Tom Sedoric and Casey Snyder

The following blog post was updated on July 14, 2020 to reflect the importance of financial literacy in navigating recent financial developments.

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 these 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 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 2.2 million retire annually, the vast majority of them are not financially prepared, and perhaps more importantly, not financially literate. A significant 2019 report by the Economic Policy Institute revealed that as of 2016, nearly half of American families had no retirement savings whatsoever, and the majority of those who did were not saving enough, with the median (50th percentile) family had only $7,800 saved in retirement accounts in 2016.

While the lack of retirement savings is a problem in and of itself, a lack of financial literacy makes overcoming this challenge even more difficult.

Financial Literacy When the Language Keeps Changing

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 increasingly complex and opaque. Returns in many markets were well ahead of historical averages in the 80’s and 90’s 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% of the American workforce in 1980 to barely 13% 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.

Using Financial Literacy to Plan for the Future

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.

Being financially literate means:

  • Having the ability to weigh the pros and cons of your goals, plan, savings, and resources.
  • Knowing how an investment manager is compensated and why.
  • Understanding that low-price choices can be a bargain, but offer no assurance of achieving one’s goals.  

A recent report by United Income had a good news/bad news finding. While “retail investment management fees fell more than 50% over the past 35 years, the benefits of lower priced products often erode as a result of non-fee costs such as higher taxes, lower investment returns and reduced money from public benefits such as Social Security and Medicare.” 

In addition, fewer than 50% of baby boomers have paid off their mortgages, according to Fannie Mae. The growth in aging population is also helping to fuel healthcare costs, which are expected rise by an average of 5.5% per year over the next decade—growing to $6 trillion by 2027, according to the Peter G Peterson Foundation, which will have an impact no only on individual retirement costs, but the health of the economy overall.

This data show that financial literacy is important for individuals simply so they can make informed decisions about their financial futures. Without taking into consideration the likelihood of higher taxes and medical costs, it is impossible to estimate how much savings will be needed in retirement. Cuts to pension funds and reduced 401(k) matches could become more common as we enter a period of economic insecurity. These shifts could seem small, but over time will impact your retirement savings.

Financial Illiteracy Fuels Regret

The dearth of financial literacy has become a melancholy chorus of regret for too many. According to a 2017 Bankrate survey, 46% 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% 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. It would be wise for baby boomers to learn these truths and pass them on to future generations.

 

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP ® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory, LLC and The Sedoric Group maintain a separate business relationship with and our registered professionals offer securities through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Steward Partners Investment Advisory, LLC. 29 Maplewood Avenue, Suite C Portsmouth, NH 03801. 603.427.8870

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory LLC and The Sedoric Group maintain a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory LLC. 2985754