The American College of Financial Services (The College) has been producing a Retirement Income Literacy Study every three years since 2014. The latest one, completed in 2023 and unveiled two months ago, paints a disquieting picture of the knowledge level of retirees and pre-retirees when it comes to the various sources of retirement income and their tax consequences.

The 2023 study surveyed 3,765 Americans aged 50 to 75 in 24-minute online interviews covering 38 questions on topics ranging from retirement plans, annuities, inflation, investments, life and long-term care insurance and housing, to and including government programs such as Medicare and Social Security. They found that the degree of understanding of the above topics correlates pretty well to the size of the respondent’s accumulated retirement savings. Wealthier people know more about retirement planning than poorer people. Unfortunately the average score for even the wealthiest respondents was only 50%.

The survey also revealed that inflation, housing, and Medicare were the retirement topics about which survey participants were most knowledgeable. But they answered less than one in four questions correctly involving long-term care, investments, and annuities, three areas which are critically important for a secure retirement. They all also underestimated life expectancy, which makes outliving their assets a serious risk.

Considering that successful retirement planning involves optimizing financial decision-making, the solution is obviously to improve financial literacy. Not surprisingly the study found that the higher the respondent’s educational level, the better the scores. And those who work with financial advisors scored higher than those who don’t in every topical area. But not everyone can afford personalized advice, and those Americans with fewer financial assets are at greater risk of running out of money than wealthier individuals.

The researchers also administered the 38-question quiz to ChatGPT. Steve Parrish, a professor at The College, noted that the generative AI tool scored only 45%, not much better than the overall 31% average of the human participants. The implication is that good knowledge of the complexities associated with the various facets of retirement planning may be hard to come by even for do-it-yourselfers.

As Parrish puts it, a successful retirement plan is not measured by getting a better score, but by the preparedness and confidence that comes with having better knowledge about all the choices involved in good retirement planning. How can we as a society improve the financial literacy of all our citizens? I believe it starts with incorporating personal finance instruction in secondary and even elementary schools so that a much greater segment of the population has sufficient grounding to be able to pick up that knowledge when they get older.

And it wouldn’t hurt to make our tax and health care systems a lot simpler as well.

Here’s a link to the study: https://www.theamericancollege.edu/knowledge-hub/retirement-income-literacy-study