The price of financial illiteracy

The bill is past due on the choice to ignore earlier generations’ fiscal lessons

If the miracles promised you by the pharmaceutical industry seem to dominate the advertising between your favorite television shows, a close second is the financial services industry with ads aplenty about how company X, Y or Z can miraculously help you and your family set and meet your life’s goals.

Why are we bombarded by often misleading messages? As the once legendary bank robber Willie Sutton allegedly said, “It’s where the money is.” Or at least it should be. While we have been blessed to work with select clients who have collaborated with professionals and who have achieved considerable success over time, these client profiles are sadly in a minority. As 10,000 baby boomers reach the age of 65 every day and an estimated 4 million will retire annually for the next 20 years, the vast majority of them are not financially prepared and, perhaps more importantly, not financially literate.

A significant 2016 study by the Economic Policy Institute revealed that nearly half of American families had no retirement savings whatsoever. The numbers are sobering no matter the sources. Furthermore, “that makes median (50th percentile) values low for all age groups, ranging from $480 for families in their mid-30s to $17,000 for families approaching retirement in 2016. For most age groups, median account balances in 2013 were less than half their pre-recession peak and lower than at the start of the new millennium.”

We have frequently talked about financial literacy and, in particular, how the baby boom generation either ignored or was not taught the fiscal lessons of earlier generations. This lack of literacy occurred as financial products, banking, insurance contracts, ETFs, mutual funds and markets became increasing complex and opaque. Returns in many markets were well ahead of historical averages in the 1980s and ‘90s, and still an entire generation is ill-prepared. Financial literacy is far more than understanding stock market returns or the credit quality of a bond. It includes understanding time, place and fundamentals.

While prior generations grew up during the peak of defined benefit pensions, such plans have decreased dramatically, from 38 percent of the American workforce in 1980 to barely 13 percent today. There are zero guarantees today — so pay attention.

If boomers and other economic participants don’t understand the power of compound interest — not only for the positive of long-term savings but the detriment of credit card debt — and the discipline of saving beyond IRAs and 401(k) investment platforms, they ultimately have sacrificed time, opportunity and independence.

Financial health reflects the cumulative decisions we make throughout our lives: whether we did due diligence and serious (non-emotional) analysis of major spending decisions (i.e., home, education, family, cars, vacations) and how those decisions might impact our future wellbeing, or did we opt for immediate gratification.

The dearth of financial literacy has become a melancholy chorus of regret for too many. According to a 2017 Bankrate survey, 46 percent said their biggest financial mistakes were not saving enough for retirement, emergency expenditures or for their children’s education. A Gallup survey, also from 2017, reported that 43 percent of Americans aged 50 to 64 planned on having Social Security as their primary source of retirement income — despite the fact that the program was never meant to be more than a retirement income supplement and “safety net.”

The bottom line is as much as you think you’re saving enough, you’re probably not, if self-reliance is the goal. This was an unspoken financial lesson that Tom’s parents and grandparents taught him decades ago: discipline, patience, a focus on delayed gratification and a plan to make one’s life financially sound. It’s worth noting those virtues came courtesy of hard truths learned by prior generations during the crucible of the Depression.

Tom Sedoric is a fiduciary who lives in Rye. Casey Snyder is a fiduciary who lives in Eliot, Maine.

Categories: Finance