Most Americans between the ages of 50 and 75 flunked a retirement income literacy quiz that tested their knowledge across a dozen areas, including inflation, investments, long-term care costs, and Social Security, according to The American College of Financial Services’ recently published Retirement Income Literacy Study.
The average retirement income literacy grade on the exam was 31% — out of a possible score of 100%.
Talk about tanking the test.
Don’t take this lightly. Everyone nearing or in retirement should aim to ace it. You might have decades to live in retirement, so lacking knowledge about the underpinnings of your retirement income is flat-out precarious.
Saving for retirement is up to us, as traditional pensions are mostly in the rearview mirror for private-sector workers. That means we need to know how much to save, where to save it, and how much to withdraw in retirement, Steve Parrish, professor of practice and scholar in residence at The American College of Financial Services, told Yahoo Finance.
“To do that, you need to have an understanding of the basic concepts about investing, taxes, insurance, and finances,” he said.
Read more: Retirement planning: A step-by-step guide
Retirement income literacy scores were disturbingly low across the board in all areas of the exam. However, there were some sharp demographic variations.
Americans with more than $1.5 million in savings scored twice as high as those with less than $100,000 (50% vs. 25%). Those with advanced degrees scored highest, followed by college graduates. Men consistently scored higher than women. White and Asian respondents scored higher than Black and Latino respondents. Finally, retired respondents scored higher than non-retired respondents.
One heartening finding: Americans in their 70s were slightly more knowledgeable than the younger set. Average retirement literacy scores increased from 25% in the 50-to-54 age group to 38% among those aged 70 to 75. Individuals over 65 had a 56% literacy rate on Medicare-specific questions, higher than the 34% scored by those under 65. Social Security literacy lands along those same lines, with those over 65 averaging 40% on those questions, compared to 28% by younger folks. Put that down to learning by necessity as retirement living takes center stage.
“The retirement income knowledge gap is a critical problem,” Cindy Hounsell, president of the Women’s Institute for a Secure Retirement, told Yahoo Finance. “Most people are not considering how to cover the costs of their last years or know enough about the financial decisions needed when planning for a longer life.”
Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?
The prospect of soaring healthcare costs is especially alarming. About 15% of an average retiree’s annual expenses will be health-related, per Fidelity. And a recent research report from the Employee Benefit Research Institute (EBRI) found that a 65-year-old couple who retired last year will spend roughly $413,000 after-tax and out-of-pocket to cover premiums, deductibles, and prescription drugs in retirement — a figure that could easily balloon.
“Healthcare spending is very lumpy,” Jake Spiegel, a research associate on health and wealth benefits at EBRI, told Yahoo Finance. “Nobody can project coming down with a chronic condition or exactly how long they will live, but you’ve got to have a rough estimate to plan for.”
Tossing darts when it comes to potential life span
Those biting healthcare costs will be a big factor if you haven’t planned for living a long life. Most people don’t have a clue what that actually means for them. Nearly two-thirds of those surveyed did not know the average life expectancy of a man at age 65.
This is particularly concerning “because so many Americans plan to supplement their Social Security with their 401(k) and IRA accounts,” Parrish said. “If they underestimate their own life expectancy, they risk exhausting their savings in retirement — potentially outliving their assets.”
When you throw the potential cost of long-term care into the mix, things get messy. On average, respondents correctly answered only 1 in 5 questions about paying for long-term care.
“Our research underscores a significant gap between expectations and reality, especially concerning long-term care,” Kaylee Ranck, director of college research, told Yahoo Finance. “Only 20% of participants have a strategy for financing long-term care, even though nearly 70% are likely to need it.”
Not to be alarmist, but you could be in serious trouble if you don’t get this right.
“If your employer-provided long-term care insurance, and if you bought early, that will help, but it may not cover what is needed, and there are fewer options the longer you wait to buy private insurance,” Hounsell said.
In the fourth quarter of 2023, an apartment in an assisted-living facility had an average rate of $75,174 a year, according to the National Investment Center for Seniors Housing & Care — and costs go up as residents age and need more care. Units for dementia patients can easily run $94,466 annually.
Home care is dear too. Agencies charge about $27 an hour for a home health aide, according to Genworth.
“The possibility of needing costly long-term care is the greatest financial risk that most older people face,” Richard W. Johnson, director of the program on retirement policy at the Urban Institute, told Yahoo Finance.
“People usually rely on family members when they become frail and need help, but sometimes they need more care than their family can provide and must turn to paid helpers,” he said. “Nursing homes, assisted living, and paid home care are expensive, and they aren’t usually covered by Medicare. Unless people have purchased long-term care insurance, they can easily run through all of their savings.”
For women, the lack of planning can be crushing.
“Long-term care is a special concern for women,” Johnson added. “Women tend to live longer than men and are more likely to become frail. Because many women outlive their husbands, they can’t rely on their spouses for care and must often turn to expensive paid home care, assisted living, or nursing home care.”
Then, too, there’s a large number of never-married women who are not likely to have family to help, Hounsell said. “How will they pay for those bonus years that may turn out to be quite costly as they age?”
Medicare was ‘never intended to pay for the lion’s share of long-term care’
“In the United States, we lack any sort of comprehensive approach to funding for long-term care,” Dr. Rachel M. Werner, the executive director of the Leonard Davis Institute of Health Economics at the University of Pennsylvania, told Yahoo Finance. “That has been the case for decades, going all the way back to the 1960s when Medicare and Medicaid were first passed into law. Medicare and Medicaid were really never built or intended to pay for the lion’s share of long-term care in this country.”
Medicaid covers only folks at the lowest income rungs. In 2024, a nursing home Medicaid applicant in Washington, DC, for example, must have income under $2,829 a month and assets under $4,000.
“That actually leaves middle-income Americans out,” Werner said. “They really have no good options.”
The bad option many end up with is spending most or all of their money paying for care, finally becoming poor enough to qualify for Medicaid.
More than 818,000 people aged 65 or older now live in assisted-care facilities and are, generally speaking, not able to tap federal funds to help cover the costs.
[For those curious to see if you have a good grasp on income literacy retirement, take this six-question quiz here from questions provided by the American College of Financial Services.]
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.
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