The National Financial Educators Council (NFEC) released their report from the National Financial Literacy Test and the results were depressing. The NFEC surveyed 11,000 people from all 50 states and the average score from 15- to 18-year-olds was 60.35%. By accepted standards, that is a failing grade.
What was the most missed question among 15- to 18-year-olds? “If I invest $100 per month starting at age 21, and that money earns a 7% return, how much will I have after 70 years?” It was a multiple-choice question with the possible answers being:
B. Between $150,000 and $225,000
C. More than 1.5 million
D. None of the above.
If you are scratching your head, don’t scare me; I’ll help you out. The correct answer is “C.”
When asked the question “… financial product(s) can help you lower your personal risk?” The adults fared a little better, with 77 percent of 50+ adults answering the question correctly. Sixty percent of 15- to 18-year-olds got it. The answer is “Insurance.” Again, these are pathetic results from both age groups.
Baby Boomers Are Still Feeling The Financial Love
How can adults feel good about their financial knowledge and planning when they are flunking real life tests? For me, they are talking the talk, but not walking the walk. The 2016 Consumer Financial Literacy Survey, prepared for The National Foundation for Credit Counseling (NFCC) and Boeing Employees’ Credit Union (BECU), proves the point. Of 1,668 adults in the United States sampled, “Once again, in 2016, two in five U.S. adults (40%) – a proportion that has held roughly steady since 2007 – say they have a budget and keep close track of their spending.” The survey goes on to say, that most respondents feel knowledgeable about money. “In 2016, a little over half of U.S. adults (56%) – down a little from the last 3 years… give themselves a grade of A or B on their knowledge of personal finance.”
The “feel good” part may belie the facts. According to a report from the Economic Policy Institute (EPI), “The State of American Retirement,” nearly half of families have no retirement savings at all. EPI reports that the mean retirement savings are just $95,776. If half have this amount, it indicates that many have no savings at all and the super savers are pulling up the numbers. A better gauge is the medium for all families. Hold on to your hats; the median retirement savings is $5,000.
Financial Advice Is Just Common Sense
Experts can confuse people and make it all too complicated. It matters less about how you are feeling about your financial state and more about your actual financial state. You can’t decide where you are going until you know where you are now.
Step 1 – Spending Now And In The Future
Create a spreadsheet and record what you are spending now and what you want to spend in retirement? You must do the heavy-lifting on this one. Look at your actual total monthly expenses and project where and how you want to live. Attach costs to every part of your life. Estimate the years you and your partner will live, and therefore what you will need to make sure you are covered.
Step 2 – Use a Retirement Calculator
There are tons out there. Every financial house has their own. You are trying to figure out how you are doing with your current savings and investment plan. If you are among the medium savers noted in the above survey and only have saved $5,000, I need not remind you of where you stand. By the way, this is not just an exercise for Mom and Dad; it’s just as useful for Millennials and younger folks, who have time on their side.
Step 3 – Design It And Do It
This is the most important step. Start to save and invest today. Even if you don’t have a handle on the exact number, you need to start or save and invest more than you are now. A savings account will not get you where you want to go. You need to invest. There are tons of investment advisors out there to help you.
Don’t be too liberal with the interest rates you use in the calculator. Too much risk is not a great thing. Again, if you are younger, you can be more aggressive.
USA Today calculated some of the numbers in the examples below. This is where you can see how the younger you start, the better off you will be. You have to figure in Social Security, 401(k) and the other sources of income. These are just raw numbers, and examples of where you want to end up when you retire at age 68.
Annual Income = $50,000
Current Savings = $10,000
Monthly Retirement Income Goal = $2,833
Amount needed to save now = $500 per month
Annual Income = $70,000
Current Savings = $30,000
Monthly Retirement Income Goal = $3,670
Amount needed to save now = $1,000 per month
You know I always preach about saving and investing. Why? Because that will help you and your offspring to take charge of your financial life and not become a victim to the lack of planning. Live below your means. Have the conversations with your partner and your kids. Consider the words of Ayn Rand; “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”