Financial literacy poor despite investing boom

by Rebecca M. Cook

for the Business Journal

Despite all the hype and media coverage of Wall Street these days, America faces a financial literacy crisis. More and more Americans have been turning to investments to meet their financial goals, yet studies and surveys show that Americans don't understand the financial basics.

Many don't understand how our securities markets work, how to assess the risks and rewards of investments or how to figure what they will need to save for retirement

That's why earlier this year the White House hosted a summit on retirement saving. The conference was mandated by the Savings are Vital to Everyone's Retirement Act of 1997.

Congress found that "a leading obstacle to expanding retirement savings is the simple fact that far too many Americans particularly the young are either unaware of, or don't have the knowledge and resources necessary to take advantage of, the extensive benefits offered by our retirement savings system."

Congress directed the U.S. Department of Labor to develop a program to promote saving for retirement and reach out to the public through public service announcements, public meetings, educational materials and an Internet site.

Most Americans have high expectations for their retirement. Yet, according to a study recently released by the Employee Benefit Research Institute and the American Saving Education Council, three out of four American workers don't know how much they will need to save to make their retirement dreams a reality. And two out of three households will probably fail to realize one or more of their major life goals because they have failed to develop a comprehensive financial plan.

Today, individuals must make financial decisions. In the past, planning for the future fell on external forces: government, through Social Security and Medicare; and employers, through pension plans directed by the employer.

Today, responsibility has shifted to the individual. Many Americans no longer expect Social Security to be their major source of retirement income and now find themselves in a precarious and challenging position.

The trend has shifted from saving to investing. In generations past, Americans put their money in savings accounts. They viewed the stock market as a pastime of the rich. Now, investing in the market is serious business, a necessity for accumulating the money essential for retirement or other financial goals.

In 1989, 31.7 percent of U.S. families owned stock. In 1995, 41.1 percent owned stock. Assets of mutual funds, now more than $4.4 trillion, have surpassed the $2.7 trillion on deposit in U.S. commercial banks.

Pension plans have also changed. In almost every sector, job benefits have declined and workers have increasingly realized that they will need to save for themselves to have economic security. Slightly less than half of America's wage-earning and salaried workers are covered by pension plans.

The role of Social Security and Medicare is changing too. More than two-thirds of retirees today rely almost totally on Social Security, many because they did not know they needed to save.

As the commissioner of Social Security recently said on Capitol Hill, "Social Security was never intended to provide for all of a worker's retirement income needs. Pensions and personal savings have always been and should always be part of a sound financial retirement plan. Average retirees today get 40 percent of their pre-retirement earnings from Social Security."

With life expectancy continuing to rise, many retirees can expect to live 20 years or more in retirement. That trend is likely to continue.

Against this backdrop, the rate of savings in the United States has dropped. In 1997 the U.S. savings rate (based on after-tax disposable income) fell to 3.8 percent, the lowest level in 58 years and less than half its postwar peak of 9.5 percent, set in 1974. A study last year by Public Agenda found that nearly half of all Americans report nothing or less than $10,000 in retirement savings.

It is not hard to figure out what you'll need to put away. The Ballpark Estimate is a single-sheet planning document that helps individuals calculate what they need to save each year for their retirement. Individuals can get the Ballpark Estimate by calling the Securities and Exchange Commission's toll-free publications line at 800-SEC-0770.

Too many Americans fail "Finance 101." Less than one-fifth of those polled passed a simple test asking whether stocks, bonds, savings accounts or certificates of deposit offered the best return for the last 20 years. Answer: stocks. Many Americans fail to comprehend the power of compound interest.

A financial plan is the road map to reach your retirement goals. Yet two out of three savers in America, according to recent surveys by the Consumer Federation of America and the Investor Protection Trust, have never prepared one.

Individuals must set financial goals and come up with a plan to achieve them. Make a plan: set goals, start saving, match investments to goals. Do an annual checkup and choose help wisely.

After you do your plan, research the pros who will help you carry it out. Call the Securities Division at the Secretary of State's Office and ask: Is the investment registered? Are the broker and the firm licensed to do business in my state? The toll-free investor hotline is 800-721-7996.

Get the facts in writing. Don't get swept away by a smooth sales pitch. Always ask for and read the company's prospectus or latest annual report. Know the investment. How long has the company been in business? What are its products and services? Has it made money?

Watch out for fraud. The tell-tale signs: pressure to invest; salespeople offering inside or confidential information; claims of a once-in-a-lifetime opportunity; promises of guaranteed returns; assurance that it's risk free; reluctance or refusal to send you written information about the investment.

Complain promptly. If you have problems, get help right away. Contact the broker's supervisor or the firm's compliance officer. Call the Secretary of State's Office.

A well-educated investor provides the best defense against securities fraud.

(Rebecca M. Cook is Missouri's secretary of state. The Secretary of State's Office is responsible for regulating the securities industry in Missouri.)

[[In-content Ad]]