Working-Age Investors and the Growing Need for Financial Literacy

Editor’s Note: This is the third part of a four-part series on financial literacy in the United States. You can find Part 1 of the series here. Stay tuned for more helpful articles on how you can reach the retirement you have worked hard to attain.

Like other working-age investors, you may have a 401(k) account — or another employer retirement plan. In anticipation of the future, you probably are socking away money for retirement. And if you are lucky, your employer is even contributing to help your nest egg grow even more.

But, with April being National Financial Literacy Month, now is a good time to be honest with ourselves. Many working-age investors don’t fully know what their investments are. Various studies, like the “Wellness in the Workplace” survey by KRC Research, have shown that, in many cases, the majority of working investors don’t understand their retirement plan make-up.  

So, take a moment to ask yourself about whether everything makes sense to you. It’s okay to admit not being fluent in your 401(k) – or even retirement in general – because money matters are hard enough for many of us. And when it comes to retirement issues, you aren’t alone.

A comprehensive barometer of U.S. adults’ readiness to make sound financial decisions is found in the TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) from TIAA Institute and the Global Financial Literacy Excellence Center. This report examines financial literacy across eight common activities: earning, spending, saving, investing, borrowing, insuring, understanding risk, and gathering information.

And the findings aren’t great.

You Have a 50-50 Chance of Getting it Right

“Most Americans lack personal finance knowledge for making appropriate financial decisions in the normal course of life,” the Index reports. “On average, U.S. adults answered 50% of the P-Fin Index questions correctly.””

Where do most people get the lowest score? Possibly in the area that can hurt us the most: understanding (and avoiding) risk. “On average, survey participants answered only 35% of these questions correctly,” the Index reports.

So, to be clear, if this test was a school assignment, a 35% score would be equivalent to receiving an F-minus. “This finding is troubling given that risk and uncertainty are inherent in most financial decision making; comprehending risk and its implications are integral to making appropriate decisions.”

On the bright side, the Index finds financial literacy tends to be highest with concepts related to debt and debt management. Perhaps that is because most of us have everyday experience with accumulating, paying down, and generally managing debt.

How Financial Literacy can Influence Your Future

The index sponsors believe the P-Fin Index correlates with financial actions and outcomes in the expected manner. Individuals with greater personal finance knowledge are more likely to have positive personal finance experiences.

“Less than one in five U.S. adults demonstrated a relatively high level of personal finance knowledge by answering more than 75 percent of the survey questions correctly,” Annamaria Lusardi, academic director of GFLEC, said in a statement. “Low levels of financial literacy, among not only the young but also people close to retirement, show we need to step up the effort to promote financial knowledge across the entire population.”

Indeed, helping investors to better money matters, make sound decisions, and minimize mistakes should be a key focus. But what about on a personal level? How can you improve your financial literacy, if you are not already there?

Jim Chilton, founder of the Society for Financial Awareness, which offers no-cost classes designed to improve financial literacy in communities around the country, believes it all starts with developing your financial plan.

Increase Your Financial IQ

“Over my 37-year career I have seen various studies, and the one statistic for which the needle never moves is: 3 out of 100, or 3 percent, do true planning while 97 percent do not,” Chilton was recently quoted as saying in a San Diego Union-Tribune article.

Why don’t we bother to plan? “Most often it’s the ‘ready-fire-aim’ mentality in which we seek instant gratification, get mired in debt and make poor decisions,” he said. “Use of credit cards, buying things unneeded with money we don’t have, at a price we can’t afford is a continuous cycle. It creates a never-ending whirlpool of poor choices.”

You can get started by learning from your own situation. Chilton suggests developing a current budget with historical data because budgeting shows trends. Next, he advises, build a financial plan in five tiers:

• Protection — All your insurances
• Retirement — Individual, employer, government
• Investing — Asset allocation, diversification
• Taxes — Planning and preparation
• Estate Planning — Distribution at death

And since the 401(k) is the primary retirement savings vehicle for millions of Americans, it’s one of many efficient ways to save up for your retirement future.

Get to Know Your Employer Plan — and Other Retirement Vehicles

While you are employed and contributing to your employer plan, your plan administrator is carrying out your investment choices (whether you remember what those choices were or not). Not only that, it is charging you and your company a fee for its services.

It might surprise you to know that you and your fellow employees are paying roughly 87% of total plan fees. Meanwhile, employers pay 9% and the plans cover 3%, according to a Deloitte and Investment Company Institute report in August 2014.

With the P-Fin Index revealing that 401(k) investors struggle with understanding risk, taking steps to address this grows increasingly important as you transition toward retirement. As an investor, you can’t rely on just your employer and your plan provider to educate you and get you ahead.

Just as you are more in charge of your personal retirement, you are also responsible for educating yourself on the steps to get to the finish line.

Act (For) Your Age

If you are within 10 years of retirement, it’s a completely different situation from your earlier working years. You should be looking at ways to protect what you have earned and have it ready to generate income in the future.

If you don’t have other retirement savings vehicles that will provide income in the future, consider personal retirement accounts to further supplement your savings. They provide another place for you to stash tax-advantaged monies, especially if you are like millions of Americans and already behind on saving.

Depending on your personal situation, needs, and goals, you may also consider other “money moves” to get to the point you need for your retirement objectives. Working with a financial professional may help you with your progress. 

Financial Guidance Helps to Fuel Progress

Research and studies suggest that working with a financial professional can help you identify your goals, chart out paths to attain them, and keep on track. Many investors with a financial professional report higher savings, more peace of mind, and better overall life perspective.

If you could benefit from the guidance of an expert, financial professionals stand ready to help you at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.