FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS

Transcription

1 PRUDENTIAL INVESTMENTS» MUTUAL FUNDS FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS WHITE PAPER STUDY FINDINGS Key Themes Financial literacy continues to pose a serious challenge to achieving retirement goals. More than a third of working-age Americans and retirees lack even basic knowledge of investing and saving for retirement. Not running out of money during retirement remains a top priority for American retirees. Close behind are the ability to afford health care and the ability to maintain their pre-retirement lifestyle. Advisors and plan sponsors play an important role in bridging the financial literacy retirement preparedness gap. Less than one-third of individuals seek retirement planning and investment advice from a financial advisor.

2 Page Introduction 3 Financial Literacy 4 Retirement Preparedness 8 Bridging the Financial Literacy-Retirement 13 Preparedness Gap About the Survey 15

3 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS With Americans living longer and a challenging global economic climate, Prudential Investments wanted to know how prepared both non-retirees and retirees were in relation to meeting their retirement goals and objectives. What is the current state of financial understanding across generations and income levels, including familiarity with financial products? How are currently employed individuals and retirees approaching retirement planning? What are their retirement goals and key concerns that may impact retirement success? What would retirees have done differently to be better prepared for retirement? Financial Literacy and Retirement Preparedness, a survey conducted by Prudential, explores the answers to these questions and more. 10, *Source: Baby Boomers Approach Age 65 Glumly, Pew Research Center Publications, December

4 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS FINANCIAL LITERACY CONTINUES TO POSE A SERIOUS CHALLENGE TO ACHIEVING RETIREMENT GOALS We have a literacy problem in the United States today a financial literacy problem. The sad truth is that more than a third of working-age Americans and retirees lack basic knowledge regarding investing and saving for retirement. While many claim to be well prepared to make financial decisions, their perception of their own skills may be inflated. When presented with a set of financial literacy questions, it was discovered that many who believed themselves savvy were lacking in actual financial knowledge. Very few have a decent grasp of the fundamental concepts of economics and finance, and less than half are able to answer four or more financial literacy questions correctly. KNOWLEDGE OF DIFFERENT FINANCIAL AREAS Managing Money 3% 7% 26% 35% 30% Managing Debt 5% 10% 24% 29% 33% Investing 17% 24% 34% 17% 8% Saving for Retirement 15% 20% 32% 23% 11% Legend: Failing Below Average Average Very Good Excellent FINANCIAL LITERACY QUIZ (answers on page 15) 1. Inflation: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? a. More than $102 b. Exactly $102 c. Less than $102 d. Don t know 2. Rates: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? a. More b. Same c. Less d. Don t know FINANCIAL LITERACY SUMMARY 3. Risk: Is this statement true or false? Buying a single company s stock usually provides a safer return than a stock mutual fund. 48% a. True b. False c. Don t know 22% 70% 28% 20% 4. Mortgage: Is this statement true or false? A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less. a. True b. False c. Don t know 15% 5. Bonds: If interest rates rise, what will typically happen to bond prices? 5% 10% a. Rise b. Fall c. Stay the same d. No relationship e. Don t know # of correct answers 4 5 Source: FINRA, 4

5 FINANCIAL LITERACY VARIES ACROSS POPULATION SEGMENTS Almost half of individuals reported being illequipped when it comes to making wise financial decisions: 19 percent consider themselves beginners and 28 percent acknowledge they need to catch up in many areas. A slightly greater percentage believe they require help in a few areas, while 21 percent believe they are very well prepared to make decisions. Millennials, women, the less affluent, and individuals who don t work with an advisor have among the lowest levels of financial literacy. Only 15 percent of women possess above-average knowledge of investing; that s compared to 34 percent of men. Among both male and female millennials (those born between the early 1980s and early 2000s), 44 percent are not currently saving for retirement and only 17 percent believe they are well prepared to make financial decisions. It is worth noting that financial literacy does improve as income levels increase. LEVELS OF PREPAREDNESS VARY Beginner 19% KNOWLEDGE OF INVESTING % excellent/very good knowledge Male 34% Female 15% Millennials 19% Generation X Boomer 23% 26% Mature 36% Affluent 41% Non-affluent 15% KNOWLEDGE OF SAVING FOR RETIREMENT % excellent/very good knowledge Male 41% Female 27% Millennials 34% Generation X 29% Boomer 38% Mature N/A Need to catch up in many areas 28% Affluent Non-affluent 24% 52% Need help in a few areas Very well prepared 21% 33% PREPAREDNESS TO MAKE FINANCIAL DECISIONS % very well prepared Male 27% Female 14% Millennials 17% Generation X 18% Boomer 23% Mature 28% Affluent 29% Non-affluent 16% 5

