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Why Financial Education Is So Important: A Primer for April's Financial Literacy Month

Why Financial Education Is So Important: A Primer for April's Financial Literacy Month

March 31, 2019

April is Financial Literacy Month.

According to a recent Transamerica Retirement Survey of Workers we have a wobbly retirement stool and this instability is illustrated by widespread unsettledness among workers: 

  • 61% of workers have not fully recovered from the Great Recession, including 41% who have somewhat recovered, 13% who have not yet begun to recover, and 7%  who may never recover; 
  • 77%  of workers are concerned that Social Security will not be there for them when they are ready to retire; 
  • Only 51% of workers agree that they are building a large enough retirement nest egg, including only 16%  who strongly agree; and 
  • 65% believe that they could work until age 65 and not save enough to meet their needs.

The views on the future of retirement are different depending on when workers were born. The study examines the perspective from four separate groups: those born before 1946 or the Silent Generation; Boomers (1946-64); Generation X’ers (1965-1978); and Millennials (1979 and on).

Each group has a different perspective on their own retirement.

Millennials - They are a digital do-it-yourself generation of retirement savers. Most are concerned Social Security will not be there for them when they get ready to retire. Many expect their primary source of retirement income to be self-funded through retirement accounts (e.g., 401(k)s, 403(b)s, IRAs) or other savings and investments.

Generation X – Sometimes referred to as the sandwich generation having kids in college and parents needing financial or emotional support in their old age simultaneously. 86% of them are worried that Social Security benefits may not be there for them at retirement. This is possibly the highest number who agree that Social Security may be a problem for their retirement because they are more aware of the problems of Social Security, but not quite at retirement age to be as confident as boomers are about collecting, while millennials have much more time to prepare and are not as focused.

Boomers – Half plan to work after retirement, either for the income or the health benefits. Thirty-four percent expect Social Security will be the main source of income in retirement. Many were already mid-career when the retirement landscape shifted from defined benefit plans to 401(k) or similar plans. They have not had a full 40-year time horizon to save in 401(k)s.

Retirement Income: Perception vs Reality 

In the 2014 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, the employees within 10 years of retirement were asked about their retirement income expectations.

And then retirees who were already living on retirement income sources were asked where their money was coming from for their living expenses.

Estimating Retirement Savings Needs

A recent survey on retirement preparedness by found 1 in 3 Americans have $0 saved for retirement and 56% have less than $10,000 saved. Also, 42% of Millennials have not even begun to save for retirement.

According to the Transamerica Center for Retirement Studies, the estimated amount of money the median respondent said they needed for retirement was $500,000. This was consistent across the generations Boomer, Gen X and Millennial alike. 

This is worrisome because if you retire at 65 with this level of savings the most income you might be able to generate safely without running out of money would be between about $15,000 to $17,500 in annual income and not a livable retirement income for most retirees.

The same study found almost half (47%) of workers indicate they guessed their income need in retirement. Just 13% have even used an income calculator or a worksheet to help them determine the need.

Having a Written Plan

Only 16% of workers in the Transamerica survey had a written plan and another 37% had no plan at all.  So, in other words, 53% had either no plan or no written plan for retirement.

Of those who had a plan (written or not), only 27% had included a strategy for dealing with long-term care, 21% had a tax strategy and only 19% had an estate planning strategy.

The Desire for Education and Advice

One of the most interesting and perplexing components of the study was around education.

Across all age groups, there was a 66% agreement about the need for additional education and advice. Millennials scored 75% in agreement on the need for education and advice. 

Interestingly, they desire education and advice, but they do not trust the industry. Perhaps therein lies the conundrum. If they were more knowledgeable on the subject then they might know who to trust or at least how to find an advisor they could trust.

Where To Learn

So how do you educate yourself or find advice?

Workplace classes given by your employer is one source of education that more employers are adding for their employees. You could attend any number of seminars given by reputable advisors at schools, public libraries, and community clubhouses. But, be aware many of them are bias by the products they use and how they are compensated. So, be sure to understand whether they are impartial to products. Ask the instructor if they have clients, and if they have clients, do they act as a fiduciary with those clients. Fiduciaries must act in the best interest of their clients, disclose their compensation and all clients fees. Look for a CFP® or Certified Financial Planner Practitioner. 

Education should focus on concepts, not products. It should educate attendees about how to answer common questions like:

  • How do my employee benefits work?
  • When should I take Social Security?
  • Should I use a Roth IRA or Regular IRA?
  • How does Medicare work and what are the medical expenses I will face in retirement?
  • How should I invest for income in retirement?
  • How do I reduce taxes?

Reading is a great start, but not usually enough. The most complicated factor is you are busy and the landscape is constantly changing. The legislation changes, the tax rules, and rates are always changing. It is a complex field. Overconfidence can lead individuals to make costly mistakes.  

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