Posted on January 3, 2015 at 9:45 PM
The National Bureau Of Economic Research recently released a research report named Financial Literacy and Retirement Planning in the United States in which researchers revealed the worrying lack of financial knowledge of any kind that Americans suffered from.
The National Financial Capability Study, which is part of the study above, for instance, finds that most Americans do not understand concepts such as compound interest, risk diversification and inflation, all of which are important to planning successfully for retirement. Older people approaching retirement find these concepts the most difficult to understand.
The report features a few simple sample questions of the kind that study subjects approaching retirement were asked. One question, for instance, asks how much you would have if you put $100 in a bank account that paid compound interest at 2% each year for five years -- more than $102, or less. Another question asks about whether it should be considered safer or riskier to put your entire retirement savings into the stocks of one company. Only half of all respondents were able to answer these questions.
When asked how much one might be able to withdraw each year from a $100,000 retirement account to make it last for 30 years, only one in three had the answer.
Many respondents believed that once they reached the age of 65, they would only have 10 years more to live, and did not need to make their assets last any longer. In truth, the average life expectancy at that age is 19 years. A person who is 65 can expect to live until the age of 84. He will need a plan to make his assets last at least as long.
Only one in two realized that the Social Security Administration offered better benefit levels to those who delayed retiring to the age of 70.
More than half of America has access to financial planners and advisors (see the report by the Society of Actuaries at: soa.org/files/research/projects/research-key-finding-under-managing.pdf). Yet, three out of four have never tried writing down a financial plan. It would appear as if the poor financial planning epidemic isn't simply the fault of these people. It is also the fault of their financial planners and advisors, who seem to not be doing their job. No competent financial planner would let their clients get away without a written plan.
Few things can be worse than growing old in paupery. If you don't want to find yourself in this scary position, you should act now. You should visit a bookstore, buy the best Financial Literacy 101-type books that you can find, and read them. These books aren't written in dense language. Rather, they are written in entertaining style, and can slowly help you get better.