26% is an Unacceptable Baby Boomer Exam Score

Things have changed so much these days that is more often than not easier to disagree about everything than it is to agree with anyone about anything. On the other hand when similar conclusions are reached from completely different sources it is worth investor attention.

The American College New York Life Center for Retirement Income completed the 2017 RICP Retirement Income Literacy Survey testing retirement income literacy. The purpose was to see how well pre-retirees and retirees possess the capability to plan for a sound financial future. The respondents were aged 60-75 which is significant because this is the age range where critical decisions must be made, perhaps for the first time, about lifetime income needs, risk, and losses. The online interviews took place with 1,244 Americans ages 60-75 with no less than $100,000 in assets outside the primary residence. It was a survey of 38 quiz questions in 12 relevant topic areas; retirement planning, ability to maintain lifestyle, income generation, annuity product knowledge, Social Security, life expectancy, death of a spouse, income taxes, inflation, housing, medical insurance, and long-term care. Of those surveyed only 26% answered the 36 questions correctly.

Now let’s see how the financial literacy test coincides with another source. As you can see in the chart below shows investor confidence (in red) between 60 and past 85 stays between 70% to 80%, but while financial literacy starts at 60% at 60 it becomes 20% after 85.

Decline in Financial Literacy Over Time: Financial literacy score and confidence level in making financial decisions by age.

Source: Finke, Howe and Huston, “Old Age and the Decline in Financial Literacy,” Management Science, 2016, DOI: 10.12871/mnsc.2015.2293

Your judgment could become impaired over time and you may not even realize it. Research shows that one’s cognitive ability to make sound financial decisions peaks just before retirement and generally declines thereafter. Whether family or friends part of the job of preparing for retirement includes identifying an advocate you can trust. Choose wisely and discuss much because it is often the case that those who inherit money often take less than two years to run through what you didn’t spend in a lifetime.

It is interesting to note, when it comes to longevity, which of course remains a wild card, in my experience women expect to live longer than their parents and men often tell me they believe they will live to about the same age as their father. According to a bumper sticker, ‘Don’t believe everything you think!’

Life Expectancy Probabilities: If you’re 65 today, the probability of living to a specific age or beyond.

Chart: Social Security Administration, Period Life Table, 2013 (published in 2016) Table: Social Security Administration 2016 OASDI Trustees Report

Source: J.P. Morgan Asset Management Guide to Retirement 2017 Edition. Probability at least one member of the same-sex female couple lives to age 90 is 55% and a same-sex male couple is 39%.

J.P. Morgan Asset Management notes, “Average life expectancy continues to increase and is a mid-point not an end-point.

You may need to plan on the probability of living much longer, perhaps 30+ years in retirement, and invest a portion of your portfolio for growth to maintain your purchasing power over time.” So, plan on longevity. It is more conservative to plan on living to 100 than it is to plan on dying at 80, only to wake up at 81 with no money, and you are still over qualified to be a Wal-Mart greeter.

Impact on Wealth on Life Expectancy: Change in average additional life expectancy in years at age 55 by income, between groups 1920 and 1940.

Source: Josh Zumbron, “The Richer You Are the Older You’ll Get,” blogs/wsj.com, April 18, 2014. Data compiled by Barry Bosworth, The Brookings Institution, data from the University of Michigan’s Health and Retirement Study, a survey that tracks the health and work-life of 26,000 Americans as they age and retire.

Research shows that the wealthier you are, the longer you may live, and the increase in additional years is actually greater for men than women as shown here. For example, the wealthiest American men born in 1940 may live an average of 5.9 years longer than similar individuals born 20 years earlier in 1920. As you take income in retirement look for areas where the dividend or the yield my meet all or a good portion of that income needed so that less principal would be eroded.

Attitude Toward Loss: How comfortable would you feel about accepting a loss after retirement compared to before retirement?

Source: Michael Finke, Ph.D.

How does your response to the key question above compare to the responses of those surveyed? If you believe you are going to be less comfortable with a loss once you retire, you may want to consider a retirement income solution that can provide you with guaranteed lifetime income, no matter how the market performs.

Since hope is not a strategy, take advantage of technology by asking your financial advisor to help you determine what market loss you are willing to accept. Then look for active management teams that have demonstrated moving risk assets off the tracks to safety in 2008 so the train didn’t crush your life savings right before your very eyes. The next step is to see how the systems put the money back on the tracks in risk assets in 2009 when the coast was clear. The time to prepare is before the next unforeseen disaster strikes. I want you to avoid regret by planning ahead while you can. Otherwise I am afraid too many investors will discover Warren Buffett was spot on with his point of view, “Risk is not knowing what you’re doing.”

The Proof is in The Planning?

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