A recipe for future retirement security

Early financial literacy training is key.

When the American College of Financial Services released the results of its first-ever “Retirement Income Literacy Survey” last December, I dutifully reported the astounding results: Just 20% of retirement-age Americans can pass a basic quiz on how to make their nest eggs last throughout retirement.

Then I took the 38-question quiz. Frankly, I’m not surprised that a majority of the more than 1,000 people between the ages of 60 and 75 who took this test failed. Unless you are accustomed to reading industry reports on best ways to invest and draw down savings in retirement or are conversant in the probability of needing long term care, I think that some of these questions are beyond the general knowledge of the average American.

David Littell, director of the retirement income program at the American College, admitted that the quiz isn’t easy. But he said the purpose is to shine a spotlight on some of the very complex decisions new retirees may need to make as they transition from building assets to spending them.

You can try it out for yourself here. Click “take the quiz” at the top of the page.

For example, one question asked when a person who is planning to retire at 65 should take the least amount of investment risk. The possible answers were age 65, age 80 or don’t know. For a generation of 401(k) investors who were repeatedly told they should reduce their exposure to equities as they age, the correct answer of 65 may come as surprise.

Expecting a typical consumer to know that the annual payout for an immediate income annuity for a 65-year-old male today is in the 6% to 7% range seems a bit of a stretch. And asking quiz takers to identify the key characteristic of a deferred variable annuity with guaranteed lifetime withdrawal benefits is downright laughable.

But that gives me hope. Maybe Americans know more about preparing for retirement than the quiz results would suggest. Although the quiz takers may have been tripped up by unfamiliar terms and concepts, I think the majority of Americans realize they need to save for retirement.

Of course, knowing how much they need to save and achieving that goal is another matter. And stretching accumulated savings over a lifetime is even harder. I fear that many baby boomers may need to tighten their belts and curtail their lifestyles as they grow older.

But that shouldn’t come as a surprise. This first generation of 401(k) participants were given little guidance about how much to save and how to invest savings for the first two decades of the defined contribution experiment. The message to take advantage of employer matches and catch-up contributions emerged late in their careers. And for some, layoffs during the Great Recession foiled their plans to work longer and save more.

“It’s like handing a kid the keys to the car and telling them to figure out how to drive,” said Neale Godfrey, a pioneer in the field of kids and money. “They might get the hang of it — after an accident or two.”

Ms. Godfrey, the president of Green$treet Commons, is on a mission to improve financial literacy by starting early. Her company provides interactive mobile apps for iPhones and iPads such as “Shmootz Happens” to help children learn money skills and teaches high schools kids, college students and returning war veterans about the stock market, encouraging small initial investments so they have skin in the game.

“We need to teach our children good money habits when they are young so they have the right tools in the future,” she said. The minority of states that require financial literacy education tend to focus on high school seniors when it is already too late, she noted.

The message that financial literacy matters now more than ever resonates with two of the cornerstone institutions of American childhood: the Girl and Boy Scouts.

The Girl Scouts designed its Financial Empowerment program to fill the gaps in financial literacy that many schools don’t have the time to address and many parents are uncomfortable discussing. Girls learn financial literacy skills through the scouting curriculum, online learning and the Girl Scout Cookie Program, described as the “largest girl-led business in the world.”

The Boy Scouts require individuals to attain the Personal Management Merit Badge on the path to becoming an Eagle Scout. Eagle Strategies financial adviser Harris Kagan said he has taught personal finance fundamentals to hundreds of teenagers over his nearly 30 years while an assistant scout master and has developed a workbook to help scouts and their families improve their money skills by researching and planning a major family purchase.

“Financial literacy is so essential in our society, especially in this age of no pensions and underfunded defined contribution plans,” Mr. Kagan wrote to me in an e-mail. So it seems that retirement security for future generations depends on what we teach our kids today. In a show of solidarity, perhaps we should all adopt the scouts’ motto: “Be prepared.”

(Questions about Social Security? Find the answers in my ebook.)