When are you most likely to be very glad you learned some basic survival skills? In an emergency, of course, when you really need them. The same holds true for basic financial knowledge. Financial literacy is always important, but it’s especially important in times of crisis, like now.
Financial literacy is a basic knowledge of saving, investing, and how the economy & financial markets work. Being financially literate is one of the keys to protecting your money, growing your retirement savings, and creating a reliable income strategy for retirement. Unfortunately, studies consistently show that many Americans aren’t able to pass even a basic financial literacy test. While financial literacy is always important, it’s especially so during periods of economic turmoil and uncertainty, like the one we’re in now as a result of the coronavirus. In this post, I’ll share some of the basic financial survival skills you may need before this crisis is over.
The first full month of the coronavirus crisis in America was April, which ironically also happens to be National Financial Literacy Month. The fact that few people probably knew this illustrates just how neglected this important topic is. Beyond offering some very basic economics or accounting classes, most high schools fail to teach it. As a result, statistics around financial literacy are frequently troubling.
Although the US is the world’s largest economy, the S&P Global Financial Literacy Survey for 2019 found that America ranked 14th in its percentage of adults who are financially literate. This lack of understanding of financial basics shows up in other reports and surveys focused on household finances. For example, more than 30% of the thousands who took part in a Charles Schwab poll said they don’t have a written financial plan because they think it’s too complicated, or they don’t have enough time to work on one. About that same percentage have zero dollars saved for retirement, and about 44% of Americans say they don’t have enough in retirement savings to cover even a $400 emergency, according to other recent surveys.
As troubling as these statistics are, what’s worse is that they come from studies conducted well before the coronavirus pandemic devastated the national economy.
In other words, lack of financial literacy was already a major problem. The pandemic has simply shed more light on it and made it a potentially bigger problem.
A new survey from the National Endowment for Financial Education found that nearly nine in 10 Americans say the Covid-19 crisis is causing stress on their personal finances. Roughly 54% say they’re worried about not having enough saved, and 48% say they are worried about their ability to pay bills.
While the causes behind these issues are very real—from record high unemployment to unprecedented economic uncertainty—for many Americans it is largely the lack of financial literacy that is causing their fear and sense of helplessness. Think of it this way: if you get lost in the woods, aren’t you likely to be less scared if you’ve learned some basic survival skills? Of course you are; in fact, you learned those skills to prepare for just such an emergency! In a way, it’s much the same with financial literacy. Being financially literate means you have the skills and understanding to face a financial crisis and improve your odds of getting through it. The more people who share this understanding, the better it is for the economy as a whole.
So what are some of the most important elements of financial literacy to be aware of, especially in a time of crisis? The answer to that question can provide you with a good understanding of the Investing-for-Income model, and why I believe it’s such a sound strategy for investors in or nearing retirement. With that, here are my Top 3 Financial Literacy Basics:
No. 1: Understanding the importance of financial defense and how to achieve it. If you’re a sports fan, you know that when a team is winning late in the game, very often it shifts its strategy to defense to try to protect the lead.That same concept is important for investors in or nearing retirement because incurring a big financial loss at that time is obviously much more dangerous than suffering one in your 30s or 40s.
That’s why I always stress that the number one priority for investors over 50 should be overprotection, which can be achieved through the use of financial strategies designed to generate income and help protect your principal.
No. 2: The understanding that reducing your investment risk doesn’t necessarily mean sacrificing return. That’s because total return is a sum of both growth and income, and lowering your risk is simply a matter of shifting your strategic focus from growth to income.
I say ‘simply’ because while the basic concept is fairly easy to understand, the execution typically requires an advanced knowledge of the markets and the universe of income-generating investment options. Most financial advisors lack this knowledge, and as a result they’re more apt to promote traditional buy-and-hold investment strategies built around stocks and mutual funds.
No. 3: The understanding that buy-and-hold investing gets riskier as you get older. Traditional buy-and-hold investing worked well in the booming 80s and 90s, when Wall Street was in the midst of one of the best long-term bull markets in its history.
However, since 2000, the stock market has suffered two major corrections of over 50%. For the past decade it has been in a period of historic uncertainty fueled by massive artificial stimulus. During this time, buy-and-hold investors have averaged about a 5.8% annual return, which is about half of what the stock market is typically said to deliver “over the long-run.” Plus, all that growth has really come just in the last seven years, and largely as a result of all that stimulus. From 2000 to 2013, thanks to those two major corrections, many stock portfolios were underwater.
That means if you retired in 2000 at age 65, it has taken you until age 85 to realize that 5.8% return! By comparison, many income-based investors since the turn of the century have enjoyed a comparable or even better return—in the form of income—with much more consistency and much less stress.
Knowing the financial literacy basics is important, but applying them to your own financial strategy is even more important, especially in times of economic crisis and uncertainty. Getting started is really just a matter of following the three Rs:
Revisit your retirement plan in the wake of the pandemic to make sure the key decisions you’ve made are still the right decisions. If you think there’s a chance you may be carrying too much risk, take steps to reduce it. Take these steps with the help of the right financial advisor (one who specializes in investing for income), and together you can confidently restart your retirement for the new “corona-economy!” To learn more about how you can invest for income, read 10 Ways to Invest for Income.
Click here to schedule a complimentary call with me and I'll help explain the best strategies for you based on your particular situation.
Related Posts
The National Bureau of Economic Research recently explored how continued low returns can influence saving, investing and retirement behaviors. According to the report, diminished returns tend to motivate people to save more in non-retirement accounts and less in their 401(k)s, alter their investment allocations, and even delay retirement and claiming Social Security benefits.1 While recent economic
Read MoreRetirement planning looks much different than it did a century ago. With lifespans and retirements lasting longer, it’s not just about planning for a financial future; we must also create a post-career strategy that takes into account emotional, intellectual and quality of life challenges during later years. After all, we don’t just stop enjoying life
Read MoreSeptember is Life Insurance Awareness Month, which makes this the perfect time to reflect upon your family’s financial goals and determine if you have enough protection under your current life insurance policy or if you should look into purchasing a new policy. If you have yet to secure a life insurance policy, it’s helpful to
Read MoreWhy is it important to plan for retirement? Do I need a financial advisor to help me? Enjoying retirement while continually watching your investments can be stressful. Every single day people enter our office with the realization they just do not want the stress and second-guessing anymore with their investment portfolio. They’ve clawed, scratched and sacrificed for years
Read More