retirees finance

Report Finds Many Near-Retirees Lack Basic Financial Literacy

Jul 10th 2015
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Financial advisors and CPAs in today's marketplace know all too well that many of their baby-boomer clients are woefully short in retirement savings. And those clients' fears extend to a panoply of affiliated retirement concerns, such as outliving savings, long-term care, Social Security, and Medicare.

Unfortunately, in many cases, they have created their own problems.

A recent report by the Hamilton Project, an affiliate of the Brookings Institution, highlights how financially illiterate most Americans nearing retirement age really are.

That financial illiteracy extends to housing and home equity – an illiquid asset that comprises a good portion of many homeowners' net worth.

So, as we're in a nascent housing recovery, here's a closer look at the home-equity issue.

  • Middle-class households nearing retirement have roughly as much wealth in their homes as they do in retirement savings.
  • Home equity plays a huge role in the net worth of just about everyone near retirement age except the very wealthy.

Looking at homeowners between 55 and 64 years old, the report divides them by net worth: $42,460; $165, 720; $417,450; and $1.485 million. (Households below the first category were not indicated and assumed to have negative net worth, according to the report.)

The first two net-worth groups have about 50 percent of their net worth in home equity; the third group, 37 percent; and the highest group, 14 percent.

A combination of home-equity and retirement accounts comprises about 70 percent of net worth for the first three groups but only 34 percent for the wealthiest. The latter, on the other hand, has most of its net worth – 53 percent – tied up in business equity (ownership in nonpublicly-traded companies) and other financial assets.

What's more, the share of net worth in retirement accounts for everyone but the wealthiest tripled from 1989 to 2013. But it still amounts to only about one-third of net worth.

Home equity as a component of net worth during that same period dropped from 44 percent to 35 percent. “Over the past quarter century, the largest single source of wealth for all but the richest households nearing retirement age has been their homes, which accounted for about two-fifths of net worth in the early 1990s and accounts for about one-third today,” the report states.

Yet, so-called “housing wealth” is illiquid. And, according to the report, homeowners rarely use reverse mortgages or lines of credit to access that home equity.

And that brings us back to the issue of financial illiteracy. Many people approaching retirement just aren't up to speed on even basic concepts, such as compounding interest.

While many near-retirees consult with advisors, many advisors are paid based on what they sell instead of what's best for their clients, according to the report.

“Research finds that advisors facing such conflicts frequently steer investors to products providing larger payments to the advisors and lower returns and higher fees for investors, suggesting that policies to align the incentives of advisors and their clients would enhance investors' savings,” the report states. “It is an open question whether there are effective, large-scale interventions for improving financial literacy.”

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