6 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS IMPROVING FINANCIAL LITERACY REMAINS AN IMPORTANT CALL TO ACTION There s no question that financial literacy promotes good financial habits. An improvement in financial habits is not only better for individuals; it s better for the US economy, as well. The more financially literate individuals become, the more likely they are to take critical steps to achieve a secure retirement, and to be in better shape financially overall. Financially literate Americans tend to save more and borrow less. Financial literacy is also the key to driving better investment decisions. Basic financial management practices like keeping track of household expenses, monitoring investments, and seeking help from investment advisors and other professionals can all contribute to improved financial literacy. Furthermore, individuals who are more financially literate are more likely to participate in employersponsored plans, a strong first step to a secure retirement. ADOPTION OF DIFFERENT FINANCIAL PLANNING PRACTICES Keep track of income and expenses Focus on physical health Estimate income from Social Security Monitor investments and make adjustments when needed Establish spending budget Set up retirement plan Talk to spouse about retirement plan Estimate income needed in retirement Estimate expenses in retirement Estimate number of years your money will last in retirement Evaluate different financial products for use in reaching your retirement savings goal Get a financial professional % taking action 7% 11% 10% 8% 7% 11% 14% 21% 20% 19% 26% 25% 25% 35% 33% 38% 30% 38% 37% 37% 34% 37% 53% 58% Legend: More Financially Literate (answered 4 or more questions correctly) Less Financially Literate (answered 3 or less questions correctly) PARTICIPATE IN EMPLOYER-SPONSORED PLAN (E.G., 401(K), 403(B), 457) More Financially Literate 61% Less Financially Literate 45% 6

7 At the end of the day, sound financial knowledge results in improved confidence in achieving top financial goals like not running out of money during retirement and maintaining a desired lifestyle. In fact, those who are more financially literate are at least 10% more confident that they would not run out of money in retirement, would be able to afford medical and health care expenses in retirement, and would have the income needed to maintain their desired retirement lifestyles. FINANCIAL LITERACY AND CONFIDENCE IN ACHIEVING TOP FINANCIAL GOALS (RANKED IN ORDER OF IMPORTANCE) Not run out of money in retirement Afford medical/health care in retirement Have income to maintain desired retirement lifestyle Have cushion to pay for unexpected expenses in retirement % very confident 26% 27% 26% 31% 39% 38% 38% 40% Not become a burden to loved ones in retirement Financial security to my loved ones if I die or become disabled 27% 38% 41% 42% Afford nursing home care in retirement 20% 31% Legend: More Financially Literate (answered 4 or more questions correctly) Less Financially Literate (answered 3 or less questions correctly) 33 % 7

8 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS RETIREMENT PREPAREDNESS Top 3 retirement goals and objectives 12 3 CONFIDENCE IN ACHIEVING TOP FINANCIAL GOALS Not run out of money in retirement Afford medical/health care in retirement Have income to maintain desired retirement lifestyle Not become a burden to loved ones in retirement Have cushion to pay for unexpected expenses in retirement CONFIDENCE IN ACHIEVING TOP GOAL OF NOT RUNNING OUT OF MONEY IN RETIREMENT % very confident % very confident Male 39% Female 26% 33% 32% 32% 36% 32% For most Americans, the most important financial goal is not running out of money in retirement. This was the top priority for 75 percent of the population. Only a third feel confident that they ll achieve that top retirement goal. This number is even lower among women, the less affluent, and younger Americans who are further from retirement. 30+ years from retirement 10 to <30 years from retirement <10 years from retirement retirees Public Private 24% 30% 30% 30% 34% 48% Affording medical care was also a key priority for 68 percent, a reasonable concern since American seniors report more problems paying for health care than other countries with advanced economies. And 66 percent of Americans make lifestyle their top priority they d like to continue living their lives in a particular way. Affluent Non-affluent 24% 46% 8

