How Financial Illiteracy Leads to Retirement Disaster

How Financial Illiteracy Leads to Retirement Disaster

Retirement is supposed to be a time of financial security and independence. Yet, for millions of Americans, it becomes a period of uncertainty and financial stress. The biggest culprit? A lack of financial literacy. 

When retirees don’t fully understand how retirement finances work, they make a series of critical mistakes that can drain their savings and put their financial future at risk. These mistakes aren’t random—they follow a predictable pattern caused by financial illiteracy. 

A study by the American College of Financial Services in Bryn Mawr, PA found that Americans aged 50-75 scored an average of just 31 out of 100 on a basic retirement literacy test. We’ve found that this lack of knowledge leads retirees into four major financial mistakes: 

1. Failing to plan for retirement 
2. Blindly trusting their financial advisor 
3. Over exposure to market risk 
4. Leading to insufficient income in retirement 

Each mistake compounds the next, creating a downward financial spiral that leaves retirees struggling to make ends meet. Fortunately, there is a proven education-first approach that helps retirees understand the challenges they face so they can decide for themselves how to overcome them and secure their financial future. 

Mistake #1: Not Planning for Retirement 

Most people spend more time planning a vacation than planning their retirement. Why? Because they don’t feel financially educated enough to make decisions about their future. 

A recent study found that 1 in 4 Americans have no retirement savings at all (U.S. Federal Reserve). Even among those who have savings, many don’t know how much they’ll need or how to structure their investments to provide stable income in retirement. 

Without a solid financial education, many retirees push off planning or assume their financial advisor will handle everything for them. This leads directly to the next mistake. 

Mistake #2: Staying the Course with Their Financial Advisor 

Retirees often assume that the financial advisor who helped them during their working years is also an expert in retirement planning. Unfortunately, most financial advisors are only trained in risk-based investments like stocks, bonds, and mutual funds. As seen in the many stock market drops over the past century, these risky investments are unsuitable for those at the end of their working career. Americans who have worked a lifetime don’t have the working years left to recover what they lose when market volatility strikes.  Even worse, many financial advisors have financial incentives to keep retirees in risk-based investments—even when those investments are inappropriate for someone in retirement. 

• Advisors using an “Assets Under Management” (AUM) model make more money by keeping clients in stocks, through fees and commissions such as 12B1 fees, turnover ratio fees, upfront commissions and other undisclosed fees that can range from 1.5% to 3%. (Association of Comprehensive Planners). 
• Commission-based advisors are financially incentivized to sell high-risk products, regardless of whether they’re appropriate for retirees (SmartAsset). The higher the risk for the client, the higher the commission for the advisor. 

By blindly trusting their advisor, investors are susceptible to being placed in high-risk investments that could put their retirement savings in jeopardy. 

Mistake #3: Being Overexposed to Market Risk

Those in and near retirement who are placed into risky investments, are vulnerable to market losses, high fees, and emotional investing mistakes. 

A study by Dalbar Inc. found that the average investor earns only 3.6% per year, compared to the S&P 500’s 10% average return. Why the discrepancy? Because most investors suffer market losses, pay excessive fees, and make irrational decisions in an attempt to overcome their losses. 

For retirees, the impact is even worse: 

• Mutual fund fees of even just 1% over a 20-year retirement, these fees can erase hundreds of thousands of dollars from savings. 
• When the market crashes, retirees lose money they can’t afford to lose. They also lose the opportunity to earn new money as they waste time recovering what they already had. 

As the unsuspecting investor remains in the red financial advisors financial advisors continue to profit off the fees and commissions. This directly compounds the final mistake. 

Mistake #4: Insufficient Retirement Income 

Financial advisors who focus on financial planning for those in their working years overlook guaranteed income for their clients, because their clients have their working income to depend on. 

Retirement portfolios need to be capable of providing a steady stream of income, because that working income disappears. Private pensions are disappearing and Social Security was never intended to be American’s sole source of income, so when investments decline, so does the income retirees need to maintain the lifestyle they had while they were working. 

Consider this: If a retiree plans to withdraw $50,000 per year, but a market downturn reduces their portfolio by 20%, their ability to maintain that income vanishes overnight. 

This is why so many retirees are being forced back into the workforce. According to a study by Atticus Law Firm, 40% of retirees have returned to work because they can’t afford to stay retired. 

The lack of financial literacy among retiree’s has led them to advisors who are ill-equipped or unwilling to plan for the impact of market losses on retirement income which is supposed to fund the retirement lifestyle American’s worked hard to build. Sadly this leaves many with no choice but to reduce their lifestyle, sell off assets, or even re-enter the workforce. 

How Do You Learn to Plan For Retirement?: 

The only way to break this dangerous cycle is through education so you can understand for yourself why it’s important, and how to shift away from market risk. That’s where working with a retirement phase expert comes in.

Unlike traditional financial advisors who keep retirees in high-risk investments, retirement phase experts exclusively use safe alternatives designed to: 

• Guarantee income for your entire retirement 
• Protect principal from market losses 
• Eliminate fees that erode retirement savings 

How can you improve your financial IQ? Find a company that specializes in educating their clients through a 3-step educational process that empowers you to take control of your financial future. Signs of a consumer driven educational process include: 

1. Requiring that prospective clients attend a minimum of three educational sessions with licensed retirement phase experts. 2. Not allowing clients to move forward until all three meetings are completed. 
2. Assigning homework from an objective and reliable source, like the Wharton School of Business, that documents the power of safe alternatives to Wall Street. 
3. Backtesting prospective clients on the assigned homework to ensure full understanding of how the strategy works. 5. Administering a 51-point financial MRI which provides unbiased analysis uncovering hidden ailments in their portfolio and safe solutions. 

If Americans receive the facts about retirement planning they will be able to make informed decisions to address their unique financial needs in a safe way.

Traditional advisors who push risky products. in hopes of earning for commissions, are not allowing their prospective clients to understand the pitfalls of Wall Street investing. These high pressure sales tactics lead to rushed decisions, a lack of financial IQ, and ultimately an insecure retirement future. 

If you want a secure, stress-free retirement, it starts with financial education and the right advisor—one that puts your safety above their commissions. Follow the steps and guidance from this article to start a path to a better understanding of retirement planning so you can enjoy peace of mind in the future.