Financial illiteracy hampering Americans' ability to plan for retirement

by Jim Sloan

A new study is out showing that financial illiteracy is "widespread" among older Americans, with only a third of those surveyed able to answer three fairly simple questions about interest rates, inflation and investments.

The study by two economic researchers for the National Bureau of Economic Research also found that fewer than a third of the 1,269 older American adults surveyed had tried to come up with a retirement plan, and of those who tried, only about two-thirds succeeded.

Most important, however, was the study's conclusion that financial understanding and knowledge are closely related to planning. People who keep track of their checking account spending and their savings account balances are more likely to have adequate retirement savings accounts.

The 3 key questions

The researchers used three questions to gauge the level of understanding of survey participants.

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

  1. More than $102
  2. Exactly $102
  3. Less than $102
  4. Don't know

2. Imagine that the interest rates on your savings account was 1 percent per year and inflation was 2 percent per year. With the money in this savings account, after a year, would you be able to buy…

  1. More than you can today
  2. Exactly the same
  3. Less than you can today
  4. Don't know

3. Do you think that the following statement is true or false, or you don't know? "Buying a single company stock usually provides a safer return than a stock mutual fund."

Answers: a, c, false. How did you measure up?

What the answers revealed

Only two-thirds got the first answer correct, but three-quarters understood the second question about inflation. On the investments question, only half of the respondents understood that holding a single company stock is typically riskier than holding a stock mutual fund.

The researchers found that those with greater financial knowledge were more likely to have attended a retirement seminar. They also found that financial illiteracy is particularly low among women and minorities and the lesser educated.

A call for greater financial education

The analysis is a clarion call for more financial education. The authors noted that the "financially savvy" are more likely to take formal educational steps to bolster their retirement savings accounts, such as using retirement calculators, going to seminars and consulting with financial experts. Those who had the best savings rates and did plan for their retirement were less likely to have gained their financial knowledge from family members, co-workers or friends.

The study comes on the heels of an Employee Benefit Research Institute (EBRI) report showing that workers' confidence in having enough money in their investments and savings accounts to live comfortably in retirement continues to drop.

The percentage of workers who say they are not at all confident they have enough in their investments climbed to 27 percent, up from 22 percent in 2010 and 10 percent in 2007. Only 13 percent said they are very confident they have saved enough.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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