Aging Options

Research Shows Lack of Financial Knowledge Puts Future in Jeopardy

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If it feels to you as though today’s financial landscape is getting more and more complicated, you’re right. Not only are we all facing increasingly complex financial choices, but there’s also more at stake: the consequences of bad financial decisions can bring lifelong pain. It’s something we see all the time here at AgingOptions as we interact with clients, seminar guests and radio listeners.

For that reason this very recent article on the blog of the Wall Street Journal caught our attention. The key point: basic financial training is essential to sound money management. The article describes a just-released study demonstrating how lack of sophistication in today’s confusing financial environment causes Americans to make poor fiscal decisions that can undermine their economic health for their entire lives, setting them up for extreme hardship in retirement. “Americans increasingly must manage their own financial affairs throughout their work lives and then in retirement,” writes one of the study authors, Professor Olivia Mitchell of the Wharton School of Business. “Yet financial products are becoming ever more complex and difficult to understand.” The net result, she writes, is that ill-informed people who are trying unsuccessfully to manage their own financial future “can get into long-term, and potentially very damaging, problems.”

Some of the specifics Mitchell gives in her study sound like a laundry list of all-too-common financial problems – the kind of sad situations we see all too often. These include some truly egregious examples of high-cost borrowing, including payday loans and rent-to-own furniture schemes, favored by ill-informed consumers. “The least informed borrow more,” says the Wall Street Journal article, “and (they borrow) more often.” Much of this borrowing is taken from retirement accounts, adding to future financial woes. Those with less financial savvy are also more likely to say they are over their heads with a debt load that has become unmanageable.

What’s more ominous is that the financial problems for a large number of Americans are getting worse, not better. “Americans are now digging themselves deeper into the financial ditch than in the past,” Professor Mitchell writes. One specific danger sign is that those nearing retirement today are much more likely to be in debt compared to earlier generations. “This is particularly true of mortgage debt, as financial markets in the go-go years allowed people to borrow more to buy more expensive houses with lower (or no) down payments. Whereas in the old days, our parents tried hard to pay off their mortgages before retirement, this is no longer the case. That means older people today are more likely to file for bankruptcy than in the past, and they are far more likely to report feeling financially fragile.”

So what difference does financial literacy make? The study cited in the Journal article lists a host of significant advantages. “Financial literacy,” says the article, “helps people plan more effectively for their financial goals, and also guides their saving. Another (advantage) is that those who invest in financial knowledge tend to hold more sophisticated investments and earn more on them. And not least, in retirement, the more financially sophisticated understand annuities better, so they are less likely to run out of money in old age.”

The bottom line in this study is the assertion that “people who invest in financial knowledge can save better, invest better and manage their money better during retirement.” If you lack financial knowledge, you will fare much more poorly at all stages of your adult life, especially in retirement. In a society where wealth inequality is growing, the study authors state that “a rather striking amount–some 30% to 40%–of retirement wealth inequality is explained by differences in financial knowledge.” The Wall Street Journal article concludes with the strong recommendation that financial knowledge be taught in high school, something only a relative handful of states require. (This 2014 article from Pew Research revealed that only 17 states require high school students to take courses that include some training in personal finance, and only four states require stand-alone personal finance classes.) Parents should look into financial training for their children – and perhaps more important, parents should get financially educated themselves, the earlier in life the better.

Our take on the Wall Street Journal is that we agree – up to a point. Here at AgingOptions we would say that, yes, financial training is extremely important in helping people practice good savings and investing habits, learn the power of delayed gratification, and build a solid financial future. But we must emphasize that financial savvy by itself is incomplete, especially when building a retirement plan. You can be the most sophisticated financial planner out there, but if all you’re thinking about are your finances when you retire you’re missing a huge part of the picture. Have you considered your health, for example? Unless you protect yourself against a medical or long term care crisis, your money won’t last very long. Then there’s the housing question, something for which too few retirees plan – instead they just assume they’ll be able live at home, without doing anything to help make that happen. All this preparation needs to be safeguarded with a sound legal plan, or else your other plans can come to naught. And finally, there’s your family: too many “good plans” fall apart because family members who were never informed of your wishes bicker and fight over your estate after you’re gone.

These five elements – finances, medical coverage, housing choices, legal protection and family communication – make up what we call a LifePlan. LifePlanning is the best answer to the question, “How can I enjoy the retirement I’ve always looked forward to?” We urge you to take the next step and investigate the LifePlanning process by attending a free LifePlanning seminar at a location that’s convenient for you. There’s no obligation whatsoever – but instead there’s a wealth of information waiting for you, information that will dramatically affect your plans for your retirement future in the best possible way. For details and simple online registration, simply click here, or call us during the week so we can assist you.

(originally reported at

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