How well do people understand financial matters when it comes to planning for retirement? According to the new global retirement readiness survey from the Transamerica Center for Retirement Studies and the Aegon Center for Retirement and Longevity, "The New Social Contract: Empowering Individuals in a Transitioning World," people are sadly lacking in financial literacy—one of the major problems that confront them in trying to make sure they have enough money on hand to retire. And that makes it tougher to save for retirement, especially in a world in which more and more responsibility is being shifted to the shoulders of the individual. The Aegon Retirement Readiness Index provides an annual score for respondents based on answers to six retirement and financial questions: three broadly attitudinal, and three broadly behavioral. The first asks how personally responsible people feel about making sure they have enough income in retirement, while the second asks them to rate their level of awareness on the need to plan financially for their retirement. The third asks how well they understand financial matters when it comes to planning for retirement. And that's where people fail pretty spectacularly, since In fact, according to the report, only 27 percent of people in the U.S. could correctly answer the "Big Three" financial literacy questions that test knowledge of compounding interest, inflation, and risk diversification. Globally, people did only a hair better, coming in at 30 percent. The other three questions, incidentally, ask people to specify how well developed their personal retirement plans are, whether they think they're putting aside enough money for retirement, and whether they think they'll be able to hit the level of income replacement they'll need in retirement. The ARRI ranks retirement readiness on a scale of 1 to 10, with low scores less than a 6, medium scores between 6 and 7.9 and high scores between 8 and 10. This is the first year, according to the report, that people actually achieved a medium score, but only by the skin of their teeth—coming in at 6.0. And while that's a major improvement since the first survey in 2012, it's not as good a result as it might appear, since 9 out of the 15 countries surveyed have low scores. The U.S. is in the medium range, with this year's score at 6.6—up from last year's 6.5—but only 20 percent of workers actually manage to hit a high score. India has the most, at 49 percent, with the U.S. following at just 32 percent. And back to that failure on financial literacy—which, according to the report, is "an essential life skill that is needed for planning and preparing for longer lives and retirement, given the complexities involved and that relatively few use a professional financial advisor (32 percent)." The survey uses a framework developed by Drs. Annamaria Lusardi and Olivia S. Mitchell back in 2004 to measure financial literacy across the 15 countries. Lusardi and Mitchell created the "Big Three" questions that measure understanding of compounding interest, inflation and risk diversification, which, says the report, "test actual knowledge of the topics, rather than self-reported knowledge. The questions are universal in nature and lend themselves well to language translation." Nobody did all that well on this three-question test, with only 30 percent of respondents globally getting all three answers correct. Germany did the best and has the highest financial literacy; 42 percent got all three questions right. In Turkey, financial literacy was lowest with just 14 percent nailing all three answers. And globally, 12 percent of respondents got them all wrong. If you'd like to gauge how well you or others might do, the three questions are in the slideshow, with answers to all in bold on the last slide. READ MORE: 5 quick facts about millennials' retirement savings Top 4 trends shaping retirement income products 3 conflicts millennials have about finances
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