{"id":648,"date":"2012-04-10T16:03:15","date_gmt":"2012-04-10T16:03:15","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=648"},"modified":"2012-05-26T11:52:15","modified_gmt":"2012-05-26T11:52:15","slug":"three-simple-questions-reveal-your-retirement-wellbeing","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=648","title":{"rendered":"THREE SIMPLE QUESTIONS REVEAL YOUR RETIREMENT WELL\u2013BEING"},"content":{"rendered":"
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Read Published Article<\/p>\n<\/div>\n

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\"\"<\/a>How prepared are you for retirement? Take this quiz.<\/p>\n

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow:<\/strong><\/p>\n

a. More than $102<\/p>\n

b. Exactly $102<\/p>\n

c. Less than $102?<\/p>\n

d. Don\u2019t know.<\/p>\n

<\/p>\n

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. With the money in this account, after a year, would you be able to buy\u2026<\/strong><\/p>\n

a. More than you can today?<\/p>\n

b. Exactly the same?<\/p>\n

c. Less than you can today?<\/p>\n

d. Don\u2019t know.<\/p>\n

3. Do you think that the following statement is true or false, or you don\u2019t know? \u201cBuying a single\u00a0company stock usually provides a safer return than a stock mutual fund.\u201d<\/strong><\/p>\n

Answers<\/strong>: A, C, False<\/p>\n

Easy pickings, right? Bet you aced it. Congrats. But the disturbing thing is the fact that only one-third of the 1,269 American adults surveyed could correctly answer all three questions, according to the findings in a new working paper,\u00a0Financial Literacy and Planning: Implications for Retirement Wellbeing,<\/em>\u00a0published this month by theNational Bureau of Economic Research<\/a>.<\/p>\n

The study is authored by two of the most well-respected researchers in the field\u2013Professor Annamaria Lusardi of the George Washington School of Business and Olivia Mitchell, Ph.D., a professor at the Wharton School at the University of Pennsylvania and the executive director of the\u00a0Pension Research Council.<\/a><\/p>\n

The three questions aren\u2019t strictly scientific, of course, but they can predict if you are likely to be prepared for retirement, according to Lusardi and Mitchell.<\/p>\n

The first two questions the authors refer to as the \u201cCompound Interest\u201d and \u201cInflation\u201d items \u201cindicate whether respondents command the key economic concepts fundamental to saving\u201d. The third question, which they dub \u201cStock Risk,\u201d evaluates knowledge of risk diversification, \u201ccrucial to informed investment decisions,\u201d they explain.<\/p>\n

To further investigate the links between\u00a0the sources of information on which households rely, financial literacy, and planning, \u00a0the researchers\u00a0designed a special module on retirement planning to assess levels of financial literacy\u00a0along with consumers\u2019 efforts to budget, calculate, and develop retirement saving plans. \u00a0Then they,\u00a0implemented this in the context of the\u00a0Health and Retirement Study (<\/a>HRS), a nationally\u00a0representative longitudinal dataset of Americans over the age of 50.<\/p>\n

The findings on financial literacy among this sample of older Americans showed that only two- thirds of the respondents understand compound interest. \u201cThis is a discouraging finding inasmuch as this generation in its 50\u2019s and 60\u2019s has made many important financial decisions over its lifetime,\u201d Lusardi and Mitchell write.<\/p>\n

More of the respondents, three-quarters, can answer the inflation question correctly and understand they would be able to buy less after a year if the interest rate was 1 percent and inflation 2 percent. Yet only half of the respondents know that holding a single company stock implies a riskier return than a stock mutual fund.\u00a0This suggests widespread financial illiteracy among older Americans, according to the authors.<\/p>\n

The researchers also asked respondents how they calculate retirement saving needs:<\/p>\n

1. Have you ever tried to figure out how much your household would need to\u00a0save for retirement?<\/p>\n

2. Did you develop a plan for retirement saving?<\/p>\n

3. How often were you able to stick to this plan: Would you say always, mostly,\u00a0rarely, or never?<\/p>\n

Last, they asked what tools people use to devise and carry out their retirement saving plans.<\/p>\n