Financial Literacy

I find Alicia Munnell exceptionally knowledgeable and and frank about the obstacles confronting unemployed Americans over fifty as they attempt to get back to work. However, I think she underplays the critical importance of financial literacy in helping all Americans make sound financial decisions that can have lifetime impacts.

Research by Annamaria Lusardi, Olivia Mitchell and Vilsa Curto, available on the National Bureau of Economic Research website, indicates the “financial literacy among Americans is disappointingly low”. Further, “lack of financial literacy has important consequences; those who lack literacy are much less likely to plan for retirement, are more likely to end up with less wealth close to retirement, are less likely to invest in stocks and are more likely to use high-cost means of borrowing.”

Consider for a moment just some of the critical financial decisions that all of us make over a lifetime with enormous implications for retirement security:

1. How to manage/invest defined contribution, 401k type, retirement plans? Such plans are the vast majority of private sector retirement plans, yet investment decisions are left up to the employee.

2. How to determine how much savings is required to maintain a standard of living in retirement?

3. Whether or not to buy a house and how to finance the purchase?

4. How to use and manage credit card and other sources of debt?

5. How much insurance is appropriate and what to pay for it?

6. If the choice is available, how to decide when to start drawing Social Security benefits?

7. How to analyze the fees and tax treatments of different financial products and associated advisers?

This list is highly incomplete but, I hope, makes the point that financial decision making is an unavoidable component of daily life with impacts that can last a lifetime. But it is also important to understand that thinking through these issues can be relatively simple, with a little guidance, and not an exercise in advanced math. Remember that the financial services industry, like any industry, tries to cloak itself in mystery and mumbo-jumbo in order to justify high costs and fees.

To create some clarity and provide some guidance, I would be happy to respond to comments posted online or e-mails with financial questions, but I will answer online for the benefit of others. I can either refer you to information on the Web or give you direction based on my 30 years of experience in finance. Some information is already available on my blog at



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