9 THE OPPORTUNITY TO IMPROVE RETIREMENT PREPAREDNESS The link between financial literacy and retirement readiness is undeniable. Today, a full third of the population rate themselves below average or failing when it comes to retirement planning, while another third is at an average level of preparedness. That means only 33 percent of our aging population is fully ready to retire. LEVEL OF RETIREMENT PLANNING Failing 33% Total Nationwide Very Good/ Excellent 33% Sixty-two percent of adults and 37 percent of those adults who are within 10 years of retirement believe they have less than 20 percent of what they need for retirement. When you consider that 10,000 Americans will be retiring every day for the next two decades, those statistics are particularly alarming. The further from retirement individuals are, the less prepared. Thirty-six percent of the total U.S. population is not currently saving for retirement at all. Of that 36 percent, 29 percent are 10 years from retirement. Even more concerning: More than 40 percent of millennials are not saving for retirement today even with the broad availability of employer-sponsored programs. What s interesting is that despite the fact that millennials are lagging with regard to saving, they still expect to retire at the age of 67, the same age as other segments. Almost everyone expects to live and work longer, and most expect to enjoy approximately 20 years of retirement. Men and women share the same expectations with regard to longevity and years in retirement. AMERICANS RETIREMENT SAVINGS Average 34% 36 % 62 % Have nothing saved for retirement Have less than 20% of what they need

10 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS On average, employed Americans estimate that they ll need about $850,000 saved for retirement, and a monthly income of about $3,000. (The more financially literate within the population place their required monthly income closer to $3,500 and total savings at over $1 million.) Millennials expect they ll need about $960,000 yet they re only saving about 8 percent of their income currently, compared to the 12 percent and 14 percent Gen X and Boomers are saving, respectively. As a segment, Gen Xers perceive their need for retirement savings to be the greatest among their multigenerational counterparts, placing their total amount needed at $1.025 million. Women overall expect to need less than men ($772,000 vs. $932,000). While how much individuals anticipate they will need at retirement varies, starting earlier can pay off. As shown in the chart below, beginning to save at age 25 versus age 35 can have a big impact on retirement savings. $255,080 STARTING EARLIER CAN PAY OFF A $10,000 initial investment + an annual contribution of $2,500, assuming a 6% average annual rate of return, yields an extra $131,045 if invested over 30 years $124,035 A $10,000 initial investment, assuming a 6% average annual rate of return, yields an extra $25,364 if invested over 30 years $32,071 $57,435 $10, Years 30 Years 20 Years 30 Years Source: Prudential Investments. For illustrative purposes. Does not represent any particular investment. Past performance is no guarantee of future results. 10

11 THREATS TO ACHIEVING RETIREMENT SUCCESS Of course, all Americans hope to retire successfully, but many have concerns. Health care costs, changes to Social Security and inflation are among the top concerns. While individuals cannot control all concerns, some concerns are within their control for example, not saving enough due to procrastination. Approximately 15 percent of adults admit to being procrastinators when it comes to planning for retirement they simply believe they have more than enough time to save for retirement, and aren t concerned with the issue at present. These numbers are highest among millennials (25 percent), men (18 percent vs. 13 percent of women), and non-affluent Americans (17 percent). PERCEIVED THREATS TO RETIREMENT SUCCESS Health care costs 52% Changes to Social Security 48% Inflation Illness or disability 39% 34% Market volatility Low interest rates 28% 26% Caring for parents/loved ones Changes to employer pension 20% 19% Sentiment around saving for retirement varies broadly. No single group seems to have a healthy perspective on the topic. Nearly 25 percent of individuals feel downright pessimistic about their retirement. This group includes the less financially literate, the less affluent, and those without a retirement account. In the words of one respondent, I will never save as much as I need, so it really doesn t matter when I start. About 35 percent feel a sense of hopelessness regarding their retirement. I should do more to prepare for a secure retirement, but I really don t know how/what to do! These individuals are more likely to be women (42 percent), the less financially literate (42 percent), or the less affluent (40 percent). A lower percentage of Americans 16 percent feel uncertain. Among Gen X (20 percent), the less literate (20 percent), and Millennials (19 percent), the overwhelming sentiment is, Anything can happen from now until I retire, so I don t see the point of planning. 29 % Source: Center for Retirement Research at Boston College; Towers Watson Healthcare Cost Survey 2010 and Bureau of Labor Statistics. 11

