Financial Illiteracy Means Government Dependency

Posted: Mar 20, 2018 11:00 AM
Financial Illiteracy Means Government Dependency

America is one of the richest nations on the planet. And yet, poverty persists and people are increasingly pessimistic about their ability to retire. How can a nation with an abundance of natural and technological resources produce pessimism among citizens concerning their own future?

The bell has begun tolling for Baby Boomers

It's a well-established fact that approximately 10,000 Baby Boomers will turn 65 each day for the next 10+ years. As this group of working class Americans nears retirement, concerns about financial literacy and stability persist. CNBC recently reported that approximately “42 percent of Americans have less than $10,000 saved for when they retire.” Another article says that a full 65% of the population saves less than 10% of their income towards retirement.

Some of the reasons for this lack of financial preparedness, according to respondents of the CNBC poll, include not earning enough, not saving enough, and struggling to pay bills. While I don't dispute these findings, as a financial professional, I'm also aware of an underlying reason contributing to these concerns: lack of financial literacy.

There's a reason we don't use pagers anymore. It's because we have cell phones. Times have changed and so have the ways we enjoy communicating. Pagers would be utterly useless in our culture. The same is true for financial tools and resources available today. Many of the previous methods for achieving financial success no longer work in today's world. This reality is leaving many in the financial dark as they struggle to maintain outdated methods using outdated tools and resources.

But financial literacy is more than just knowing the tools and resources needed to be financially successful. Financial literacy includes understanding the “why” behind the financial goal. A writer for Bloomberg Finance recently told Financial Advisor IQ “Once you know why to do it there are resources that will show you how.” Maybe the “why” is more important than the “how.”

For example, accumulating funds that will be tax-free in retirement is a great idea. But the average American is not likely to put much priority on this without knowing why it's important. Explaining that tax rates are likely to rise due to growing national debt and inflation and that their purchasing power could be diminished due to taxes can bring about a measure of financial literacy through understanding.

How Financially Literate are You?

Let's take a quick test to see how financially literate you are. See how many of the questions below you can answer.

1. What is the sustainable portfolio withdrawal rate generally recommended after retirement?
2. What is the only way to accumulate tax-free money for use during retirement?
3. What is the right amount of insurance a family should carry into retirement?
4. Is it possible to protect a primary residence from any liens due to long-term care costs?
5. What percentage of your monthly income should your mortgage payment consume?
6. How much will you spend in retirement monthly and annually?
7. What percentage of your monthly income should you be saving towards retirement on an annual basis?
8. How does your debt-to-income ratio affect your credit score?

These are just a few of the critical questions you need to be able to answer if you want to be prepared for retirement. The full list of questions encompasses every aspect of your financial position, including your current income, debts, assets, liabilities, coverages, benefits, major purchase goals, planned education costs, and more.

The fact that so many are so unprepared for retirement is a sign that people will struggle when our economy takes a dip. We saw this during The Great Recession when many lost their jobs, and subsequently their homes and their cars. People were pulling money from their 401(k)'s to fund their monthly expenses; a disastrous decision that many have not fully recovered from ten years later. 

From a social perspective, people that are not financially independent are at the mercy of the government. This is how a politician can simply promise to cut taxes, give free healthcare, free cell phones, or free college education and gain widespread support. People that need money are willing to ignore character, moral, and policy flaws just to get free stuff. It's a great campaign strategy. It's lousy economic policy.

It has been said that the definition of insanity is to “keep doing the same thing over and over while expecting different results.” If you continue to ignore the financial red flags while expecting your results to be different than decades of evidence, you might be insane. If you want to be different, and start seeing real change in your financial future, it's time to become financially literate.

Start by making sure you are putting at least 10% of your pre-tax income into your employer sponsored retirement account. Combine that with creating a budget and spending less than you make on an annual basis and you will be on the road to financial literacy and retirement.

Be sure to send me a postcard from your beach (or mountain).