Financial Literacy Shortfall Imperils Secure Retirement, Experts Tell Congress

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Brokers and advisors, together with a whole spectrum of government officials, educators, and nonprofits, have a role to play in improving older investors’ financial literacy and helping them navigate complex decisions, a panel of experts told members of a Senate committee on Thursday.

Put simply, older people, regardless of their level of wealth or education, need help with money.

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“We believe investor knowledge is key to prevent investor harm, especially among older adults,” said Gerri Walsh, senior vice president of investor education at Finra, the brokerage-industry self-regulator.

“Americans entering retirement face consequential decisions about healthcare and how to turn years of hard-earned savings into income lasting for the rest of their lives. Pivoting from asset accumulation to spending down assets, retirees often must make once-in-a-lifetime choices they typically cannot undo,” Walsh said. “One wrong decision can upend decades of careful financial planning.”

Bob Casey, the Pennsylvania Democrat who chairs the Special Committee on Aging, has been active in drafting legislation that aims to address some of the challenges of financial literacy among older Americans. One bill would direct the federal government to provide citizens who are approaching eligibility for Medicare with information about the enrollment rules. The so-called Benes Act, backed by groups like AARP, would seek to demystify the Medicare-enrollment process and eliminate unnecessary gaps in coverage.

“If individuals would receive clear guidance from the federal government about Medicare right before they enroll, it would meet a need for information at a critical decision-making time,” said Patti Szarowicz, an aging and disability resource counselor in the Atlanta area. “I say this because of the experience with speaking with highly educated individuals who report being very confused by the complexity of the Medicare enrollment process.”

Financial professionals have a role to play there, as well, particularly those who offer retirement and financial planning services. It’s a key area of focus at Finra, which has set up a foundation devoted to research and education aiming to improve financial literacy. The regulator also polices the industry for brokers who take advantage of older investors.

“While not all harm results from sales-practice abuses,” Walsh said, “Finra does take swift action against broker-dealer misconduct.”

The results of the foundation’s research aren’t altogether encouraging. In 2009, a survey found that 42% of Americans had a high level of financial literacy. By 2018, that figure had fallen to 34%, and the trend appears to be continuing.

“An early look at the 2021 data collection suggests levels have fallen slightly further,” Walsh said.

The largest drop-off in financial literacy is among adults ages 18 to 34, Walsh said, though she points to other distinct challenges that older investors face.

“Other foundation-funded studies have shown that knowledge about financial and health matters generally declines with age, with a faster rate of decline tied to such things as poorer decision making, a higher susceptibility to scams, and lower psychological well-being,” she said. “Overestimating one’s cognitive skills has also been tied to poor decision making, as has loneliness when paired with lower cognition.”

Further complicating the demographics of financial literacy is a gender gap that sees women who outlive their spouses struggle to fund a comfortable retirement, according to Cindy Hounsell, founder and president of the Women’s Institute for a Secure Retirement.

“Women live longer and they need more retirement income, and they generally have less,” Hounsell said.

The numbers are stark. There are 6 million more women age 65 or older than men, according to Hounsell. Nearly 70% of Americans 85 or older are women, and by that late stage of retirement, many have exhausted their savings.

“Many of the 85-plus group end up near or in poverty, even if they’ve never been poor before,” Hounsell said. “This is especially common for women living alone and for minority women.”

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