12 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS ADVICE AND LEARNING FROM RETIREES Successful retirees are more likely to retire on schedule or later than they had planned. How do they achieve that successful retirement? When asked about their experience, they offered helpful words of wisdom for those planning their futures: It s never too early in life to begin saving on as regular a basis as you can. Pay yourself first. If your employer has a 401(k) plan, put as much into it as you can--especially if they match up to a certain amount! Find a financial advisor you can trust; invest some conservatively and some aggressively. Many even advised to reduce debt, work as long as you are healthy, and even work part-time once retired. 5 things retirees wish they d done differently SOURCES OF RETIREMENT INCOME RETIREMENT INCOME SOURCES Employer-sponsored retirement plans play a major role in helping participants achieve retirement security. More than a third of non-retirees expect to draw the majority of their income in retirement from such accounts. Those currently retired rely on their employer-sponsored plan for more than a quarter of their current income. While retirees currently receive more than two-fifths of their income from Social Security, non-retirees anticipate that Social Security will contribute less than a fifth to their retirement income. After their employer-sponsored plans and Social Security, those planning for retirement expect to draw income from other retirement accounts, such as IRAs, and cash to provide income during retirement. Employer-Sponsored Retirement Plan Other Retirement Accounts (e.g., IRA) Cash Social Security Income from Investments Home Sale/Reverse Mortgage Part-Time Job Others 1% 1% 3% 6% 5% 10% 7% 7% 8% 7% 9% 12% 17% Legend: 26% 38% Pre-Retiree Retiree 43% 12

13 ADVISORS AND PLAN SPONSORS CAN HELP BRIDGE THE FINANCIAL LITERACY RETIREMENT PREPAREDNESS GAP We have already established a link between financial literacy and retirement preparedness. We know that advisors and retirement plan sponsors can help in educating individuals, promoting financial literacy and bridging the gap. Those who work with advisors are much more likely to invest in employer-sponsored retirement plans, regardless of their level of financial literacy. They also have a more diversified mix of investments to save for retirement, including individual stocks, bonds, and mutual funds. Yet less than one-third of individuals seek retirement planning and investment advice from a professional financial advisor, so the literacy preparedness gap continues to grow and retirement preparedness suffers as a result. FINANCIAL LITERACY AND PRODUCTS USED TO SAVE FOR RETIREMENT There is also significant opportunity for advisors to provide better tools to educate, empower, and encourage participants to save more. These professionals are not fully embracing the opportunity. However, only 38 percent of participants rate the education, tools, and information provided by their employer s plan as excellent or very good. Even worse, 29 percent do not think plan sponsors are working in their best interest. Plan sponsors and advisors need to work harder and more creatively to gain participant trust and make educational tools accessible and user-friendly if we intend to build a more financially literate and retirement-ready population. Employer-sponsored plan (e.g., 401(k), 403(b), 457) Employer-sponsored pension plan Individual retirement account (IRA) that is NOT employer-sponsored Cash (checking, money market, certificates of deposit, or savings accounts other than IRA) Individual bonds (government, municipal) Individual stocks Mutual funds Exchange traded funds (ETFs) Annuities Life insurance Primary residence Other properties/real estate investment With a Financial Advisor 20% 33% 39% 40% 20% 8% 41% 15% 49% 16% 12% 1% 27% 12% 42% 32% 47% 27% 16% 10% 67% 59% 64% 63% Without a Financial Advisor 39% 27% 16% 36% 14% 46% 37% 11% 5% 26% 6% 23% 4% 7% 1% 8% 3% 25% 19% 29% 13% 7% 5% 56% Legend: More Financially Literate (answered 4 or more questions correctly) Less Financially Literate (answered 3 or less questions correctly) 13

