 1,047 adults comprising 512 men and 535 women 18 years of age and older, completed December 15-18, 2016. Both phases were conducted by ORC International, which is not affiliated with Fidelity Investments. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed.

About Fidelity Investments
Fidelity’s mission is to inspire better futures and deliver better outcomes for the customers and businesses we serve. With assets under administration of $5.8 trillion, including managed assets of $2.2 trillion as of January 31, 2017, we focus on meeting the unique needs of a diverse set of customers: helping more than 26 million people invest their own life savings, 23,000 businesses manage employee benefit programs, as well as providing more than 12,500 financial advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.

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¹ This response is based on a Fidelity estimate of what people should consider saving by the time they retire.
² As represented by the S&P 500 Index
³ Source: S&P Dow Jones
⁴ 1928-2016 historical average market return for the S&P 500; when adjusted for inflation is approximately 7%.
⁵ This hypothetical estimate assumes the individual or household sets aside $50 a month for 25 years. Rate of return is 7.0% annual interest which is compounded monthly. Estimated increases in retirement monthly income are in constant 2015 dollars. This estimate assumes the $50 deferral amount stays constant through the entire 25 year period and represents a nominal value. It is assumed that the participant took no loans or hardship withdrawals from these savings. All dollars shown are pretax dollars. Upon distribution, applicable federal, state, and local taxes are due. No federal, state, or local taxes; inflation; or account fees or expenses were considered. If they were, the estimated amount would be lower. Actual realized value may be significantly more or less than this illustration.
⁶ Source: Social Security Administration life expectancy calculator
⁷ Source: Social Security Administration
⁸ Source: Social Security Administration data. The basis for this increase: comparing one’s Social Security income at full retirement age of 67 against one’s projected Social Security income at the “early eligibility age” of 62. If you can wait even longer to collect your Social Security benefit, you will be eligible for delayed retirement credits which will increase your benefit an additional eight percent each year up until age 70 (for those born after 1942).
⁹ Source: Bureau of Labor Statistics, “The Experimental Consumer Price Index for Elderly Americans”
¹⁰ Estimate based on a hypothetical couple retiring in 2016, 65-years-old, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for "average" retirees, but may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. Life expectancies based on research and analysis by Fidelity Investments Benefits.

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