14 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS 78 % of investors ask for financial advice 36 % 31 % 19 % IN SUMMARY With more Americans retiring now than ever before, and so few prepared for the next chapter in their lives, there s a growing chance that many will not achieve their retirement goals. Retirement today is not the sure thing it was for past generations, and those preparing for retirement have a broad set of priorities. Yet saving for retirement isn t the top priority for many, and isn t even a concern for some. There is a clear need to bridge the financial literacy gap and ensure that every individual, from Gen Y through current retirees, understands the importance of good financial habits, particularly as they relate to retirement savings. Financial advisors and retirement plan sponsors can play a significant role in bridging this gap. By making plans accessible and understandable, and by providing better tools and education, plan sponsors can foster greater trust and participation among employees. If financial literacy becomes a shared priority, more Americans are likely to understand their retirement planning options, more likely to plan successfully, and more likely to achieve the retirement they envision. 14

15 Fund Risk Information Mutual fund investing involves risks. Some funds are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Lower-rated fixed income investments ( junk bonds ) have speculative characteristics, including particularly credit risk. Investments in foreign securities are subject to currency risk and to economic and political developments in the countries where the foreign issuer is located or the security is traded. Also, investments in emerging markets may be less liquid and subject to more price volatility than investments in developed countries. There is no guarantee the respective fund s objective(s) will be achieved. The risks associated with each fund are explained more fully in the respective fund s prospectus. Defi nitions Affluent is defined as those with household income >= $75K or net investable assets >=$250K Millennials/Generation Y (21 to 34) Generation X (35 to 49) Boomer (50 to 68) Matures (69 or older) ABOUT THE SURVEY The Financial Literacy and Retirement Readiness Study was conducted using an online survey among 1,302 adult Americans nationwide. All participants met the following criteria: Age 21 and up Some involvement in household financial decisions Employed full-time or part-time, self-employed, stay-at-home parent, or retired Students and those who were unemployed were excluded in the non-retiree sample The Financial Services Group of Lightspeed Research fielded the survey between October 31 and December 2, Test answers: (1) a. More than $102 (2) c. Less (3) b. False (4) a. True (5) b. Fall 15

16 FINANCIAL LITERACY AND RETIREMENT PREPAREDNESS DRIVEN TO MEET YOUR CHALLENGES Prudential Investments is dedicated to helping you solve your toughest investment challenges--whether it s capital growth, reliable income, or protection from market volatility and other risks. Through ever-changing markets, we strive to be a leader in a broad range of investments to help you stay on course to the future you envision. Our investment professionals also manage money for major corporations and pension funds around the world, which means you benfi t from the same expertise, innovation, and attention to risk demanded by today s most sophisticated investors. Together they manage more than $884 billion in assets (through 12/31/2014). We believe the knowledge and experience of a financial professional provides a valuable advantage, so we make our products avalable through financial advisors. We are part of Prudential Financial, a company America has been bringing its challenges to for 140 years. Bring us yours. FOR MORE INFORMATION, contact your financial professional or visit our website at prudentialfunds.com. Consider a fund s investment objectives, risks, charges, and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. Contact your fi nancial professional for a prospectus and summary prospectus. Read them carefully before investing. Mutual funds are distributed by Prudential Investment Management Services LLC (PIMS). Prudential Fixed Income is a unit of Prudential Investment Management, Inc. (PIM), a registered investment advisor. PIMS and PIM are Prudential Financial companies Prudential Financial, Inc. and its related entities. Prudential Investments LLC, Prudential, the Prudential logo, Bring Your Challenges, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. MUTUAL FUNDS: Are not insured by the FDIC or any federal government agency May lose value Are not a deposit of or guaranteed by any bank or any bank affiliate PI4159 Expiration: 12/31/2016